Tomer Zaharovich – Managing Partner and Co. Founder
Tomer is an experienced compliance professional, a specialist in Anti Money Laundering (CAMS) and Counter Financing of Terrorism, with vast experience in practical compliance, strategic consultancy, and training for tier 1 banks, FIUs, funds, governments, Fintec Companies, MSB’s and financial institutions.
Tomer served as Senior Manager at PwC, leading the local International Compliance and Regulatory Services practice and as Special Matter Expert for the firm’s global compliance and Anti Money Laundering team, taking part in projects around the world.
Prior to joining PWC, Tomer served as the Head of Compliance and MLRO for the International and Private Banking division for large banks, working in Switzerland, UK, USA, Cayman, Panama, Mexico, Germany, France and more.
Previously, Tomer worked in compliance and AML/CFT specialist in the head office of Travelex Foreign Exchange, based in the UK.
At the moment Tomer is one of the lecturers at the seminars that are organized by ABIT in the section for AML & CFT and Compliance.
Mr Tomer you as a specialist and expert in Anti-Money Laundering and Counter Financing of Terrorism, based on your worldwide working experience in what way is money laundering used to help finance terrorisms?
Well, thank you for your kind introduction and for the opportunity to be here in Macedonia. I always enjoy visiting the Balkan; it is a region of untapped wonder and unspoiled beauty. I love it.
Money laundering is as you would expect one of the main tools used by terrorism to process any financial proceeds and embed them within the legal financial system. The reason money laundering is necessary is because often, the originators of the funds are under surveillance by authorities in various countries, or appear on sanctions lists. It therefore becomes necessary to hide the origin of the funds and “wash” them into accounts of seemingly innocent civilians who are not flagged as perpetrators of illegal acts.
It is important to remember however, that money laundering in terrorism is unlike other money laundering activities. By that I mean that typical money laundering activity usually involves proceeds of crime and therefore the origins of the funds are often “dirty”. In money laundering for terrorism, the origins of the funds may be totally legitimate, like from a charity or seemingly innocent business transactions. In fact, if you look closely at financing of terrorism, you will see that there are several differences in the way it behaves in comparison to criminal money laundering.
It is also interesting to note that when we look at funding of terrorism activities, we tend to think of it as money which is destined to be transferred to someone who will at one point create a physical act of terrorism, like exploding or shooting innocent civilians. Unfortunately, financing of terrorism is much more than that. In reality, if you look at total global terrorism funding, you will find that a large proportion of it goes to fund political activities, training operations, investment in school, health and local communities (as an alternative to a local failing regime) and so on. Furthermore, much of this funding activity originates from terrorism supporting states, businesses, wealthy individuals and Diaspora sympathizers. All of these make it extremely difficult to track money laundering for terrorism funding purposes.
What is the meaning of money laundering, and who needs to perform anti-money laundering checks?
Money laundering is essentially the act of hiding the true origins or ownership of funds.
There is much literature and many theories and charts that talk about “inserting” and “layering” and so on…I won’t go into all these as I am sure your readers are very well versed and read. I will say that in reality there are many ways money laundering occurs and the way it is done, does not always follow what is theorized in academic circles.
Firstly, it goes without saying that hiding the origins of funds which were not produced illegally may not constitute money laundering, i.e. if I was to transfer cash to my sister and she deposits that in her account, clearly that would not be considered money laundering. But if I was to do so for the purpose of evading tax, than in some countries, that would be considered money laundering since the funds are generated as a result of a predicate offence. For those readers who are unfamiliar with the term…”predicate offences” are offences that are considered a component of a more serious criminal offence. In recent years, tax evasion was added as a predicate offence in many countries as part of a global effort to fight financial crime.
Not all countries require predicate offences in order to establish a basis for money laundering. In the UK for example, one does only need to show illegal origins (of sufficient seriousness) to funds in order to establish a basis for prosecution.
Secondly, as we see with criminal acts such as funding of terrorism, the path of establishing prosecution under money laundering is not always clear. For example, a fund that had originated with an Iraqi sympathizer’s bank account in the United States, and transferred through the banking system all the way to a charity involved in helping children in war ridden Mosul may not look suspicious. How can we tell that the money ultimately was grabbed by ISIS terrorist members and used to purchase guns? Furthermore, even if we knew it, how can we prove it?
The financial industry had been given the important task of spearheading the fight against financial crime and thus to choke the abilities of criminals to operate. It must now develop the tools to deal with it.
Is it necessary to harmonise the criminalisation of money laundering, and why?
You’ve picked on a great point!
I think that governments are now realizing that harmonization and cooperation is the only way we, as a people, could step forward as a united front in order to successfully beat crime.
There has been a lot of attention given by governments and global organizations to the way we can become more efficient in the way we deal with money laundering. Robert Wainwright – Director of Europol, for one, has been instrumental in highlighting the issue and drawing attention to its importance.
Take for example the recent terror attack in Manchester, UK. The person who was responsible for the attack was, some time earlier, stopped and questioned by the Italian authorities for traveling to train in Syria, as many “foreign fighters” inevitably do. He was known to the authorities as a potential terrorist. If the information had been effectively shared with the British authorities, or indeed with the international community, could the bombing of the Manchester arena been avoided? We will never know, but this highlights the need for information sharing. Flagging that person as a potential terrorist would have alerted the financial industry as to his funding efforts – in this case he used student loans to fund his activities.
Harmonization is another manifestation of improved communication. In the same way that accounting standards have been slowly merging into an international code of practice in order to combat mishaps such as transfer-pricing and reporting manipulations, Anti Money Laundering laws must also do the same. When looking at the global pattern of money laundering activities, as we at Sunstone inevitably do, we see a cynical use of legal differences between countries. One of the classic examples for this is the use of shell companies in tax havens used to hide ultimate beneficial owners, or using jurisdictions which are not part of tax reporting treaties, and so on.
A less familiar example of taking advantage of differences in national criminalization in different countries is the use of jurisdictions where there is little enforcement. This is normally due to inconsistencies in the legal system or its suitability to the local eco system. Bribery norms in West Africa, Human trafficking in the Far East, sales of counterfeit goods in Asia, barter trading in the Middle East and so on. Criminals take advantages of the “social norms” in certain regions; norms that dictate the level of attention the local authorities give a particular illegal activity.
Could any non-legislative actions be taken in the fight against terrorist financing?
This is a much debated issue these days. I think the financial world is now realizing that terrorism is a problem in its own right, rather than a sub-set of money laundering as was traditionally thought of. As such, it is equally being realized that tools must be developed if we are to deal with terrorism successfully.
At Sunstone, we have spent much time on the matter as we have been approach by many institutions, national and financial, in order to support strategic and technological developments in the field.
In fact, this is a great question because of its importance and due to the way it is presented. Firstly, the question highlights the problem-at-hand that requires a solution. Secondly, it recognizes that the solution could be non-legislative. I will address these in turn.
Non-legislative: One of the biggest challenges to the fight against terrorism is the very low rate of prosecutions that accompanies most investigations. That is to say that out of 100 alerts investigated, only a handful will end up in a successful prosecution of the suspect, if at all. It is very difficult to attain forensic evidence due to
a) International span and lack of cooperation between jurisdictions,
b) Legislation, at times, prevents investigators from conducting a thorough, timely search where necessary.
Thus, if we are to find a solution, we must either change legislation (in most countries) or, more simply, find non-legislative solutions.
As for the question-at-hand, I believe that there are solutions to fighting modern money laundering and financing of terrorism. Firstly, I would say that the problem has changed over the last year, mainly due to the evolution of crypto technology, decentralized authorization systems and payment legislation. Money laundering occurs at a different level these days, in comparison to traditional money laundering. We are witnessing much more identity theft, electronic banking, payment facilities and off-grid banking. The fight against money laundering and financing of terrorism must shift a gear in order to match the future, which is already here.
What is needed now is a different approach to thinking about money laundering and financing of terrorism. Yes we can still look at suspicious transactions and produce SAR’s but we could also shift our attention and look elsewhere. These days individuals have a virtual presence as well as a physical one. This kind of presence, correctly evaluated, can tell us much more about our clients than our traditional KYC. There is technology that can help us, as financial institutions, tackle money laundering and financing of terrorism by new means.
In fact, as a part of our effort to find solutions to money laundering and financing of terrorism in the modern era, we have been assisting several technological companies develop such technology; aimed at doing just that. It is all very exciting and it is a field that keeps growing. There is no doubt in my mind that AML & CFT will look entirely different in the next 5 years.
What are Financial Intelligence Units, could any actions be undertaken to enhance financial intelligence in fight against financing terrorism?
Financial Intelligence Units (FIU’s) are a great idea and a useful instrument in the fight against ML & FT. We work with several FIU’s around the world, helping them establish National policy and develop practical tools. I think the part FIU’s play in the landscape of the war on money laundering and financing of terrorism is a vital one. We view them as the “responsible adult” of the financial playground as they have the ability to instigate good practices on a national level and act as an ambassador internationally in order to promote harmonization and cooperation.
FIU’s are essentially an intelligence style agency, aimed mainly at dealing with issues such as AML & CFT. Their role and ability varies from one country to the next but they are meant to do the same thing. Their role involves mainly, but not exclusively: collecting typology information, initiating investigations, leading legislative instrument evolution, collaborating internationally with other FIU’s and authorities, collaborating with local regulators.
Good intelligence takes time, patience and lots of resources. If we view FIU’s as instrumental in fighting crime, as we undoubtedly do, we should empower them to do more. We can do this by providing the resources, technology, political backing and the strategic training to create a formidable wall of defense around our financial well being.
How can virtual currencies be used to finance terrorism despite new trends in global financial regulations?
Crypto technology in general, and crypto currencies in particular pose a challenge to the regulatory framework.
As legislation tightened over the last few years, regulators noticed that tighter regulations had the opposite effect from the one intended. Tough regulations were intended to stop money laundering but due to tougher on-boarding requirements, coupled with the creation of alternative financial markets (crypto currencies and other technology), customers started to leave the banks and move over to easier, simpler, less regulated alternatives.
The regulators responded by amending the 4th directive (for example in Europe) and allowing banks to use faster, more efficient technology on the one hand, and on the other, to regulate alternative financial markets and providers, amongst which are virtual currency wallet providers and exchanges.
In practice, this is all too little, too late. Furthermore, it is very difficult to regulate virtual currency players as it is not always possible to know under which jurisdiction they operate.
There is evidence to show that crypto currencies and other financial asset classes are used for terrorism, money laundering and other crime but it is limited in comparison to traditional FIAT currencies markets mainly due to volatility, liquidity and technological knowhow that is required in order to do so successfully.
It is also understood today, as opposed to what was originally believed, that virtual currencies are traceable and, with the right resources and technology, it is possible to track and catch criminal activity. It all depends on the resources available and the will to do so.
We know money laundering is linked with financing terrorism and corruption, what efforts are taken to combat?
Money laundering is indeed linked to terrorism and corruption. I find it much more effective to think of the act of money laundering as the tool used by terrorists and corrupt individuals to transact money and support their goals. Thinking of money laundering as the tool rather than the crime itself allows one to separate the two and develop solutions which are purpose made to fit each part of the crime, making the fight against crime much more successful.
Efforts are being developed on all fronts, local, national, international and global. We can see it in the amount of legislation and regulation that is being constantly developed and updated. We can see it in the amount of money financial institutions and regulators are spending on staff. We see it in the amount of technological solutions that are being developed in the Reg-Tech industry.
There is still a long way to go. There are areas which are not well regulated such as Money exchanges, Hawalas, and so on. Add to that the creation of new alternatives such as Fin-Tech solutions and virtual currencies and you soon find that the race is far from coming to an end.
A shift in thinking from local efforts to global solutions and to the use of technology is, in my mind, a step in the right direction in terms of directing efforts towards a solution. We see a maturing of the financial industry and an awakening of the regulatory bodies in facing reality and learning that in order to win, we must match modern times and relay less on tradition as is normally accepted in banking. The tools are there, we just need to demonstrate the willingness to use them.
Sunstone is a leading compliance & strategy consulting firm, what best strategic solution you recommend to prevent terrorist moving and laundering cash across borders?
As mentioned earlier, terrorism is a complex concept; much larger than that normally perceived. It spans the globe and ranges from raising money to distributing it, supporting legal and illegal activities, providing humanitarian services and buying weapons. It happens in formal financial institutions and informal ones; it uses illegal activities and corrupt individuals. It can be viewed sympathetically in one region and with hostility in another. It is a beast of a problem and it is just growing.
The correct strategic approach to combating terrorism on the financial front, would be to understand it, learn its different facets, define the weak points, divide into areas of activity and develop solutions for each. Otherwise it is just too difficult to tackle. There is no magic formula.
Today, we are experiencing a surge in terrorist activities around the world. We are also, however, seeing the development of a new world of virtual existence and technological developments. We should learn to harness what we have; to take advantage of our strengths and apply new tools to new realities.
As we speak, many technological solutions are being developed around the world. The best of minds are creating new realities in the shape of artificial intelligence and analytical methods. All that we have to do is to apply them; use them to stay one step ahead of those wishing harm upon us. Once we realize that traditional methods are familiar also to the bad guys, we will have to change our approach.