Understanding the Predicate Offences to prevent money laundering
Understanding the Predicate Offences to prevent money laundering
No significant financial crime can be executed without resorting to other crimes. An interconnected network of crimes drives other crimes or acts as a shield to other crimes.
In this blog, we will discuss predicate offences, their impact, the international standards and regulatory framework to combat predicate offences and address the associated challenges and relevant best practices.
What is a Predicate Offence? – Predicate Offence Meaning with an Example
Predicate offences are those crimes that are a part of the web of crimes that ultimately lead to financial crimes, such as Money Laundering (ML) and Terrorism Financing (TF). For example, illicit funds derived from predicate offences such as tax evasion or corruption are converted into legitimate income through the financial crime of Money Laundering.
What is a Predicate Offence in Money Laundering?
Money laundering involves the act of disguising the source of money generated from a criminal activity. The criminal activity referred to here is nothing but a predicate offence resulting in one generating proceeds of crime. A predicate crime includes various illegal activities. Say, human trafficking is a predicate offence.
Money Laundering is not an act done in isolation. There is always an underlying criminal activity that results in illicit gains and serves as the basis for money laundering.
If predicate offences are controlled, it will naturally result in control over money laundering, and hence, Governments across the world have criminalised predicate offences to counter ML/TF. There are 21 predicate offences of money laundering, which are classified by various local and international bodies.
What is Predicate Offence under UAE AML/CFT Regulations?
What is a Predicate Crime? – Predicate Crime Meaning under UAE Laws
Under the UAE AML/CFT regulations, the phrase “Predicate Offense” has been defined as under:
Predicate Offense Definition:
Any act constituting a felony or misdemeanour under laws of the UAE, whether committed inside or outside the UAE, when such act is punishable in both countries – UAE and the other country where the crime has been committed.
Further, the definition of the term “Crime” in the UAE AML/CFT regulations includes money laundering and related predicate offences.
Significance of Understanding Predicate Offences
Predicate offences are important because they serve as the point of origin or source for Money Laundering operations.
Regulated Entities that endeavour to counter money laundering risks must be aware of the relevant predicate offences, as the act of money laundering is dependent on the underlying predicate offences. The proceeds of predicate offences are concealed by way of Money Laundering.
So, to be able to better comprehend the money laundering risks, Regulated Entities must first have a comprehensive understanding of the predicate offences.
Stages of Money Laundering and Predicate Offences
The stages of money laundering include placement, layering and integration, and predicate offence is a connecting link in the cyclical chain of Money Laundering. The illegal proceeds of predicate offences are placed into the financial system to conceal the illicit nature of such funds by layering and finally integrated into the economy. Once integrated into the economy, new predicate offences are committed using certain potions from laundered proceeds to fund the predicate offence, and proceeds from new predicate offences are again ready for laundering.
Impact of Predicate Offences
Businesses or institutions that are vulnerable to predicate offences run the risk of straining their reputation or facing other kinds of risks, such as:
- Legal Risks
- Operational Risks
- Social Costs, such as the impact on the credit score
- Money laundering risks
- Terrorism and terrorism financing risks
The economy of a country and its society bear the final brunt of predicate offences. For instance, terrorism and terrorism financing threaten a country’s national security, tax crime and fraud, insider trading, and market manipulation weaken the financial system, lead to a loss of revenue for the government, and negatively impact the influx of foreign investment.
The increased exposure to such crime affects the overall stability of the country and its reputation.
Predicate Crimes: Regulatory Framework and Standards
FATF Predicate Offences
The Financial Action Task Force (FATF) is the global Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) watchdog. It sets international AML/CFT standards and recommendations for the effective implementation of the recommendations. FATF’s 40 Recommendations is the Northern Star guiding countries in adopting effective AML/CFT controls.
Through the recommendations, FATF has also defined the designated categories of offences that are considered ML predicates and suggested a non-exhaustive list of such predicate offences.
What Activities will be considered as Predicate Offences?
To include the broadest range of predicate offences, the FATF has provided that countries should apply the crime of money laundering to all serious offences.
21 Predicate offences have been classified by FATF (Financial Action Task Force). Predicate crimes from this predicate offence list have been criminalised internationally. Note that this list of FATF predicate crimes is not a comprehensive list of predicate offences, as there may be any other act of misdemeanours or felonies, apart from what is mentioned hereunder, which aids the laundering of funds and, thus, be considered as predicate offences. However, the FATF list of 21 predicate crimes provides a good understanding of what a predicate offence is to anyone who is asked to define a predicate offence.
FATF’s List of 21 Predicate Offences
- Terrorism, including terrorist financing
- Illicit arms trafficking
- Participation in an organised criminal group and racketeering
- Trafficking in human beings and migrant smuggling
- Sexual exploitation, including sexual exploitation of children
- Tax crimes (related to direct taxes and indirect taxes)
- Illicit trafficking in stolen and other goods
- Corruption and bribery
- Forgery
- Counterfeiting currency
- Insider trading and market manipulation
- Environmental crime
- Murder, grievous bodily injury
- Kidnapping, illegal restraint, and hostage-taking
- Robbery or theft
- Smuggling (including in relation to customs and excise duties and taxes)
- Illicit trafficking in narcotic drugs and psychotropic substances
- Extortion
- Fraud
- Piracy
- Counterfeiting and piracy of products
European Union (EU) Directives on Money Laundering
The first directive issued by the EU defined the scope of predicate offences as per the 1988 Vienna Convention while encouraging member nations to expand its scope to other countries.
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Global Regulatory Approach to Predicate Offences
Predicate Offences vary between countries and are usually codified in a country’s criminal code, considering the country’s economy and market. Hence, it’s a bit difficult to carve out a general list of predicate crimes in Money Laundering. Here’s a gist of the global regulatory framework for predicate offences:
The UAE’s Federal Decree-Law No. (20) of 2018 on Anti-money Laundering and Combating the Financing of Terrorism and Financing of Illegal Organisations defines predicate offence as any offence or misdemeanour that is applicable under the laws of UAE irrespective of whether it is committed within UAE or outside UAE subject to the condition of dual criminality.
UAE National Risk Assessment (NRA) 2018 and Predicate Offences
The UAE National Risk Assessment (NRA) conducted in 2018 considered the Money Laundering threat of FATF 21 predicate offences and identified the following predicate crimes as posing the most likely threats of Money Laundering:
- Fraud
- Counterfeiting and piracy of products
- Illicit trafficking in narcotics
- Professional third-party ML
Identifying and Reporting Predicate Offences in UAE
Cabinet Decision No. (10) Of 2019 Concerning the Implementing Regulation of Decree Law No. (20) of 2018 on Anti-Money Laundering and Combating the Financing of Terrorism and Illegal Organisations requires Financial Institutions (FIs) and Designated Non-Financial Businesses and Professions (DNFBPs) to report a suspicious transaction to the Financial Intelligence Unit (FIU) if they suspect the commission of a crime.
FIs and DNFBPs are thus required to give effect to indicators which can be used to identify the suspicion of the occurrence of a crime for the purpose of reporting to the FIU. Such indicators must also be updated from time to time.
Common Red Flags Associated with Predicate Offences
It is essential for FIs and DNFBPs to identify red-flag indicators associated with predicate offences before putting in place controls to safeguard themselves against ML/TF risks and the risks from other illicit activities.
Such red flags include:
- Transactions involving high-risk jurisdictions
- No proper explanation for the source of the funds
- Inconsistency between the financial status and business or professional activities
- Unusual transactional patterns
Role of Compliance Officer in Countering Predicate Offences
FIs and DNFBPs are also required to appoint a Compliance Officer to review their internal rules and procedures for combating ML activities and their predicate offences in consonance with the AML/CFT laws and suggest necessary updates.
Suspicious Activity Report/Suspicious Transaction Report (SAR/STR)
It is mandatory for Financial Institutions and DNFBPs to register with the goAML portal. The goAML Suspicious Transaction Reporting System adopted by UAE allows DNFBPs and FIs to report suspicious transactions, activity, or patterns.
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Challenges in Addressing Predicate Offences
Addressing the threat posed by predicate offences can be challenging not just for the regulatory authorities but also for Regulated Entities such as FIs and DNFBPS. These challenges include:
Investigation of Predicate Offences
The Financial Intelligence Units face several challenges when investigating predicate offences, such as:
- Identifying the intricate network of entities involved
- Uncovering the sophisticated nature of criminal activities
- Establishing a nexus between Money Laundering and predicate offence
- Gathering direct or documentary evidence for establishing the committing of a crime
Legal Challenges
The cross-border nature of predicate offences, the differences in global regulatory standards, the lack of effective mutual cooperation and bureaucratic challenges significantly impact the efforts to combat Money Laundering and its predicate offences.
Evolving Nature of Predicate Offences
As technology advances and global economies evolve, criminals constantly adapt their methods, and new types of predicate offences emerge, such as cybercrime and cryptocurrency-related crimes, making it difficult for DNFBPs and FIs to identify such suspicious activities.
Transnational Nature of Predicate Offences
The methodologies of predicate offences transcend boundaries. This poses a significant challenge to the regulatory authorities and Regulated Entities due to the following:
- Jurisdictional complexities
- Difference in legal frameworks
- Tracing the origin of the illicit acts and their proceeds
Lack of Resources and Expertise
DNFBPs and FIs are required to comply with the regulatory framework for combating Money Laundering and its predicate offences. However, they may not necessarily have the adequate resources or well-trained staff in AML compliance to fulfil their regulatory obligations.
Can a Person Committing a Predicate Offence Be Held Guilty under UAE AML/CFT Regulations?
The AML/CFT law provides that a person shall be held guilty of committing a predicate offence and be treated as the perpetrator of the money laundering crime if he knows the fact that the associated proceeds have originated from a misdemeanour or felony and intentionally commits any of the following acts:
- Carrying or transmitting the proceeds to hide the illicit source of funds,
- Hiding the actual source, nature, location, ownership, and rights associated with those proceeds,
- Acquisition, possession, or utilisation of those illicit proceeds,
- Helping the money launderer or perpetrator of predicate offences escape punishment.
The UAE AML/CFT laws provide that the penetrator of predicate offences will not be saved from the punishment of committing the crime of money laundering, as these two crimes would be treated as independent crimes. Thus, a person guilty of a predicate offence would also be charged with a money laundering crime and punishable under both offences.
Companies need skilful and knowledgeable employees to implement a robust AML framework to safeguard the business from being exploited by money launderers.
AML training brings a consistent understanding across all levels of the importance of AML compliance and their role in identifying ML/FT threats to save the company and its reputation. All the employees, including the senior management, stay more aligned with AML-related organisational objectives, resulting in the more successful adoption of the AML/CFT compliance program.
Best Practices for Combating Predicate Offences
To overcome the above-mentioned challenges, DNFBPs and FIs should extend their AML compliance efforts to combat predicate offences as a best practice. This includes:
Risk-Based Approach
In essence, the Risk-Based Approach (RBA) is the efficient implementation of controls to mitigate the most significant ML risks to which the DNFBPs or FIs are subject. It works on the principle of ‘higher the risks, higher the controls’. By adopting RBA, Regulated Entities are better equipped to detect ML risks, mitigate them, and report them at an early stage.
Customer Due Diligence (CDD)
CDD is a mechanism for identifying customer information by seeking personal information like name, date of birth, nationality, and address and verifying them against independent, reliable sources such as passport, ID Card, or Driving License.
CDD also involves identifying the Beneficial Owner of the customer or proposed transaction and the nature of the business relationship that the customer intends to establish.
Know Your Customer (KYC)
KYC is the first step in CDD. DNFBPs and FIs collect and verify customer identity information and documents based on the legal nature of the customer.
Name Screening
DNFBPs and FIs are required to Screen the names of their customers against the following lists:
This process helps DNFBPs and FIs to ensure that the customer is not involved in any terrorism-related activities or has any adverse news suggesting any relation to a serious offence, such as fraud or drug dealing, that may be a predicate to money laundering. Additionally, determining the PEP status allows DNFBPs and FIs to evaluate if the customer poses ML risks through predicate offences such as corruption.
Customer Risk Assessment and Risk Profiling
Based on the KYC and screening, DNFBPs and FIs can classify their customers into high-risk, medium-risk, and low-risk customers. And adopt a Risk-Based Approach to perform further due diligence.
Enhanced Due Diligence
Enhanced Due Diligence is the additional set of due diligence conducted by DNFBPs and FIs when dealing with a high-risk customer. It includes:
- Identifying and verifying additional customer information such as the nature of business, the purpose of a transaction
- Classifying the Source of Wealth and Source of Funds
- Seeking approval from senior management before onboarding or engaging with the customer
Transaction Monitoring
DNFBPs and FIs must periodically monitor their customers’ transactions to see if they are in agreement with the customer profile, transaction history, customer behaviour or transaction details. Any suspicious deviation or inconsistency with the transaction pattern can be a red flag indicator to potential predicate offences and their subsequent ML risks.
Training and Awareness
DNFBPs and FIs must train their employees and staff members to identify the red flags and suspicious behaviour, transactions or patterns associated with predicate offences and ML activities to effectively implement their internal procedures, policies, and controls.
Using an Efficient AML Software
DNFBPs and FIs can overcome the challenges of resource deficiency, inefficiency, accuracy, time constraints, etc, with the help of AML software based on cutting-edge technologies.
Adopting a Collaborative Approach
A more collaborative approach through public-private partnerships, information sharing, and greater transparency can bolster the overall efforts to combat Money Laundering and its predicate offences.
Conclusion
By attaining a comprehensive understanding of predicate offences, Designated Non-Financial Businesses and Professions (DNFBPs) and Financial Institutions (FIs) can strengthen their control against the risks of money laundering and terrorism financing.
Frequently Asked Questions
A predicate offence is an illegal activity that is the foundation or the first crime in the chain of another crime. Predicate offences are the crimes or illegal activities from which the funds are derived for Money Laundering.
The Financial Action Task Force (FATF) provides a non-exhaustive list of designated categories of offences that are predicate to Money Laundering.
Fraud, corruption, tax crimes, extortion, piracy, insider trading and market manipulation are some of the common examples of Money Laundering predicate offences. However, different jurisdictions have different definitions for predicate offences.
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About the Author
Jyoti Maheshwari
CAMS, ACA
Jyoti has over 8 years of hands-on experience in regulatory compliance, policymaking, risk management, technology consultancy, and implementation. She holds vast experience with Anti-Money Laundering rules and regulations and helps companies deploy adequate mitigation measures and comply with legal requirements. Jyoti has been instrumental in optimizing business processes, documenting business requirements, preparing FRD, BRD, and SRS, and implementing IT solutions.