Money laundering awareness and preventing at commercial banking system in ho chi minh city

The need for enhancing the anti money laundering regime and made the international financial systems transparency and integrity is more important than ever to ensure and limit the public

UNIVERSITY OF ECONOMICS HO CHI MINH CITY

2011

CHUNG PHỐI DIỆU

MONEY LAUNDERING – AWARENESS AND PREVENTING AT COMMERCIAL BANKING

SYSTEM IN HO CHI MINH CITY

MASTER THESIS

Faculty of Banking

Ho Chi Minh City – 2011

UNIVERSITY OF ECONOMICS HO CHI MINH CITY

2011

CHUNG PHỐI DIỆU

MONEY LAUNDERING – AWARENESS AND PREVENTING AT COMMERCIAL BANKING

MAJOR: BANKING AND FINANCE

MAJOR CODE: 60.31.12

MASTER THESIS SUPERVISOR

HỒ VIẾT TIẾN Ph.D

Faculty of Banking

Ho Chi Minh City

I assure that the contents and figures in this research are from my study and performance and have been properly quoting

The writer

Chung Phoi Dieu

ABSTRACT

ACKNOWLEDGE ABBREVIATION LIST OF TABLES Chapter 1 Introduction to the study 1

1.1 Rationale of the study: 1

1.2 Statement of the problem: 2

1.3 Research questions: 2

1.4 Research objectives: 3

1.5 Scope and limitation of the study: 3

1.5.1 Scope: 3

1.5.2 Limitation: 4

1.6 Methodology of the study: 4

1.7 Structure of the study: 5

Chapter 2 Overview of Money laundering (ML) and Anti Money laundering (AML) 7

2.1 Basic information about ML: 7

2.1.1 Definition of ML: 7

2.1.2 The cycle of ML 8

2.1.3 The impact of ML and the importance of AML: 10

2.1.4 Examples of suspicious transactions: 12

2.2 The worldwide experience on enforcement of AML: 13

2.2.1 Some typical organizations set up and promote standards on AML: 13

2.2.2 The AML enforcement in some countries: 19

Chapter 3 Research Methodology 23

3.1 Research design: 23

3.3 Data analysis and presentation: 29

Chapter 4 The current awareness and preventing on ML at commercial banks in HCMC 33

4.1 Overview of ML and AML in Vietnam banking system: 33

4.1.1 Overview of legal framework of ML and AML on Vietnam banking system: .33

4.1.2 Overview of commercial banking system in HCMC: 37

4.1.3 ML & AML in Vietnam banking system in general: 39

4.2 The necessary of AML in Vietnam: 41

4.3 The achievement of AML in banking sector: 43

4.3.1 Legal system: 43

4.3.2 Government management and monitoring of ML and AML: 43

4.3.3 Methods of AML: 43

4.3.4 AML international cooperation: 44

4.4 The main constraints of ML and AML in Vietnam banking sector: 44

4.4.1 Largely cash-based economy: 44

4.4.2 Deficiency of ML and AML law and regulations: 45

4.4.3 ML and AML - new concept to Vietnam: 45

4.4.4 The competition between banks: 46

4.4.5 The inconsistence implementation of ML and AML procedures between banks: .47

4.4.6 Lack of the on site inspection undertaken to date by financial supervisors: 48

4.4.7 Lack of the information exchanging with international departments: 49 4.5 The evaluation of awareness and preventing ML at commercial banks in HCMC: 49

Chapter 5 The implications for the banking systems on ML & AML 58

5.1 Macro implications: 58

5.1.1 Improving the legal framework on ML and AML in Vietnam: 58

5.1.2 Popularizing and promoting the knowledge of ML and AML to the public: 59

5.1.3 Establishing the closely and prudently monitoring: 60

5.1.4 Enhancing international relationship to corporate to international AML: 62

5.2 Micro implications: 62

5.2.1 Learning and sharing experience between commercial banks lead by SBV: 62

5.2.2 Establishing and strengthening the missions of AML department: 63

5.2.3 Popularizing and enforcing the AML policies and procedures in each bank: 63

5.2.4 Conducting on-going training to staffs: 68

CONCLUSION 70

REFERENCE 71 APPENDIX

Nowadays, people in the world gradually recognize that there is serious risks exist when the criminal activity that involves crime money is transferred or

“laundered” successfully to become the legitimate fund It could bring to large threat to the economy as such huge “legitimate” fund which in turn could control again the economy Especially, banking system may be one of the place for these money laundering activities to be happened easily incase there are loose of controlling and vigilance for this risk The need for enhancing the anti money laundering regime and made the international financial systems transparency and integrity is more important than ever to ensure and limit the public funds mobilized will not be the laundered or criminal funds or the banks will not be used for money laundering

As a part in the global economy integration and global financial systems, Vietnam is also under the trend to build the fence to prevent for the money laundering We are here to assess for the current situation of the money laundering and anti money laundering regime in Vietnam commercial banking sector in order

to find out for any implications to improve the current regime to be as strong as we could Of course, the effective way is to give rise to banks and personal responsibility To detect, prevent ML and protect the financial community, every financial institution and every employee in the financial sector has a role to play

Firstly, I would like to express my deep and sincere appreciation to my research Supervisor, Dr Ho Viet Tien for his valuable guidance and comments as well as his experience sharing and encouragements throughout my research course

I would like to thank to the banking experts from commercial banks in Ho Chi Minh City who are enthusiasm and helpful to share their knowledgeable opinions and experience Moreover, the gratitude is also addressed to all of the banking staffs, banking friends and classmates who fervently participated in the survey Last but not least, my special appreciation is extended to all instructors at Faculty of Banking and Postgraduate Faculty, University of Economics Ho Chi Minh City for their precious coaching and supporting during my study

Once again, thanks for all my beloveds for your ceaseless support to complete this research

AML Anti – Money Laundering

AMLIC Anti-Money Laundering Information Center

APG Asia Pacific Group

CDD Customer Due Diligence

CFATF Caribbean Financial Action Task Force

EAG Eurasian Group on Combating Money Laundering and

Financing of Terrorism ESAAMLG Eastern and South African Anti Money Laundering Group

FinCEN Financial Crimes Enforcement Network

FSRBS FATF-style regional bodies

GAFISUD Financial Action Task Force on Money Laundering in South

America GIABA Inter-Governmental Action Group against Money Laundering

in West Africa

MENAFATF Middle East and North Africa Financial Action Task Force

ODCCP Office for Drug Control and Crime Prevention

PEPs Politically Exposed Persons

SBV State bank of Viet Nam

UNODC United Nations Office on Drugs and Crime

Table 4-2 – The suspicious transactions report 41

Table 4-3 – The statistical data of question 9 51

Table 4-4 – Frequency thinking of ML and AML of staffs 53

Table 4-5 – AML policy and department in each sector 54

Table 4-6 – The sources of ML and AML knowledge 55

Table 4-7 – Actions taken by staffs 56

Chapter 1 Introduction to the study - 1.1 Rationale of the study:

Drugs / arms trafficking, corruptions, smugglings etc “generate” huge monetary value every year The criminal would find the way to “clean” these illicit funds to be the legal sources as from the legitimate business activities for their own using This cleaning process is known as money laundering Gradually, money laundering (ML) and anti money laundering (AML) became a global issue as its wide range affect on economic, finance, politic as well as society of not only within

a country but also worldwide stability Especially the banking system is constantly under the threat from these laundering processes

Most countries now have AML measures in place and these laws, regulations give rise to corporate and personal responsibility Currently there are 34 countries became members of Financial Action Task Force on Money Laundering (FATF), an intergovernmental body whose purpose is to develop and promote an international response to combat money laundering

Vietnam is also became a member of Asia Pacific Group (APG) on Money Laundering in 2007 and is on the way to develop their laws and enforcement on this global issue to comport with international standards Due to the habit of using cash

as well as the increasing of the trade and investment, Vietnam has been labeled as the site of significant money laundering activities by the United Nations Office on Drugs and Crime (UNODC) Almost all trade, investment, cash in transactions are not monitored effectively at our banking system due to ML and AML is still a new concept in many people’s mind in Vietnam The banking system could be used for money laundering

Therefore, the faster and effectiveness Vietnam banking system upgrade the regime of ML and preventing ML, the less the crimes are disguised to legitimate

business through this channel The awareness of the bank staffs on AML plays an important role in preventing the service provided by the bank from being used for illicit activities The banking staffs needs to be vigilant at all time to protect the reputation as well as the customers of the bank and to meet the legal and moral obligations

1.2 Statement of the problem:

Well awareness of AML will help to reduce the possibility of the money launderers to legalize their crime funds This thesis will conduct an assess on the understanding and awareness of banking staffs (between Vietnamese commercial banks and foreign banks in Vietnam) on ML and preventing ML in order to know the current situation of this issue in our banking system; address the main achievements and practical constraints and to find out the implications in order to take additional steps necessary to establish the strong AML regime in Vietnam banking system

1.3 Research questions:

With the above research statement, the study will answer the following questions:

- What are ML and why Vietnam banking system needs to prevent ML?

- What are the current situations of ML & AML in Vietnam banking system? What are the main achievement and practical constraints of ML & AML in Vietnam banking system?

- What are the current understanding and awareness of ML and preventing of ML between foreign bank and Vietnamese commercial bank staffs? Are there differences AML practices between these two sectors (hypothesis testing)?

- What are the implications for the regime of ML & AML in Vietnam banking system?

1.4 Research objectives:

Researching the problem and answering the above research questions will aim to

- To gain the knowledge of ML & AML in general

- To approach the current practices of ML & AML in Vietnam banking system

- To assess the understanding and awareness between Vietnamese commercial bank and foreign bank staffs in ML & AML

- To figure out the implications to improve and establish the strong knowledge and regime of ML & AML in Vietnam banking system

1.5 Scope and limitation of the study:

1.5.1 Scope:

As mentioned above, this study will research the awareness and prevention

of ML at commercial banks in Vietnam through two main sectors of banking system that is Vietnamese commercial banks and foreign banks in Vietnam Vietnamese commercial banks sector included three Vietnamese state-owned commercial banks and eight Vietnamese joint-stock commercial banks Foreign banks in Vietnam sector included four 100% foreign-owned banks, six branches of foreign banks (details see appendix 1) We excluded the joint venture bank in this research

The reason for choosing these typical banks for research is due to their large charter capital and their widest network compared to each sector’s individual banks (details of charter capital and network of the above individual banks see appendix 1)

We conduct the research on the case study at Ho Chi Minh City (HCMC) of Vietnam The research will be conducted through the random banking staffs in the head offices, main transaction offices, branches, transaction offices, transaction points and representative offices at HCMC of the choosing banks

1.5.2 Limitation:

By end of October 2011, there are approximate 44 banks in Vietnamese commercial banks sector and 63 banks in foreign banks sector1 (excluded 5 joint venture banks) and thousand of their head offices, main transaction offices, branches, transaction offices, transaction points and representative offices across Vietnam Due to the limitation of time and resources of author, the sample of the study is not large enough to cover all banks’ banking staffs in Vietnam on ML & AML understanding; it is proposed to cover some typical banks as mentioned above

in two sectors with a sample of 120 staffs Together with the ML transactions are diversified with sophisticated disguise The knowledge of the ML & AML needs to

be updated day by day to cover all tricky of the launderers The above constrains will be continuously researched and completed by other studies

1.6 Methodology of the study:

The data collection used in the research will be the secondary data and the primary data from in-depth interviewing and survey conducting The sources of the secondary data will be Internet, Newspaper, Periodical Magazines, Articles, Law and regulations etc…The primary data will be the in-depth interviews from banking experts who works for both above two sectors and the mass sample survey (120 staffs from different choosing Vietnam commercial banks and foreign banks in HCMC of Vietnam) The survey research approach will come out with the null hypothesis H0 and the alternative hypothesis H1 as below

+ H 0 : There is no difference in the awareness and prevention of ML between Vietnamese commercial banks and foreign banks in HCMC

+ H 1 : There is difference in the awareness and prevention of ML between Vietnamese commercial banks and foreign banks in HCMC

Data analysis will be developed thereafter to test for the above hypothesis

1 State Bank of Vietnam’s bank network report

1.7 Structure of the study:

Chapter 1 – Introduction to the study

This chapter is mainly stated the rationale of the study, the problem statement, the research questions and objectives, the scope and limitation, the methodology and the structure of the study

Chapter 2 – Overview on ML & AML

This chapter is a review of some academic information which is applied for analysis throughout the research included the concept of ML & AML, the impact of

ML and the importance of AML, the example of suspicious transactions, the regulations on ML & AML worldwide, the experience and regime of ML & AML

in some countries

Chapter 3 – Research methodology

The chapter is to describe, justify the research methodology used in the study With the research problem mentioned in chapter 1 which is identified by the first draft of exploratory research, the researcher established the research design, conducted data collection and data analysis to solve the research problem

Chapter 4 – The current awareness and preventing on ML at commercial banks in HCMC

This chapter goes through the overview of legal system of ML and AML in Vietnam and the overview of commercial banking in HCMC; presents descriptive findings from international AML organization about ML & AML of Vietnam in general; discusses the necessary of AML in Vietnam and the main achievements and constrains in ML and AML in Vietnam; analyses the opinions and experience from banking experts of commercial banks in HCMC and the results from the testing of the hypothesis with regarding to the current awareness on ML & AML of banking staffs between Vietnam commercial banks and foreign banks in HCMC

Chapter 5 - The implications for the banking systems on ML & AML

Through the research results from chapter 4, this chapter is aim to provides the implications for improving the current situation on ML & AML of both Vietnamese commercial banks and foreign banks in Vietnam

Chapter 2 Overview of Money laundering (ML) and Anti Money laundering

(AML) -

In this chapter we will go through some basic information of ML and AML from the definition to the cycle of ML, the example of suspicious transactions of

ML to the legal framework, AML organization and the experience of AML in the world This chapter would also point out how impact of ML and the importance of AML

2.1 Basic information about ML:

2.1.1 Definition of ML:

In general, ML is the process of disguising the identity of illegally obtained money so that it appears to have originated from legitimate sources Any kind of criminal activity including fraud, tax evasion, corruption, drug trafficking, prostitution, smuggling, kidnapping or extortion can be a source of funds that need

to be laundered

As defined in the Article 3 Chapter 1 of the Decree No 74/2005/ND-CP on 07/06/2005 of the government on preventing of money laundering that ML means acts committed by individuals or organizations to legitimize money or property acquired from criminal activity through the following specific activities:

a/ Directly or indirectly participate in a transaction related to money or property acquired from criminal activity;

b/ Receiving, appropriating, moving, converting, transferring, transporting, using or transporting across borders money or property acquired from criminal activity;

c/ Investing in a project or work, contributing capital to an enterprise or otherwise concealing or disguising, or obstructing the verification of the origin, the

truth or the location, movement process or ownership of, money or property acquired from criminal activity

2.1.2 The cycle of ML

One of the most common means of ML that the banks maybe encountered on a day-to-day basis that is the accumulated cash transactions will be deposited by different tricky into the banking system These simple transactions may be just one part of the sophisticated transactions of ML Understand how the ML process works could help detecting, preventing and protecting against ML There are three stages

of ML during which there may be numerous transactions made by launderers

ML usually begins with the proceeds of crime Therefore, the first and key stage of ML operations is the physical placing of cash proceeds derived from illegal

activity into the financial system so that the process can start We called it the

placement stage At this stage, cash is often involves

The money is then moved through a complicated series of transactions to

disguise criminal origins - the layering stage This stage is separating illicit

proceeds from their source by moving the criminal money through complex layers

of transactions to disguise the link between the money and its origins Cheques or wire payments are often used at this stage

When the money is free from any association with criminal activities; it becomes “clean” legitimate money The criminal can now use the layered fund to

invest in any clean, legitimate financial product or service This is the integration

stage - the final stage in the process where the illicit funds are converted into a

seemingly legitimate source, thereby successfully disguising their criminal origins

If the layering process has succeeded, integration stage will place the laundered proceeds back into the economy by re-entering the financial system but appearing to

be normal business funds

This cycle of criminal funds to be concealed as legitimate funds usually involves at least one provider of financial service The banking systems will always

be a potential target, so the banks must constantly guard against the risks Criminal can target financial institutions at each of these above three stages It’s important for all the banking system to prevent criminal funds from entering, continuing through

or leaving the financial system

The following chart illustrates the laundering stages in more detail

Process of money laundering

High risk transfer

Low risk transfer

Source: The Monetary Authority in Hongkong, Section 7(3) of the Banking

Ordinance: Guideline on prevention of money laundering

Illicit Activity

Proceeds of fraud, tax

evasion, drug trafficking,

prostitution, smuggling,

kidnapping or extortion

Placement Placing of Bulk Cash into financial system by

*Mix illicit proceeds with legitimate deposits

*Deposit amount in small denominations

*Diversified banks and commercial transactions

to place in

Intergration

Use layered funds to purchase

clean, legitimate assets

Layering Disguise origin of initial deposit through

*Multiple Transfers

*Multiple Transactions

2.1.3 The impact of ML and the importance of AML:

2.1.3.1 The impact of ML:

By its nature, ML is an illegal activity carried out by criminals which occurs outside of the normal range of legitimate activities No one knows exactly how much criminal fund flows through the worldwide financial system every year, but the amounts involved are undoubtedly huge As estimated by the International Monetary Fund, each year billions of dollars of criminal proceeds are "laundered” and the amounts involved could be two to five percent of the world's GDP The possible consequences of ML on one country’s owned economics, financial, social, and political as well as the external stability could easily be recognized

Money launderers try to exploit the operation in the global financial system as well as differences national AML laws and systems to find the room to disguise their criminal funds Countries with weak or ineffective controls where launderers can move their funds more easily without detection may likely attract more criminals Then organized crime could through their laundered funds to acquire control of large sectors of the economy through investment, or offer bribes to public officials and governments The economic and political influence of criminal organizations can weaken the social moral standards, and ultimately the democratic institutions of society Moreover, the countries in which subject to the control and influence of organized crime, the investors or the international financial organizations who intend to invest in such countries ought to pay more attentions and controls for the fund originate from or to there The reputation risk of these countries may be affected The negative consequence of ML, therefore, for a country’s financial, social stability and macroeconomic performance is inevitability

ML even has caused destabilizing effects on the economies of other countries as in increasingly interconnected world; problems in one country can quickly spread to other countries in the region or in other parts of the world

Especially for banking institutions, one of the most common laundered system, ML has also presented serious risks A reputation is the one of the most valuable assets of a banking institution If funds from criminal activity can be easily processed through a particular institution – either because the employees or directors have been bribed or because the criminal nature of such funds could not be recognized – the institution could be drawn into the complicity with criminals and become part of the criminal network itself Any association with criminal activity is likely to attract public attention Evidence of such complicity will lead to the substantial fines, charges or restrictions on the freely operation of the institution and may have a damaging effect on the attitudes of other financial intermediaries, the regulatory authorities, and especially the damaging confidence from the public customers

2.1.3.2 The importance of AML:

Through the above analysis of the negative consequence of ML both nationally and internationally, we could see that strong AML regimes will play an important part to reduce such suffering in the future

For banking institutions, it can take a long time to build a relationship of trust and loyalty with a customer, but this trust and loyalty can be lost in an instant incase these institutions have involved in ML So controlling the risk associated with ML isn’t just about avoiding fines and regulatory ensures It is about protecting reputation, ability to attract new customers as well as ability to keep existing customers

Some might argue that developing economies cannot to be too selective about the sources of capital they attract But postponing action is dangerous The more it

is deferred, the more gap organized crime could abuse at those countries Therefore, AML must be conducted worldwide and strictly

AML enhance financial sector integrity and stability, which could facilitate countries’ integration into the global financial system As with the damaged integrity of a financial institution which is perceived to be subject to the control and influence of organized crime, there is an adverse effect on foreign investment to that country Fighting ML is therefore a part of creating a business friendly environment which is a precondition for the country’s economic development and foreign investment attracting

Finally and most importantly, targeting the ML aspect of criminal activity means hitting these activities where it is vulnerable as without a usable or legitimated profit, the criminal activity will not be continued As such, society, political, economic, finance could be stable That is the core of AML

2.1.4 Examples of suspicious transactions:

The technique that criminal used to disguise the origins and purpose of their funds are changing and developing all the time So it is difficult to make a definitive list of transactions and behavior that are usual or suspicious But there are a number

of indicators of usual or suspicious activity

Some key and common methods the criminals may use to disguise the source

or purpose of their funds included making small deposits into the financial system

to avoid suspicion; using seemingly innocent people or business partners to act as accomplices to contact the financial system in different ways; transferring money across international borders… In order to develop specific guidance and screening skill on detecting ML for banking staffs, FATF and the national international financial institutions / financial intelligence units has consolidated some examples

of suspicious transactions There may be suspicious in cash transaction, bank account, wire transfer, lending, offshore international activities (See appendix 5) These examples are not intended to be covered all ML tricks but just to provide the most basic ways in which money may be laundered to enhance the vigilance of banking staffs

2.2 The worldwide experience on enforcement of AML:

ML and AML has been the world wide issue since several decades We could see that there are plenty of organizations to set up and promote standards on ML & AML both international and regional in which some typical ones will be gone through below to have an overview of the issue of ML & AML in the world With the increasing flows of international commerce, each country when joining through such flows had developed its owned standards and guidelines on ML & AML based

on the international and regional standards The experience and implement of ML & AML on several countries will also be reviewed as following

2.2.1 Some typical organizations set up and promote standards on AML:

2.2.1.1 United Nations (UN):

The United Nations (UN) was the first international organization to undertake significant action to fight ML on a world-wide basis Founded in October of 1945,

UN is the international organization with the widest range of membership There are currently 193 member states of the UN throughout the world2

UN actively operates a program to fight ML - the Global Program against Money Laundering (GPML) - which is headquartered in Vienna, Austria, was a research and assistance project within the United Nations Office for Drug Control and Crime Prevention (ODCCP) The Program's goal is to increase the effectiveness

of international action against ML by offering comprehensive technical expertise to the requesting member states

UN has also adopted international conventions that have the effect on law in a country once that country has signed, ratified and implemented the convention, depending upon the country’s legal structure The UN Security Council has the

2 List of member states of UN at http://www.un.org/en/members/

authority to bind all member countries through a Security Council Resolution There are Conventions that respect to ML included:

First, the United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (1988) (Vienna Convention) came into force on 11 November 1990, defines the concept and calls upon countries to criminalize the ML activity;

Second, the International Convention Against Transnational Organized Crime (2000) (Palermo Convention) effective on 29 September 2003, adopted the same approach as FATF’s 40 recommendation on ML (as appendix 6) that is specifically require each member (1) to criminalize ML and all serious crimes as predicate offenses of ML, whether it takes place in or outside of the country; (2) to establish regulatory regimes to deter and detect all forms of money laundering, including customer identification, record-keeping and reporting of suspicious transactions; ensure the ability of cooperation and exchange of information among administrative, regulatory, law enforcement and other authorities dedicated to combat ML, both nationally and internationally, and consider the establishment of a financial intelligence unit to collect, analyze and disseminate information; (3) to promote international cooperation.3

2.2.1.2 The Financial Action Task Force (FATF):

FATF is an inter-governmental body whose purpose is the development and promotion of policies, both at national and international levels, to combat money laundering FATF is therefore a "policy-making body" which brings together legal, financial and law enforcement experts to achieve national legislation and regulatory reforms in AML.4

3 The Palermo Convention, Article 7

4 About FATF see at http://www.fatf-gafi.org/

FATF’s three functions with regards to ML are monitoring members' progress

in implementing necessary AML measures; reviewing ML techniques and measures; and promoting the adoption and implementation of appropriate standard measures globally In performing these activities, the FATF collaborates with other international bodies involved in combating ML

counter-FATF has been formed since 1989 and reviews its mission every five years 34 FATF member jurisdictions and 02 organizations5 have signed the mandate of the Task Force This mandate demonstrates the commitment of each members of the FATF to combat international crime and ML, and is a sign of their confidence in the FATF as an important instrument in that fight

FATF has developed Forty Recommendations on money laundering (refer to appendix 6) This Forty Recommendations were initially issued in 1990 and had been revised in 1996 and 2003 to update new developments in ML and to promote developing best practices internationally FATF assesses each member country against these recommendations in published reports Countries seen as not being sufficiently compliant with such recommendations are subjected to financial sanctions

2.2.1.3 FATF-Style Regional Bodies (FSRBs):

FATF-style regional bodies (FSRBs), together with the FATF, promote and implement a global network to combat ML throughout every geographic region in the world Certain FSRBs have issued their own conventions on AML FSRBs are standards to regions while FATF is to the whole world FSRBs assist their members

to establish coordinated domestic systems for reporting and investigating suspicious transaction and to develop effective capacities to investigate ML At a timely period, FSRBs help to evaluate the situations and compliance to global ML & AML standards of each member in order to identify the weaknesses and advise the

5 List of FATF’s members and observers at

http://www.fatf-gafi.org/document/52/0,3746,en_32250379_32236869_34027188_1_1_1_1,00.html

remedial action accordingly and provide information about trends, techniques and developments on ML & AML

FSRBs are voluntary and collaborative organizations Membership is open to any country within the given geographic region that is willing to commit the effective rules and objectives for ML & AML of the organizations By the interlink memberships - some members of FATF are also members of the FSRBs - help make the closer relationship between FATF & FSRBs There are a number of FSRBs as below:

(1) The Asia Pacific Group (APG) on ML was officially established in February 1997 in Bangkok Currently, APG included of 41 members and a number

of international and regional observers including the United Nations, IMF, FATF, Asian Development Bank and World Bank6

(2) The Caribbean Financial Action Task Force (CFATF) was incorporated as the result of meetings organized in Aruba in May 1990 and Jamaica in November

1992 in which twenty-nine states of the Caribbean Basin agreed to implement common countermeasures to address the problem of ML CFATF has currently 30 members7

(3) The Eastern and South African Anti Money Laundering Group (ESAAMLG) was established in 1999 ESAAMLG comprises of 14 memberships8 (4) The Eurasian Group on Combating Money Laundering and Financing of Terrorism (EAG) was incorporated in October 2004 and has 07 members: Belarus, China, Kazakhstan, Kyrgyzstan, the Russian Federation, Uzbekistan, and Tajikistan

6

For more information of APG’s members and observers see at http://www.apgml.org/apg-members/ &

http://www.apgml.org/observers/

7 For more information of CFATF’s members at http://www.cfatf-gafic.org/mutual-evaluation-reports.html

8 For more members of ESAAMLG information at http://www.esaamlg.org/mcp/index.php

(5) The Financial Action Task Force on Money Laundering in South America (GAFISUD) was formed in December 2000 and has 10 member states of Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Paraguay, Peru and Uruguay, Mexico (6) The Inter-Governmental Action Group against Money Laundering in West Africa (GIABA) was established in December 1999 and consists of 15 countries: Benin, Burkina Faso, Cape Verde, Côte d’Ivoire, Gambia, Ghana, Guinea Bissau, Guinea Conakry, Liberia, Mali, Niger, Nigeria, Senegal, Sierra Leone, and Togo9 (7) The Middle East and North Africa Financial Action Task Force (MENAFATF) incorporated in November 2004, consists of 16 members: Algeria, Bahrain, Egypt, Jordan, Kuwait, Lebanon, Mauritania, Morocco, Oman, Qatar, Saudi Arabia, Sudan, Syria, Tunisia, United Arab Emirates, and Yemen10

2.2.1.4 The Egmont Group of Financial Intelligence Units

As part of the effort to fight ML, each country normally established financial intelligent units (FIUs) that serve as a national centre for the receiving, analysis of potential ML and promote AML programs The FIUs are the link of information exchange between financial institution and law enforcement with regarding to ML

& AML Because ML & AML is practiced on a worldwide scale, there has been the need to share information on a cross-border basis As such, the Egmont Group of Financial Intelligence Units was established in 1995 to provide a forum for FIUs around the world to take advantage of cooperation in the ML & AML aspect The main goals of Egmont group include expanding and secured systematizing international collaboration in the exchange of information; increasing the effectiveness of FIUs by offering training and sharing experience to improve the expertise and capabilities of member FIUs; increasing coordination and support among FIUs; and promoting the establishment of FIUs in conjunction with an AML

9 For more members of GIABA information at http://www.giaba.org/index.php?type=a&id=226&mod=33

10 For more members of MENAFATF information at

http://www.menafatf.org/topiclist.asp?ctype=about&id=430

program in place, or in areas with a program in the early stages of development There are currently 119 memberships Egmont members11 can take advantage of the cooperation and mutual assistance provided by the group

2.2.1.5 The Basel Committee on Banking Supervision

The Basel Committee on Banking Supervision, established by the central-bank Governors of the 10 countries at the end of 1974, meets regularly four times a year The committee formulates wide supervisory standards and guidelines and recommends statements of best practices on a wide range of bank supervisory issues These standards and guideline will not be forced to comply but will be absorbed and best applied to each country through detail measures and regulatory depend on each national practice and law Three of the Basel Committee’s supervisory standards and guidelines concern money laundering issues included (1) Statement on Prevention of Criminal Use of the Banking System for the Purpose of Money Laundering considers that the first and most important to combat against ML is the integrity of banks' own managements and their vigilant which will help preventing their institutions from becoming associated with criminals or being used as a channel for ML The Statement is intended to reinforce those standards of conduct;

(2) Core Principles for Effective Banking Supervision (Principle 15) – The banks must determine to have adequate policies, practices and procedures in place, including strict “know your customer” rules, that promote high ethical and professional standards in the financial sector and prevent the bank from being used; intentionally or unintentionally, by criminal elements These “know your customer”

or “KYC” policies and procedures are a crucial part of an effective AML framework for every country;

11 For more information of Egmont members see at http://www.egmontgroup.org/about/list-of-members

(3) Customer due diligence for banks – This statement provides more specific information for the above two statements The KYC standards set out in this statement are intended to benefit banks beyond the fight against ML by protecting the safety and soundness of banks and the integrity of banking systems

2.2.2 The AML enforcement in some countries:

2.2.2.1 In USA:

There are some key points of law with regarding to the AML in USA Firstly, any activity or transaction that gives rise to a suspicion that a possible violation of laws or regulations has taken place must be reported To make these reports, financial institutions and broker dealers must submit a Suspicious Activity Report to the Financial Crimes Enforcement Network (FinCEN) within 30 calendar days of determining that the activity or transaction under review meets regulatory definitions of suspicious activity

Secondly, the identity of all clients must be established and verified in line with the Customer Identification Program (CIP) requirements This includes the requirement to provide a notice to the client informing them about the CIP program and the requirement to identify, verify and document the client's identity The verification method used to verify a client's identity, along with any information obtained to resolve a discrepancy, must be retained The CIP requirements also state that the following four elements be obtained prior to account opening (Full legal name, physical address, ID number, date of birth)

Thirdly, a Currency Transaction Report must be submitted to FinCEN for any deposit, withdrawal, exchange of currency or other payments or transfers by, through, or to the bank, made by a client during a single business day with an aggregate value of more than $10,000 A Monetary Instrument Log must be completed for cash purchases of monetary instruments between $3,000 and

$10,000 A Currency or Monetary Instrument Report must be completed when

currency or monetary instruments with an aggregate value of $10,000 or more are mailed, shipped or carried into, or out of, the United States

Fourthly, new and existing clients must be screened against government lists

of known narcotics traffickers and terrorists, such as the Office of Foreign Assets Control (OFAC) list

Fifthly, financial institutions and their employees must conform to the requirements of the Bank Secrecy Act's "Travel Rule" provisions These provisions require financial institutions to collect and maintain certain information (including the client's true name and address) and applicable records of funds transfers and transmittals of funds of $3,000 or more

Sixthly, never inform an individual that they, or their activities, are the subject

of a Suspicious Activity Report or an internal Suspicious Transaction Report If you

do, you may be guilty of a criminal offense

Seventhly, never conduct or attempt to conduct a financial transaction which involves the proceeds of specified unlawful activity

Eighthly, it is important to be aware of any attempts to structure transactions

to evade any reporting requirements So be alert to the pattern of a client's currency transaction and pay attention to any evidence that they are making transactions with the intention of avoiding a required report

Ninthly, the Money Laundering Control Act prohibits "willful blindness" in the case of ML and terrorist financing prevention If you choose to "look the other way" when faced with potentially suspicious events, you may be found to be

"willfully blind" "Willful blindness" means choosing to ignore or disregard a collection of circumstances or events that individually or collectively may be suspicious and could indicate money laundering or terrorist financing If you choose

not to know, you may be facilitating criminal behavior and could be named as an accessory to the crime

2.2.2.2 In China:

In China, the AML are regulated including as following Firstly, never knowingly assist anyone to convert the proceeds of crime into cash or financial instruments, to transfer the funds through accounts or to assist in ML in any way Secondly, never let anyone know that they, their activities or someone they are connected with, are being investigated or that they are the subject of a suspicious activity report If you do, you could be found guilty of the offense of "tipping off" Thirdly, must report any client activities or transactions that are prescribed by current laws and regulations as suspicious transactions and report large-value transactions in cash transfers, non-cash transfers (by check, Internet banking, telephone banking, or wire transfer) with a total value greater than those prescribed

in the Administrative Rules

Fourthly, must establish, verify and record the identities of any clients (individual, corporate or other units) who make large-value transactions with a value greater than those prescribed in the Administrative Rules

Fifthly, must establish and verify the identity of all clients in line with the Know Your Client (KYC) / Customer Due Diligence (CDD) procedures

Sixthly, must follow the procedures on keeping and maintaining records of client transactions and of the documents used to establish and verify their identity Seventhly, must immediately refer any judicial or authorized government agencies enquiries concerning the account details of specified clients to the AML Compliance Officer for handling and must always communicate any questions or doubts you have about any aspect of money laundering prevention to your manager

or AML Compliance Officer

Eighthly, must conduct KYC procedures on an ongoing basis upon the occurrence of trigger events

Secondly, it must establish and verify the identity of all clients in line with your business line's Know Your Client (KYC) / Customer Due Diligence (CDD) procedures

Thirdly, it must follow your business line's procedures on compiling, keeping and maintaining records of client transactions and of the evidence used to establish and verify their identity

Fourthly, never inform an individual that they, or their activities, are the subject of a report If you do, you could find yourself guilty of the criminal offence

of Tipping-Off

Fifthly, always communicate any questions or doubts you have about any aspect of money laundering prevention to your manager or Money Laundering Reporting Officer

Chapter 3 Research Methodology -

3.1 Research design:

This section is aim to describe the structure as well as plan to investigate of the research problem and to obtain the data and evidence on the relations of the problem

In order to explore the research problem on the awareness and preventing of

ML at commercial banks in HCMC, a form of exploratory research has been carried out The choice of exploratory research is based on the three below reasons Firstly,

ML & AML is a complicated issue with diversify of techniques, procedures and guidelines and it is also a new concept to many people’s mind in Vietnam Second, AML has been in a preliminary stage in Vietnam and the draft Law on AML in Vietnam now is under discussion at the 13th National Assembly Third, exploratory research is quick, flexible and efficiency means to collect and assess information insight into this research issue when the secondary data of such issue is insufficiency in Vietnam

By the first draft of secondary data collection and informal discussions with the knowledgeable and experience banking staffs, the researcher progressively shape the research plan to solve the research problem This study will research the awareness and preventing of ML at commercial banks in Vietnam through two main sectors of banking system that is Vietnamese commercial banks and foreign banks

in Vietnam Vietnamese commercial banks sector included the Vietnamese owned commercial bank and Vietnamese joint-stock commercial banks Foreign banks in Vietnam sector included 100% foreign-owned banks, branch of foreign banks We conduct the research on the case study at HCMC of Vietnam Due to the consideration of cost and the limited time allocated, the research problem will be examined through the approach of three major exploratory techniques

state-Beginning with a review on the secondary data of the related information in the world as well as in Vietnam will support the background information to the research problem This is the fastest and cost saving way to reach to the desired information

Following later is the in-depth interview to the experience banking experts who have experience working in both the Vietnamese commercial banks and foreign banks at HCMC in Vietnam The interview will be conducted by face to face meeting and telephone conversation to consolidate the interviewees’ memories and experience Using interview method could help the researcher be flexible to prescreen to ensure the correct participant is replying and do more things such as probe additional questions to make clear and improve the quality of information received during the interviewing Especially the telephone interview could be repeated to callback to better fit the timetable of the respondents

Finally, a questionnaire survey will be adopted through a sample of 60 staffs random from different Vietnam commercial banks and 60 staffs from different foreign banks in Vietnam to cross check the comments from the experience banking staffs as above approach technique The survey research will come out with the hypothesis as follow

+ Null hypothesis (H 0 ): There is no difference in the awareness and prevention of ML between Vietnamese commercial banks and foreign banks in HCMC

+ Alternative hypothesis (H 1 ): There is difference in the awareness and prevention of ML between Vietnamese commercial banks and foreign banks in HCMC

The simple quantitative analyses will be undertaken from the consolidation data to test for the above hypothesis

According to Sekaran (2006) states that: “exploratory studies are done to better comprehend the nature of the problem since very few studies might have been conducted regarding the phenomenon needed to be understood Extensive interviews with many people might have to be undertaken to get a handle on the situation and the phenomena Once a better understanding is obtained, more rigorous research can then proceed”12 As such, the results of the above approach techniques will give some indications to solve the research questions as mentioned

in chapter one as well as to conclude of the possibility of the hypothesis which was supposed as above It could be the best foundation for future research or more formal studies could be canceled incase the problem is not as important as first thought

3.2 Data sources and collection

As exploring the research problem, many different types of data sources has been used, some may much more valuable than others There are generally two main levels of data sources that are primary sources and secondary sources Quoting from Donald R Cooper and Pamela S Schindler (2003), “primary sources are original works of research or raw data without interpretation and secondary sources are interpretations of primary data”13 In this research with relation to the above research structure, these two levels of data sources will be collected The researcher has prepared for the data sources and collections as below

3.2.1 The secondary data:

The sources of the secondary data will be internet, encyclopedias, newspaper, periodical magazines, articles, peer discussions and reports on ML & AML of Vietnam from the State Bank, the government departments of Vietnam as well as

the international AML organizations etc… The international as well as the national laws and regulations of ML and AML will also be the good source of background information on the research problem This secondary data will be classified and consolidated to meet the purpose and scope of the research

3.2.2 The primary data:

Together with the secondary source, the researcher collected more two primary sources from in-depth interview and questionnaire survey

at Vietnam and with at least five-year experience in banking field The purpose of the interview is to consolidate the perception, experience and recommendation of

ML and AML of the respondents in both sectors A list of interview participants at HCMC was established; including three participants currently work at foreign banks

in Vietnam with previous experience in Vietnamese commercial banks and two have current job at Vietnamese commercial banks while previously experience was

at foreign banks in Vietnam (Refer to appendix 4)

3.2.2.2 Questionnaire survey:

3.2.2.2.1 Sample of the survey:

Together with the above in-depth interview, the sample survey are also conducted random on 120 banking staffs from separate banks in HCMC of two groups – Vietnamese commercial banks and foreign banks in Vietnam 60 staffs are chosen from banks in Vietnamese commercial banks group The remaining 60 staffs are picked from the group of foreign banks in Vietnam The details of researched banks in each sector are in appendix 1

The banking staffs from the above banks will be selected randomly from the departments in which they have to communicate or deal directly with the customers

in their daily operation These departments included the commercial finance, personal finance, global banking finance, international trade, treasury, counter, customer service The reason for choosing these departments for research as the staffs from these departments may have the highest opportunity for the money launderers to approach to

3.2.2.2.2 Questionnaire of the survey:

Some of the survey questions are established based on the secondary data and some are drawn from the informal discussion and the in–depth interview with the experience banking staffs A maximum of 22 questions are anticipated The cover words are also included in the questionnaire for persuading the individuals to response The questionnaire included three sections in which

+ Section A with seven questions is to check for the general information of the respondents;

+ Section B consists of total twelve questions in which two is open-ended

questions This section is surveyed for the opinion of the staffs on ML & AML The

open-ended questions are generated in order to collect more different idea from the banking staffs;

+ Section C includes three questions for the staffs who are still not realized of the concept ML and AML

of the above selected banks to push up the completion time and pre-screen the respondents This method has also been applied to the banking staffs who are studied at the post-graduate banking class of the University of Economics in HCMC

to diversify and pre-screen the source of the targeted participants and decrease the turnaround time and cost of the survey

3.2.2.2.4 Survey errors:

According to Donald R Cooper and Pamela S Schindler (2003), there are often two factors could cause bias in interviewing that is non-response and response

error Using the above mixed mode, could somehow help increasing the representation and decreasing the above two errors These two errors have also been mitigated by the pilot test A small sample of banking staffs has been interviewed personally to examine the appropriation and effectiveness of the questionnaire and the survey result The questionnaire will be revised thereafter should there is any necessary to correct to meet the research purpose and reduce the non-response and response error

3.3 Data analysis and presentation:

Once the data has been collected, data analysis will be the next step of the research in order to investigate the targeted information Data analysis consists of two parts – data preparation and descriptive statistical summary

Firstly, we will do the data preparation Data preparation is the way to convert the raw data into the more appropriate form for analysis in which keeping and ensuring the accuracy of the data Data preparation included data editing, coding and data entry Each types of data source we will have different data preparation + There are plenty of secondary source, we are classified and edited this source to ensure that the data entry is accurate, uniform, complete and consistent with the research problem and questions

+ The in-depth interview questions will be grouped into three main groups that is the factors affected the ML & AML regime in Vietnam banking system; the current situation of ML & AML in Vietnam banking system and the implications for AML in Vietnam banking system in order to meet the research objective and research questions The content analysis method is used to analyze the data collected from the nine open-ended in-depth interview questions The steps to use the content analysis that are firstly the body of data will be developed into the referential units in which each unit contains one concept dimension Then each dimension will be divided to small categories and frequency counts will be applied

to each category The content analysis was chosen as it could provide the general insights into these primary data source and aggregate it to the selective perception

of the content in which allow us to calculate and select the appropriate and valid data

+ The sample survey result will be scanned to detect the errors and omissions, then to correct them if possible or to exclude them if not suitable in order to make sure that the minimum data quality standards which mentioned in the data collection section have been achieved After scanning the data, the data coding will be established by assigning numbers to the answers so as to group the responses into a limited number of categories The data coding is necessary for efficient analysis As stated by Donald R Cooper and Pamela S Schindler (2003), the coding rules must

be appropriateness, exhaustiveness, mutual exclusivity and single dimension in order for the category sets contain the critical information needed for analysis After coding, all the data collected will be keyboarded to enter to excel sheet for viewing, storing, manipulating and analyzing Then, a second look and a numerical summary at this data set could continue help discover and rectify the remaining problem such as miscoded, out of range data, unreasonable data, etc Pass by the data preparation, below are summary of the descriptive statistical and statistical hypothesis testing procedures which are used to analyze the sample survey result to find out the characteristic of the population The objective of descriptive statistical analysis is to develop sufficient knowledge to describe a body

of data and the hypothesis testing evaluate the accuracy of the hypothesis by determining the statistical significant that the data reveal true difference, not random sampling error Real true difference means that the difference actually occurs in a population

+ To develop the understanding on the data collected, their characteristics of location, spread will be analyzed The common measures of location – the central