Electronic security - risk mitigation in financial transactions : public policy issues

This paper builds on a previous series of papers (see Claessens, Glaessner, and Klingebiel, 2001, 2002) that identified electronic security as a key component to the delivery of electronic finance benefits. This paper and its technical annexes (available separately at http://www1.worldbank.org/finance/) identify and discuss seven key pillars necessary to fostering a secure electronic environment. Hence, it is intended for those formulating broad policies in the area of electronic security and those working with financial services providers (for example, executives and management). The detailed annexes of this paper are especially relevant for chief information and security officers responsible for establishing layered security. First, this paper provides definitions of electronic finance and electronic security and explains why these issues deserve attention. Next, it presents a picture of the burgeoning global electronic security industry. Then it develops a risk-management framework for understanding the risks and tradeoffs inherent in the electronic security infrastructure. It also provides examples of tradeoffs that may arise with respect to technological innovation, privacy, quality of service, and security in designing an electronic security policy framework. Finally, it outlines issues in seven interrelated areas that often need attention in building an adequate electronic security infrastructure. These are: 1) The legal framework and enforcement. 2) Electronic security of payment systems. 3) Supervision and prevention challenges. 4) The role of private insurance as an essential monitoring mechanism. 5) Certification, standards, and the role of the public and private sectors. 6) Improving the accuracy of information on electronic security incidents and creating better arrangements for sharing this information. 7) Improving overall education on these issues as a key to enhancing prevention.Knowledge Economy,Labor Policies,International Terrorism&Counterterrorism,Payment Systems&Infrastructure,Banks&Banking Reform,Education for the Knowledge Economy,Knowledge Economy,Banks&Banking Reform,International Terrorism&Counterterrorism,Governance Indicators

Losing the War Against Dirty Money: Rethinking Global Standards on Preventing Money Laundering and Terrorism Financing

Following a brief overview in Part I.A of the overall system to prevent money laundering, Part I.B describes the role of the private sector, which is to identify customers, create a profile of their legitimate activities, keep detailed records of clients and their transactions, monitor their transactions to see if they conform to their profile, examine further any unusual transactions, and report to the government any suspicious transactions. Part I.C continues the description of the preventive measures system by describing the government\u27s role, which is to assist the private sector in identifying suspicious transactions, ensure compliance with the preventive measures requirements, and analyze suspicious transaction reports to determine those that should be investigated. Parts I.D and I.E examine the effectiveness of this system. Part I.D discusses successes and failures in the private sector\u27s role. Borrowing from theory concerning the effectiveness of private sector unfunded mandates, this Part reviews why many aspects of the system are failing, focusing on the subjectivity of the mandate, the disincentives to comply, and the lack of comprehensive data on client identification and transactions. It notes that the system includes an inherent contradiction: the public sector is tasked with informing the private sector how best to detect launderers and terrorists, but to do so could act as a road map on how to avoid detection should such information fall into the wrong hands. Part I.D discusses how financial institutions do not and cannot use scientifically tested statistical means to determine if a particular client or set of transactions is more likely than others to indicate criminal activity. Part I.D then turns to a discussion of a few issues regarding the impact the system has but that are not related to effectiveness, followed by a summary and analysis of how flaws might be addressed. Part I.E continues by discussing the successes and failures in the public sector\u27s role. It reviews why the system is failing, focusing on the lack of assistance to the private sector in and the lack of necessary data on client identification and transactions. It also discusses how financial intelligence units, like financial institutions, do not and cannot use scientifically tested statistical means to determine probabilities of criminal activity. Part I concludes with a summary and analysis tying both private and public roles together. Part II then turns to a review of certain current techniques for selecting income tax returns for audit. After an overview of the system, Part II first discusses the limited role of the private sector in providing tax administrators with information, comparing this to the far greater role the private sector plays in implementing preventive measures. Next, this Part turns to consider how tax administrators, particularly the U.S. Internal Revenue Service, select taxpayers for audit, comparing this to the role of both the private and public sectors in implementing preventive measures. It focuses on how some tax administrations use scientifically tested statistical means to determine probabilities of tax evasion. Part II then suggests how flaws in both private and public roles of implementing money laundering and terrorism financing preventive measures might be theoretically addressed by borrowing from the experience of tax administration. Part II concludes with a short summary and analysis that relates these conclusions to the preventive measures system. Referring to the analyses in Parts I and II, Part III suggests changes to the current preventive measures standard. It suggests that financial intelligence units should be uniquely tasked with analyzing and selecting clients and transactions for further investigation for money laundering and terrorism financing. The private sector\u27s role should be restricted to identifying customers, creating an initial profile of their legitimate activities, and reporting such information and all client transactions to financial intelligence units

Aligning anti-money laundering, combating of financing of terror and financial inclusion : Questions to consider when FATF standards are clarified

Purpose &ndash; The purpose of this paper is to identify key questions that should be addressed to enable the Financial Action Task Force (FATF) to provide guidance regarding the alignment of anti-money laundering, combating of financing of terror and financial inclusion objectives.Design/methodology/approach &ndash; The paper draws on relevant research and documents of the FATF to identify questions that are relevant to consider when it formulates guidance regarding the alignment between financial integrity and financial inclusion objectives.Findings &ndash; The FATF advises that its risk-based approach enables countries and institutions to further financial inclusion. It is, however, not clear what the FATF means when its uses the terms &ldquo;risk&rdquo; and &ldquo;low risk&rdquo;. It is also unclear whether current proposals for financial inclusion regulatory models will necessarily limit money laundering (ML) aswell as terror financing risks to levels that can be described as &ldquo;low&rdquo;. The FATF will need to clarify its own thinking regarding low money laundering and low terror financing risk before it will be able to provide clear guidance to national regulators and financial institutions.Originality/value &ndash; This paper was drafted to inform current FATF discussions regarding guidance on financial inclusion. The questions are relevant to all stakeholders in financial regulation.<br /

Australasian Consumer Fraud Taskforce: results of the 2012 online consumer fraud survey

The Australasian Consumer Fraud Task Force has conducted a range of fraud prevention and awareness raising activities since 2006. This report presents the results of the 2012 online consumer fraud survey. Foreword Each year, since 2007, the Australian Institute of Criminology (AIC) has collected information on consumer scams by conducting an online survey of Australians who have received scam invitations during the preceding 12 months. The research is conducted on behalf of the Australasian Consumer Fraud Taskforce (ACFT), which is comprised of 22 government regulatory agencies and departments in Australia and New Zealand who work alongside private sector, community and non-government partners to prevent fraud of this nature. In order to understand the dynamics of consumer fraud victimisation, the ACFT has conducted a range of fraud prevention and awareness-raising activities over the last eight years. The annual survey seeks to obtain a snapshot of the public’s exposure to consumer scams, to assess the range of ways in which scams can affect victims and their families, to determine how victims respond and to identify emerging typologies and issues that could be used to inform fraud prevention initiatives. Survey respondents are not representative of the whole Australian population, as the sample is made up of those individuals who choose to participate, although in 2012, over 1,500 people completed the survey with good levels of representation from all states and territories, and other demographic categories. This report presents the results of the survey conducted in conjunction with the 2012 campaign, Slam scams! Press ‘delete’, throw it out, shut the door or just hang up. The campaign theme was concerned with scam delivery methods that focused on raising awareness about the many ways in which scammers try to deliver scam invitations. A phone call, SMS, mobile application, house visit, letter, email, fax, blog, online chat or dating service—scammers will use any of these means to target victims. The primary message was simple—stop the contact at the point of delivery; if you don’t engage with a scammer in the first place, you can avoid being scammed. As in previous years, a high proportion of respondents had received a scam invitation (95%), with almost a quarter responding to the scam in some way. Unfortunately, eight percent reported having lost money—approximately $8,000 per person or almost$850,000 in total. The most prevalent scam type involved fraudulent lotteries, while this year, the second-most prevalent scam concerned computer support scams, which are sometimes a means of extracting payments for non-existent services from victims or, on other occasions, a means of installing malicious software that can be used to extract personal information at a later time. In terms of delivery methods, although email continued to be the most common method by which scams were delivered, the use of landline and mobile telephones (including SMS) to target potential scam victims increased. This report also includes some additional information on online shopping scams—the subject of the consumer fraud awareness week in June 2013. The prevalence of scams targeting those who sell or buy high-value items online, such as motor vehicles, was high in 2012, indicating a need for enhanced awareness of the risks involved in this form of consumer activity

The Determinant of Money Laundering: Evidence from Italian Regions

Following the INTERPOL’s definition, money laundering is: “any act or attempted act to conceal or disguise the identity of illegally obtained proceeds so that they appear to have originated from legitimate sources”. Illegally obtained funds are laundered and moved around the world using front companies, intermediaries and other money transmitters. In this way, the illegal funds remain hidden and are integrated into the legal economy. Such type of crime undermines financial institutions’ and jurisdictions’ reputation, compromises investors’ trust in them, and therefore weakens the entire financial system. By using annual data for the Italian regions (NUTS-2) over the period 2008 to 2015, this work aims to investigate the determinants of money laundering in Italy. Given the high heterogeneity in terms of economic and institutional characteristics, as well as for the activity of organized crime in financial-related activities, Italy is a compelling case study. Our main findings reveal that in most of the Italian regions enforcement activities do exert significant deterrence on criminal behaviors: a negative relationship between enforcement and illegal trafficking of waste can be identified only for very high levels of enforcement efforts. Moreover, we find that the major determinants influencing the rate of money laundering differ between northern-central and southern regions, confirming the existence of a regional dualism. In particular, while in the northern-central area the crime rate is positively related to the level of corruption, the incidence of mafia-type crimes and negatively to the education attainment, in the southern regions money laundering is positively related to the size of the gaming and gambling sector

Anti-money laundering and counter-terrorism financing survey of regulated businesses in Australia - methodology report

This report provides a stand-alone description of how the Australian Institute of Criminology’s Anti-money Laundering/Counter-terrorism Financing Survey of regulated businesses was undertaken, emphasising the importance of understanding the methodology and design of this national census of regulated businesses in Australia. As is often the case with social scientific research of a quantitative nature, the detail of how surveys were conducted are sometimes relegated to deep within a long report, or attached in a lengthy appendix, often being overlooked by the average reader. This report provides a stand-alone description of how the Australian Institute of Criminology’s Anti-money Laundering/Counter-terrorism Financing Survey of regulated businesses was undertaken, thus emphasising the importance of understanding the methodology and design of this national census of regulated businesses in Australia. It reviews all of the procedures and steps undertaken from a data collection and methodological perspective and provides an important accompaniment to the major survey report published in conjunction with this methodological review. Both reports should be read together. The current report provides a summary of the methodological approach, consolidation of assorted reports generated throughout the study, a review of sample utilisation and response dynamics and a summary of issues for consideration for future similar surveys

Future digital money: The legal status and regulation of bitcoin in Australia

Virtual and digital crypto-currencies, specifically Bitcoin, were developed by an anonymous pseudonym ‘Satoshi Nakamoto’ in 2009 and have become a developing form of payment system used by businesses and consumers. Unlike traditional payment systems, Bitcoin is a peer-to-peer network with unique characteristics. Bitcoin is a private, anonymous and decentralised network that is intended to work independently from a government or banking authority. Bitcoin is therefore a network dependent upon mathematical algorithms between two users and managed through a process called ‘mining’, which is then stored within a user’s private ‘wallet’. This innovative technology offers numerous opportunities as a payment system; however, the legal challenges and risks it creates can be detrimental to consumers and businesses that use Bitcoin as an alternative payment system. The legal challenges of Bitcoin cause uncertainty for governments, businesses and consumers on the treatment of Bitcoin as an acceptable means of payment in Australia. Therefore, the purpose of this thesis is to determine whether Bitcoin is a form of ‘money’ and as such ought to be accepted as legal tender by the Australian Government under specific legislative instruments. Furthermore, this thesis will examine how Bitcoin is used to facilitate money laundering activities. Moreover, this thesis considers the treatment of tax within Bitcoin transactions and how unregulated Bitcoin transactions can be used to avoid tax. In addressing these legal issues and concerns, consideration is given to the possible regulation of virtual and digital currencies like Bitcoin in Australia. This thesis considers Australian banking, money laundering and taxation legislation and examines whether these regulatory frameworks are suitable to include Bitcoin as a payment system in order to limit money laundering and tax evasion activities within Bitcoin payment systems. Additionally, this thesis examines regulatory approaches to virtual and digital currencies in foreign jurisdictions, namely the United States, Canada and the European Union in order to gain some insight into how other countries are regulating Bitcoin as a payment system. This thesis arrives at a number of conclusions relevant to the possible regulation of Bitcoin in Australia. Firstly, it identifies Bitcoin as money and a form of payment system, but not legal tender and therefore not an accepted legal currency in Australia, which considers self-regulation of Bitcoin as a payment system a possibility. Secondly, it recognises that existing money laundering legislation can be amended to include Bitcoin as a payment system through which money laundering can take place and where Bitcoin exchange platforms are required to implement a ‘know-your-customer’ policy or ‘know-your-user’ policy. Thirdly, this thesis identifies that Bitcoin is recognised as a commodity for tax purposes and that suitable guidelines can be introduced on how to deal with tax activities and tax evasion within Bitcoin payments. Lastly, it is also recommended that international organisations such the Financial Action Task Force and International Monetary Fund could provide clarity on the treatment of virtual and digital currencies, specifically Bitcoin, as a payment system and legal currency, given that Bitcoin in global and borderless. Therefore, this research contributes towards how the Bitcoin network operates, its legal challenges and regulation in order to further research in this area of law