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FMU Issues Red Flag Indicators For Detection of Transactions Made Through The Proceeds of Drug Trafficking

Financial Monitoring Unit (FMU) has issued ‘red flag indicators’ to the financial institutions for detection of financial transactions relating to proceeds generated through drug trafficking.

The FMU has shared these ‘Red Flag indicators’ with the Governor, State Bank of Pakistan; Chairman, Securities and Exchange Commission of Pakistan; Chairman Federal Board of Revenue; Directorate General of Designated Non-Financial Business and Professions (DNFBPs); President, Institute of Chartered Account Pakistan (ICAP); President, Institute of Cost and Management Accountant Pakistan (ICMAP); Director-General, Central Directorate of National Savings (CDNS) and Director General, Anti-Narcotics Force.

The FMU’s letter said, these red flags are intended to aid the financial institutions and a combination of these red flags, in addition to analysis of the customer financial activity, profile and current transactional pattern may indicate a potential financial activity related to drug trafficking.

In order to identify a suspicion that could be indicative of Money Laundering (ML) or Terrorism Financing (TF) activity through drug trafficking proceeds, FMU has prepared the red flags indicators that are specially intended as aid for the reporting entities, which are attached as “Red Flags Indicators for Financial Activities related to Drug Trafficking”.

The FMU stated that the individuals of origin of drug-producing jurisdiction remitting money for family support, Nongovernmental organizations (NGOs) engaged under cover of relief works for Refugees, construction and development business near bordering areas, general traders, import/export companies engaged in business with drug-producing high-risk countries may be potentially be involved in the drug trafficking business. However, the client’s overall profile in addition to analysis of the customer financial activity, profile and current transactional pattern may indicate a potential drug trafficking activity.

The FMU has asked the financial institutions to remain alert in cases where the customer making deposits/withdrawals or otherwise generally operates an account accompanied or on instructions by a third party. Moreover, newly opened customer account seems to be controlled by a third party, including forms completed in different handwriting and/or the customer is not sure about the address provided in the form”.

The red flags relating to the transactional channels revealed that the foreign currency exchange transactions carried out by non-resident individuals over a short period of time, and transfers are made through non-banking remittance systems i.e., Money transfers which are not related to business, investment activity, or real estate purchase done by non-resident individuals through funds originated from a foreign jurisdiction.

The customer making deposits/withdrawals or otherwise generally operates an account accompanied or on instructions by a third party and newly opened customer account seems to be controlled by a third party, including forms completed in different handwriting and/or the customer is not sure about the address provided in the form.

Based on the analysis of the reported STRs and information provided in the FATF Report on Financial flows linked to the production and trafficking of Afghan opiates, people are considered as one of the critical “resources” in the drug trafficking business. They may use Financial Institutions as a channel for conducting financial activities related to drug trafficking. Such individuals are involved at different stages of the drug trafficking business model that may be classified into the following major categories:-

  • Individuals/small drug dealers that could be possibly involved in the retail of drugs (for instance, batches of up to 5 grams). They spend their proceeds on personal consumption, rent, and other services. They may carry out foreign exchange transactions and money transfers through various money transfer systems In addition to the proceeds from drug trafficking, some of them have a legal source of revenue such as General Stores, Milk Shops, Beauty Salon, Milk Shops, Pan Shops, Small tea stalls, Medical Stores etc.
  • Couriers and small drug dealers who deliver small drug batches (e.g., heroin batches of up to 20 grams) or purchase them from other salesmen. This category presumably includes mostly drug consumers who, depending on the situation, either act as intermediaries or independently buy small drug batches for resale. They earn their money from the difference between the purchase and resale prices of drugs. These people often do not have another source of revenue and spend their proceeds on buying a new batch of drugs, paying for transportation services and personal consumption.
  • Middle-sized drugs dealer, who sell drugs obtained from criminal organizations (e.g., batches of up to 1 kilogram of heroin), mainly as their sole source of income, however, they may engage in legal business activities. Proceeds from drug trade are spent on personal consumption or maybe partially spent on their own legal business activities, purchases of currency, real estate, and provide for a luxurious lifestyle.
  • Individuals involved in drug transportation. They are employed to transport drug batches (up to several tens of kilograms) within certain periods (e.g., once a month). Such people have other sources of revenue that are mostly related to transportation. They are not directly involved in drug sales but are only engaged in the shipment of drugs. In addition to personal consumption, they spend their proceeds on developing their own businesses, as well as on informal involvement in their acquaintances’ businesses, and providing loans. In addition, they acquire real estate, personal property and jewelry.
  • Large Suppliers of Drugs are usually members of criminal organizations or associations who run regular supplies of large drug batches to a particular country. Such individuals may be top executives and/or founders of companies involved in various illegal activities. They might be involved in the delivery of cargoes to companies and organizations using vehicles equipped with a cache for drug shipments. Some of the proceeds from drug trafficking are transferred through proxies and front men to company or personal offshore accounts, while the remaining proceeds may be returned in the form of export revenue to the accounts of original suppliers. They may also use companies set up for channeling funds abroad. Additionally, they spend proceeds from drug trafficking on acquiring chemical substances for drug production, personal consumption, creating and developing businesses, bribing officials, and for other purposes.
  • Individual Involved in the storage and packing of drugs are usually members of criminal organizations and associations who are may not directly involve in drug sales – They spend their proceeds on personal consumption, rent, acquiring personal and real property and for other purposes. These people may or may not have other sources of revenue.
  • Financial facilitators – people who are employed by a criminal organization to carry out financial transactions related to proceeds from opiate trafficking – These individuals may span the whole spectrum of criminal complicity ranging from full awareness, indifference, negligence and incompetence with regards to implementing AML measures – These individuals may be professionals working for financial institutions or DNFBPs, unlicensed money service providers or nonprofessional financial facilitators.

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