Economic Crime Institute Conference Find the Fraudster/Money Launderer

Economic Crime Institute Conference Find the Fraudster/Money Launderer Anti Money Laundering Basics Presentation by: Christopher L. King, CFE, CAMS My comments and opinions offered during this conference are my own and do not represent in any way those of my employer or other affiliations I have with other organizations. 21st Annual ECI Conference

Session Agenda Discuss Anti-Money Laundering (AML ) terms. Review red flags of potential suspicious activity related to money laundering. Summarize related laws, regulations, sanctions and penalties. Identify the minimum requirements for an AML Program. Discuss case studies. 21st Annual ECI Conference

Money Laundering and Terrorist Financing Overview Money Laundering Overview What is Money Laundering? Money laundering is defined as the criminal practice of making funds from illegal activity appear legitimate. Money launderers attempt to do this by disguising the sources, converting cash to other forms, or moving money to places where it is less likely to attract attention. Although money laundering is a diverse and often complex process, it generally involves three stages: placement, layering, and/or integration. Placement Layering Integration

Money Laundering and Terrorist Financing Overview Three Money Laundering: Basic Terminology Stages of Through these stages, funds appear to be proceeds from legal activities. Three stages: Placement Layering Integration Placement is the introduction of unlawful proceeds into the financial system. Structuring, which is considered a type of placement activity, is any attempt to evade legal reporting requirements for cash/currency transactions conducted with a financial institution. Examples of structuring may include, but are not limited to: Cashing checks for amounts just below reporting or recordkeeping thresholds. Dividing large amounts of cash/currency into smaller sums that fall below reporting or recordkeeping thresholds and then depositing the funds directly into a bank account on one or more days, in any manner.

Money Laundering and Terrorist Financing Overview Three Stages of Money Laundering Money Laundering: Basic Terminology (continued) Through these stages, funds appear to be proceeds from legal activities. Three stages: Placement Layering Integration Layering involves moving funds around in the financial system in order to conceal the origin of the funds. Examples include, but are not limited to: Exchanging monetary instruments for larger or smaller amounts. Wiring or transferring funds. Buying or selling securities through numerous accounts. Obtaining a loan in one or more financial institutions. Integration is the ultimate goal of the money laundering process. In this stage, the illicit funds may appear legitimate and are often used to purchase other assets, for example: Real estate or other assets Securities investments Cash Intensive Businesses

Money Laundering and Terrorist Financing Overview Case Study: Placement, Layering, and Integration Money Laundering: Basic Terminology (continued) The following case study details how four university students involved in an international money laundering ring, moved millions of dollars of illicit drug proceeds through financial institutions. Placement The initial account was opened by a NJ university student who stated that he was unemployed. Days after establishing the account, wire transfers were received from two travel agencies, “Trav-L Bound” in Greece, and “Vizit the World” in Portugal. Both fictitious travel agencies were created by the students as front companies to launder illicit drug proceeds. In the following months, the account continued to receive multiple high-dollar wire transfers from Greece and Portugal. Layering Once the wires were received, the student transferred the funds to three other students who held accounts at other financial institutions. Using the funds, the students wrote small-dollar checks payable to the travel agencies, purchased multiple traveler’s checks and pre-paid debit cards, and mailed them to the travel agencies. The students also deliberately over paid their tuition/ books to receive refund checks issued by the university. Integration The university refund checks were then comingled with the wired funds. The combined funds were used to pay for the students living expenses, luxury items, investments, and advertising to make the travel agencies look legitimate.

Money Laundering and Terrorist Financing Overview Case Study:ofPlacement, and Integration Comparison Organized Layering, Crime to Terrorist Financing Organized Crime Terrorist Groups Motivated by profit/greed Seek economic ends Engage in corruption Network and cell based structure Requires safe-havens Needs to recruit new members Requires specialists Group identity important Threat of violence Select targets that pose threat to the group Avoid public attention Money laundering essential operating tool Motivated by ideology Seek political ends Engage in corruption Network and cell based structure Requires safe-havens Needs to recruit new members Requires specialists Group identity important Threat of violence Select symbolic targets Seek public attention Money laundering essential operating tool

Money Laundering and Terrorist Financing Overview The BasicsTerrorist of Terrorist Financing Terrorist financing is the financial support of terrorism or of those who encourage, plan, or engage in terrorism. The intent of terrorism is to intimidate people, governments, or international organizations to do, or refrain from doing, any act through the threat of violence. Examples Examplesof of Legitimate LegitimateFunding Funding Sources: Sources: Business Businessownership ownership Personal Personalemployment employment Government, Government,charitable charitable or orrelief relieffunds funds Funding Sources Used by Terrorists Examples Examplesof ofUnlawful Unlawful Funding FundingSources: Sources: Extortion Fraud Extortion Kidnapping Kidnapping Theft Smuggling Robbery Smuggling ID IDTheft Theft Narcotics Trafficking Narcotics Trafficking Terrorist groups seek to develop and utilize legitimate and unlawful sources of funding that are relatively mobile to ensure that funds can be used to obtain material and other logistical items needed to commit terrorist acts.

Money Laundering and Terrorist Financing Overview Learning Check Let’s Review Which statement is true about money laundering? Laundered funds are always derived from legitimate sources, such as charities. Layering is the way money launderers withdraw funds from the financial system. Money laundering is an economic problem only impacting financial institutions within the U.S. Structuring is a crime that involves dividing large amounts of cash/currency into smaller sums that fall below reporting or recordkeeping thresholds and then depositing the funds directly into a bank account on one or more days, in any manner.

Money Laundering and Terrorist Financing Overview Learning Check Let’s Review From the examples below, select three schemes that could be used by money launderers to move illegal funds. Smuggling bulk currency out of the U.S. to evade currency reporting requirements Falsifying the value or quantity of shipments Requesting a payment to be made to a company’s head office located in the same country Moving illicit funds between countries through wire transfers

Detecting and Escalating Suspicious Activity Detecting and Escalating Suspicious Activity Red flags are signals of potentially unusual or suspicious transactions or other activities that should raise the level of suspicion and may call for further escalation. The mere presence of a red flag is not necessarily evidence of money laundering or terrorist financing activity. However, it does indicate that further review should be performed before proceeding to determine if the activity in question has a reasonable or legitimate purpose. It is important to know the customer because what might be a red flag for one customer, may be normal business for another. If a reasonable explanation is not determined, the suspicious transactions or other activities should be escalated for further investigation

Detecting and Escalating Suspicious Activity Red F Detecting and Escalating Suspicious Activity lags for Suspicious Activity These examples may help to recognize money laundering schemes. Examples of Potentially Suspicious Activities Activity inconsistent with customer’s business Customer provides insufficient or suspicious information Efforts to avoid reporting or recordkeeping requirements Irregular Lending activity Other suspicious activity Examples of Potentially Suspicious Transactions Automated Clearing House (“ACH”) Excessive Cash Funds Transfers Shell Company Trade Finance

Red F Suspicious Activity Reporting (SAR) Filing Triggers lags for Suspicious Activity A timely and accurate SAR must be filed with FinCEN when any of the following circumstances are discovered: Insider abuse involving any dollar amount (regardless of whether there is a loss to the institution). Violations aggregating 5,000 or more where a suspect can be identified. Violations aggregating 25,000 or more regardless of a potential suspect. Transactions aggregating 5,000 or more that involve potential money laundering or violations of the BSA. The Money Services Business threshold is 2,000). Understand differences between 30 days and 60 day filing requirement (suspect and no suspect identified).

Laws and Penalties Red F Money Laundering AML and Regulations Terrorist Financing Laws lags for Suspicious Activity Money laundering and terrorist financing laws help safeguard the U.S. financial system from these and other illicit financial crimes. These acts provide law enforcement officials with more tools to investigate, prosecute, and penalize money launderers and terrorist financiers. Bank Secrecy Act USA PATRIOT ACT* Financial institutions must identify the source, volume, and movement of currency and other monetary instruments deposited into financial institutions or transmitted into or out of the U.S. Financial institutions must file currency transaction reports for transactions over designated thresholds. Currency transaction reports are used to identify individuals or entities conducting cash transactions and to maintain a paper trail. Financial institutions must report suspicious activity that involves money laundering or other criminal activity. Enhanced the criminalization of terrorist financing. Established requirements for a customer identification program. Required financial institutions to have due diligence procedures, and in some cases, enhanced due diligence procedures for certain accounts. Improved information sharing between financial institutions and the U.S. government. *Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism

Laws and Penalties Red F AML Penalties and Enforcement Actions Federal banking agencies, securities regulators, the Department of Justice, and FinCEN can bring criminal and civil money penalties against financial institutions and individuals for violations of the Bank Secrecy Act (“BSA”). U.S. penalties may include, but are not limited to: Financial institutions can lose their charters. Financial institution employees can be removed and barred from banking. Individuals convicted of money laundering or terrorist financing can face up to 20 years in prison and a fine of up to 500,000 per count. Property involved in money laundering or terrorist financing may be subject to forfeiture.* Criminal penalties may apply for willful blindness violations, failure to implement regulations, and for structuring transactions to evade BSA reporting requirements. *Asset forfeiture has proved to be an important tool in the fight against money laundering by removing the profits of illegal activities from criminals. In some cases, funds have been returned to the victims of fraud.

Laws and Penalties Office of Foreign Assets Control (OFAC) As of July 2010, the following list of countries and territories have economic sanctions and prohibitions against them: Balkans* Belarus* Burma Cote d’lvoire (Ivory Coast*) Cuba Democratic Republic of the Congo* Iran Iraq* Liberia* North Korea Somalia Sudan Syria Zimbabwe* *The sanction programs for these OFAC countries and territories target specific named entities or persons on OFAC's Specially Designated Nationals list.

Know Your Customer Section 326 of the USA PATRIOT Act The Customer Identification Program (“CIP”) is intended to enable financial institutions to form a reasonable belief that they know the true identity of their customers. Financial institutions are held accountable for the effectiveness of their CIP, ongoing customer due diligence efforts, and their ability to record the steps taken to verify customers’ identities. At a minimum, the USA PATRIOT Act requires financial institutions to implement procedures for the following: Obtain Customer identification information, such as name, physical street address, date of birth, government –issued ID number. Verify The identity of each customer to the extent reasonable and practicable , and Maintain records of the information used to verify the customer’s identity. Click here for additional information.

Summary of BSA/AML Program Elements Risk-based policies, procedures and controls reasonably designed to prevent, detect and report money laundering. Periodic (formal) risk assessment, which considers geography, customer type, products, services and transactions. The policies, procedures and controls noted above are designed and implemented to address the risks identified in the risk assessment. Regulatory examinations include a review of the risk assessment. A Customer Identification Program (Section 326 of the USA PATRIOT Act), to ensure that the institution can reach a reasonable determination that it knows the true identity of its customer. Transaction monitoring, including applicable record-keeping requirements and reporting of Suspicious Activity (and other reports required by the BSA, e.g., Currency Transaction Reports). Policies, procedures and controls designed to ensure compliance with requirements of the Office of Foreign Assets Control and related laws and regulations. The designation of an AML Compliance Officer. An appropriate AML training program. Independent testing of the program. Appropriate infrastructure to allow for and facilitate escalation of important issues, supervision, consequence management, communication with law enforcement.

Case Studies Note: there are three case study examples for this portion of the session. Place the case studies in order, based on the number of red flags present. We will discuss each of the three cases in small break-out groups. 21st Annual ECI Conference

Case Studies (1) A wire transfer from an account in the Middle Eastern Geographic area is being sent from another bank to a customer. 21st Annual ECI Conference

Case Studies (2) Activity is noted on a bank account as follows: Deposits Tuesday, August 03, 2010 10,000.00 Branch # 1Modesto CA Tuesday, August 03, 2010 7,000.00 Branch #2Modesto CA Tuesday, August 03, 2010 9,000.00 Branch #3Modesto CA Monday, August 09, 2010 10,000.00 Branch #1Modesto CA Wednesday, August 11, 2010 9,000.00 Branch #4Modesto CA Friday, August 13, 2010 10,000.00 Branch #4Modesto CA Wednesday, August 18, 2010 9,000.00 Branch #1Modesto CA Friday, August 20, 2010 10,000.00 Branch #4Modesto CA Withdrawals 8/04/2010 for 6,500 Branch # 5 and # 6 Sun City, AZ 8/04/2010 for 5,000 Branch #5 Sun City, AZ 8/04/2010 for 5,000 Branch #5 Sun City, AZ 8/04/2010 for 900 Branch #5 Sun City, AZ 8/04/2010 for 500 Branch #5Sun City, AZ 8/05/2010 for 4,600 Branch #5 & #6 Sun City, AZ 21st Annual ECI Conference

Case Studies (3) A report is received that a customer brought in some currency that smelled funny. Besides the customers’ pedigree and account information, there are no additional details listed in the referral. 21st Annual ECI Conference

Links to Additional Resources Bank Secrecy Act Regulations – FFIEC/BSA Info Base – 31 CFR 103 BSA Reporting Requirements A Selection of AML Groups/Organizations: – ACAMS (Association of Certified Anti-Money Laundering Specialists) – FATF (Financial Action Task Force) – FinCEN (Financial Crimes Enforcement Network) – OFAC (Office of Foreign Assets Control) – Wolfsburg Group 21st Annual ECI Conference