Anti-Money Laundering in a Nutshell by Kevin Sullivan

Awareness and Compliance for Financial Personnel and Business

Many AML personnel like to check and select a box without understanding why. You need to understand the nomenclature of AML. Understand what is causing alerts in the AML system. It is crucial to understand the Bank Secrecy Act. The major players are the financial institutions, the regulators and law enforcement. These players need to work together in a dynamic environment.

What is Money Laundering?

Laundering is a method of ‘cleaning’ the funds so that it would not appear to be suspicious. The gangsters created businesses like Laundromats so as to ‘gamble’ and to ‘wash clothes’. This was to avoid suspicion as to how the funds came about. This term has been around since the beginning of the 20th century. Why does a bad guy need to do it in the first place? If you have drivers who are paid to carry suitcases from one vehicle to another without knowing what is in the suitcase, chances are that it is hard to prosecute such people. These are known as mules. The trick is to employ the mules without them knowing what is going on. So when they get caught, they have little they know which they can reveal. AML is often very tactical and you may not know that it is happening. The industry is suspected to be about US $2 billion a year. In early stages, it is difficult to tell whether the source is for tax evasion, funding for terrorists etc. The aim is to ‘clean’ the source and make it appear legitimate. This could be done via ‘smoke screen’ transactions. Banks will perform due diligence on its customers, such as examining transaction timelines and transaction activity compared with similar businesses out there. There needs to be a predicate offense to initiate an AML case. The 3 stages are (1) placement; (2) layering; (3) integration. Placement is the act of talking bulk cash proceeds and bring it to a bank. This isn’t easy. Carrying a wheelbarrow of cash isn’t a good idea. The right way is to use a small denominations and use a business vehicle that is reliant on cash. However, law enforcement requires suspicious activity reports, currency transaction and cross-border declaration rules. Layering is where the launderer needs to make many small transactions. This is to avoid people from tracking him. One way is to use shell companies or move the money to other jurisdictions. Another way is to buy large value items and then sell them subsequently. Transactions above $10,000 must be reported to the Treasury Department. FATF has created an AML template to follow. If law enforcement wants information from a bank, they will need to send a subpoena. However, this requires time and the money might have been moved away already. Integration is where the funds are assimilated into the financial system. This is hooray for the launderer. Launderers often engage in transactions which are less than $10,000 at one go. Greed is a common cause of laundering. Terrorism is a possible cause as weapons cost money. Lastly, some criminals have an unbalanced mind. Every part of the AML team is important and plays a defined role.

Money laundering is the practice of integrating the proceeds of crime into the legitimate mainstream of the financial community by concealing its origin. – Kevin Sullivan

Methods of Money Laundering. There are only 3 ways: (1) through the legitimate financial system; (2) physically moving the money; (3) physically moving goods. For the first way, structuring deposits over a period of days, with each less than $10,000, is an example. One could hire other people to make deposits through different bank branches but to the same account. This is known as ‘smurfing’. Another way could be bringing the cash off shore into a country with strong secrecy laws. Cash can be hidden in funny places and then smuggled out. Domestic wire transfers are a type of means too. Gold is a method of laundering, and so are money service businesses (US Postal Service). Common money transfers are made through western union, Amex etc. For MSB, customer anonymity is usually maintained. However, MSBs are required to report suspicious transactions to the Treasury department recently. Records of wire transfers must be maintained for transactions above $3k. It is generally more difficult to track cash in a country with strong banking secrecy laws. SWIFT is the international message service that FIs use to send their messages for wire transfers. For SWIFT, you need to provide information like the International Bank Account Number (IBAN). SWIFT is the system that allows the transfer and transmits information signifying the transfer of funds. There are many fields of information required before a wire transfer can take place. Casinos are a way of laundering money. Casinos are required to file currency transaction reports. However, casinos have brushed up their AML programs in recent years. There are 3 methods of trade-based money laundering: 1) over and under-invoicing; 2) black market peso exchange (commonly used); 3) hawala (underground banking system). Hawala has no regulatory requirements and is ethnic in nature. In addition, there are no money trails available. Understand the red-flags of money laundering. Always ask for documentation, and use authentication when dealing with third parties. Cyber banking via the Internet is getting more common. Some cyber banks do exist. However, note that they do not have deposit protection and that once the bank folds, your funds are gone. A launderer can lease ATMs to other people and they will in-turn lease to others. This reduces the level of due diligence that is applied on them. Most pre-paid cards do not require identification and launderers can maintain anonymity. This is a viable way for launderers, although it is slow. Vehicles are often purchased in the integration phase of AML. It is difficult to launder money using credit cards. Laundering via purchase of real estates is getting more common. For LLC, it is difficult to determine who the beneficial owner is as an LLC can be owned by sub-LLCs, which in turn might be owned by sub-sub-LLCs. For a cash intense business, laundering can be easy as once the dirty money is comingled with clean money, it is difficult to trace. Life insurance products can be bought using dirty money and then cashed out prematurely. Digital currency is a big thing and can be manipulated by launderers. They are not regulated and depositors can maintain anonymity. There are a huge variety of ways in which money can be laundered. As long as there is crime, there is a need for AML personnel.

Federal Regulations – The Laws, Rules, and Guidelines to Fight the Good Fight. We need to stop bad guys from laundering money. The Bank Secrecy Act requires FIs to keep AML programs. There are many legal tools in the fight against AML nowadays. Any cash transaction via an FI exceeding $10,000 must be reported on a currency transaction report (CTR). This must be filed with the FinCEN. There is also a need to maintain a suspicious activity report. If the cash or bearer instruments are brought out of the US, a report needs to be filled as well. Wire transfers are not under the CTR scope. A CTR is important in the investigation. In some countries, their limit is $15,000. For non-FIs, cash transactions more than $10,000 need to be keyed into the 8300. It is a crime under the Money Laundering Control Act to further criminal activity, conceal ownership of property etc. The Financial Crimes Enforcement Network (FinCEN) was launched in 1990. The Annunzio-Wylie Act in 1992 requires banks to complete and report a suspicious activity report (SAR). Several high-risk geographical areas were identified as ‘high-intensity financial crime areas’. The Patriot Act in 2001 gives Treasure the power to deal with US FIs for foreign AM. Enhanced due diligence for correspondent accounts that are maintained for certain foreign banks must be instituted. Banks should share information on terrorism and money laundering with one another. For KYCs, comparisons must be made with known or suspected terrorist or terrorist organizations generated by government agencies. FATCA helps combat tax evasion by US taxpayers who have assets outside the US. The next chapter will discuss on how to build an AML program.

Build a Quality AML Program. Sometimes, AML falls under the Compliance Unit. FIs may hate regulators because of too much regulation. Regulators will say that there are not enough regulations and that FIs compliance unit must be beefed up. Regulators have power to sanction your organization if you are not performing well. Once something bad happens, heads will roll. Fines can be heavy and banks should never try to cut corners. Regulators can only conduct random inspections on the bank. Law enforcement can make recommendations. An AML systems need to achieve 1) prevent money laundering and terrorist financing; 2) to report suspicious activity; 3) to train all personnel on legal and internal procedures. Educate staff on the importance of AML. Compliance training is important and it should be on-going in nature. Internal procedures must document risk and the controls to mitigate risks. It should document due diligence checks. KYC guidelines must be established. Policies must be put in writing and cannot be documented in the head. Policies must also be approved by the board. Policies should be updated on a yearly basis and there should be documentation on what triggers alerts in transaction monitoring. An organization must have a designated compliance officer. There needs to be a process to update the regulations and the training programme must be addressed. An independent audit should be performed on the AML system. High-risk accounts must be reviewed thoroughly. All employees must be trained in AML. Training should be conducted annually. It should cover all pertinent regulations. Identify the risk, which can be customer related or issue-related risks. Risks analysis, management and risk review needs to be conducted. Risks can include product risk, legal entity, business type, country risk etc. For high risk clients, increased level of due diligence and monitoring needs to be instituted. High customer risks include foreign FIs, PEPs, foreign corporations, shell-companies etc. High product risks include trade finance, private banking, electronic funds transfer, lending etc. High geographic risks include any OFAC sanctioned country, jurisdictions of primary money-laundering concern, offshore financial centres etc.

AML is not an income-generating component of the institution. An AML unit can be quite expensive, and, in and of itself, there is no return on investment. Hence, that alone is reason for some FIs to be hesitant to invest and develop a compliance unit any more than the bare minimum. – Kevin Sullivan

KYC and Customer Identification Program. The terms can be used interchangeably. It means identifying your customer, monitor his transactions and update his files. These pieces of information must be reviewed too. Customer identification is the first step, followed by KYC. KYC must be done at the onset of the customer relationship. The officer needs to verify the identity of the person and maintain records of his identity. Documentation as to what type of records will suffice should be written too. Account Opening documentation must be kept and maintained. Be wary of shell companies. OFAC maintains a free list of names, entities that have been sanctioned. The transaction monitoring unit will clear the alert and see if the risk can be accepted. A due diligence actually means a background investigation. Basic due diligence is needed in order to satisfy the regulations. EDD is usually needed for high risk customers. A checklist should be used for Due Diligence. Evidence must be collated. Documentation is important when it comes to an investigation. KPIs should not be set on how cases per day etc. Do not put a time clock on investigation. Never put time limits on AML investigation. If you outsource your DD, you should have thorough oversight on the vendor. Some banks might outsource this to third world countries. Sometimes, when there is a material change in customer information, an EDD is required. The good guy may not be able to catch the bad guy because the good guy only studies problems which are already known. Trust your gut. Cultivate an investigative mind by learning to ask why. When you sense something is not right, please ask why. Keep abreast with the latest industry developments. Make use of new sources and technology. Justify, articulate and define everything. Learn to create risk-based due diligence. It is very important to ask ‘where is the source of funds?’ Risk ratings might vary over time. If the customer is too high risk, it is advisable not to deal with him/her. Learn to allocate a risk scoring methodology. Gather intelligence sources and check against that. Obtain public records. You can even pay for certain databases. It is important to purchase good transaction monitoring software. If you clear it in the system, there needs to be a reason for it. Ensure that the system is not generating too many false positives. Understand your correspondent bank’s AML processes. You have to trust that they have performed the DD work. PEPs can be a senior political figure, a member of his immediate family, or a close associate. Understand some of the KYC red flags.

If you think it stinks, it probably does. You do this job every day, and you work with people who do this job every day. If for some reason the hair on the back of your neck stands up, then go with the feeling. – Kevin Sullivan

A Suspicious Activity Report (SAR) is born. Some banks file more than necessary to avoid being questioned by regulators. The FFIEC prescribes standards for supervision of financial institutions. Writing a complete SAR is very important. How do you identify what is suspicious? When should you file an SAR? Sometimes, the system can help you flag out suspicious cases based on set criteria. The amount of the transaction doesn’t really matter. There are 30/60/90 filings. SAR must be reviewed before they are sent to FinCEN. There is also a narrative that must be written when the SAR is filed. Be short and brief. Don’t leave blank boxes. Use language that people can understand. The auditor will hammer you if you are supposed to file but failed to. Law enforcement will pick particular SARs of interest for further checking. Law enforcements usually need subpoenas before they can request for information. FinCEN will compile statistics of SARs. It is useful to understand trend analysis.

Tips for Law Enforcement and Financial Crimes Investigators. Profit is an essential aspect of most crimes. This chapter is dedicated to the law enforcement investigator and the FI investigation team. An individual does not need a CPA to perform an investigation. Law enforcement personnel need to have the right training to perform their role well. The compliance unit of the bank will be involved. The investigator should talk to the law enforcement agency. There are numerous regulators for the different types of FIs. FIs take regulators seriously. Law enforcement look out for criminal activity while regulators look at whether the guidelines and standards are being adhered to. Some of the regulators are the SEC, Securities Exchange Commission, Federal Reserve bank etc. Not all law enforcement agencies have access to the FinCEN portal to view SARs. SARs help provide leads for law enforcement agencies. SARs are confidential and information should not be simply shared around unnecessarily. You may be able to obtain KYC documents from the bank. Most of us do not think like bad guys. Once a bad guy using a fictitious ID, it can foil your plans dramatically. Explore the internet for possible sources of new information. Use your instincts. Always learn to be suspicious. Discover the facts as best as possible. If your hair at the back of your neck stands, it probably means something is wrong. Consider different type of hypotheses. Read the Association of Certified Fraud Examiners (ACFE). Learn to invest in your career and develop your career. Don’t be afraid to spend money and time on educating yourself. Financial crimes are growing.

The Importance of a Global Approach to Money Laundering. Many crimes are transnational nowadays. Money laundering is an issue that affects everyone. The FATF consists of many member countries. There is also the Basel Committee on Banking Supervision. Wolfsberg helps to develop and shape guidelines for banks and regulators. The IMF has also been incorporating AML concepts into its procedures.

The New Financial Crime Model. You can contact law enforcement immediately after you file an SAR. There is an increasing trend of fraud and AML units combining and joining forces. Fraud and AML personnel should be cross-trained. However, do take note of the confidentiality requirement of the cases. 95% of all criminal activity is committed because of greed. There are various ways in which a fraud can be conducted. Please understand the red flags for AML cases.

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