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Abbreviations

• AML: Anti-Money Laundering
• ICE: Immigration and Customs Enforcement
• ACAMS: Association of Certified Anti-Money Laundering Specialist
• MBS: Money Service Business
• BSA: Bank Secrecy Act
• CTR: currency transaction report
• CMIR: currency or monetary instrument report
• FATF: Financial Action Task Force
• IRS: Internal Revenue Service
• USPS: U.S Portal Service
• CHIPS: The Clearing House Interbanl Payment System
• SWIFT: The Society for Worldwide Interbank Financial Telecommunications
• IBAN: International Bank Account Number
• CTRC: Currency Transaction Report for Casinos
• LLCs: limited-liability companies
• DCO: designated compliance officer
• MLCO: money-laundering compliance officer
• AMLCO: anti-money laundering compliance officer
• SAR: suspicious activity report
• FFIEC: Federal Financial Institutions Examination Council
• FCU: financial crimes unit

The term money laundering was coined in the famous 1920s gangster era of American history. Between gambling, prostitution, and sales of prohibition alcohol, there was a lot of cash that required laundering. In other words, a method or methods had to be developed so that the government did not become suspicious about the true nature of a gangster’s funds.

Turning “Bad” Money into “Legitimate” Money

Money laundering is the practice of integrating the proceeds of criminal enterprises into the legitimate mainstream of the financial community.

Or

The conversion or transfer of property, knowing it is derived from a criminal offense, for the purpose of concealing or disguising its illicit origin or of assisting any person who is involved in the commission of the crime to evade the legal consequences of his actions.

Palermo Convention

The Three Stages of Money Laundering

Stage 1 – Placement

Placement is the first stage of the process. Simply, this is the act of physically taking bulk cash proceeds and bringing them to a financial institution for deposit or transfer.

Doing the math, you can see how quickly this can become an issue. It’s hard to carry and move such a heavy load. Can you imagine some guy walking into the bank with a wheelbarrow loaded with cash? It certainly would attract a lot of attention from a financial institution. This is where the money launderer needs a good cover story—one that makes it seem all that cash appears to have come from a legitimate source.

The dirty money needs to be transformed into a less noticeable and more portable form and then “placed” into a legitimate financial institution. (Placed could mean the cash is deposited or substituted for another form, such as a money order, bank check, prepaid access card, and so on.) Since large amounts of cash can attract attention and may be subject to federal reporting requirements, criminals depend upon the use of businesses that deal with substantial amounts of cash. Businesses that might normally have large amounts of small-denomination bills include restaurants, bars, hotels, casinos, car washes, vending machine companies, and laundromats. The large amounts of cash can be broken up into smaller amounts that are then each deposited directly into a bank account, or else they purchase a succession of monetary instruments (money orders, cashier’s checks, and so on) and then deposit them into accounts at various locations. The end result is that the original money has been changed and is one step removed from its original starting point.

Since large amounts of cash can attract attention and may be subject to federal reporting requirements, criminals depend upon the use of businesses that deal with substantial amounts of cash. Businesses that might normally have large amounts of small-denomination bills include restaurants, bars, hotels, casinos, car washes, vending machine companies, and laundromats. The large amounts of cash can be broken up into smaller amounts that are then each deposited directly into a bank account, or else they purchase a succession of monetary instruments (money orders, cashier’s checks, and so on) and then deposit them into accounts at various locations. The end result is that the original money has been changed and is one step removed from its original starting point.

Some examples:
► The cash is deposited directly into a bank account or incorporated into the proceeds of a legitimate business.
► The cash is exported out of the country.
► The cash is used to purchase high-ticket items, goods, property, or business assets.

Stage 2 – Layering

Layering is the second step of the three-step process. Layering requires the launderer to make numerous transactions, possibly involving several front companies and entities. By doing this, the launderer is attempting to distance himself from the money and make it harder for the authorities to track. Typically, these layers involve foreign countries that have strong bank secrecy rules, which in turn makes the cash trail harder to follow. It is to the advantage of the launderer to use as many layers as possible, using several shell corporations and moving numerous transactions through as many jurisdictions (especially outside of the United States) as possible. Other layering techniques involve the purchase of big-ticket items such as cars, boats, planes, or securities. These are usually registered in a nominee’s name (someone other than the launderer); sometimes friends, family members, college students, and seniors are paid to be nominees. Casinos are often used to layer funds because they readily take cash in.

Some examples:
► The money is wire transferred out of the country using shell companies. 
► The money is deposited into foreign banking systems. 
► A previously purchased high-ticket item or property is sold off.

Stage 3- Integration

The third and final phase of the money-laundering process is integration. This is the phase where the layered monies are incorporated into the legitimate financial world and assimilated with the assets of the legitimate system. In other words, it’s spending day for the bad guy. This is the light at the end of the tunnel—the giant payday for the launderer. Finally, it’s what he has been waiting for: the ability to buy cool stuff or do more bad deeds as a result of the proceeds of his crime. He will transfer the funds into the mainstream using various methods such as business investments, big-ticket luxury items, and real estate purchases.

► Phony loan repayments or doctored invoices are used as concealment for the dirty money. 
► A complex web of wire transfers makes it difficult to trace the original source of the income.
► The proceeds from sold goods or property appear to be legitimate.

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Various Methods of Money Laundering

Structuring
The method of laundering money most reported on is structuring. A person “structures” financial transactions when that person, or his agent, conducts or attempts to conduct more than one currency transaction in one or more days by separating deposits into several smaller deposits of less than $10,000 each. The reason for a launderer to structure deposits is to avoid the Bank Secrecy Act (BSA), which requires financial institutions to report all cash transactions over $10,000.

Bulk Cash Smuggling
Bulk cash smuggling is a successful and frequently used method to launder ill-gotten gains. Once the cash is offshore and in a country with a strict bank secrecy law, the process of layering begins. In recent years, launderers have tried to hide it in automobile transmissions, phony television sets, battery chargers, electrical appliances, diaper boxes, and grocery goods. Cars with traps are not only used to deliver drugs but also used to smuggle money across the border. The launderer will also attempt to use airline couriers, private planes, commercial vessels, and the U.S. Postal Service. Further, the cash might be converted into negotiable instruments such as money orders and traveler’s checks and mailed to overseas banks. Most recently, money launderers have made use of domestic wire transfers to move the bulk cash to a transfer point close to a national border. This is done to alleviate the possibility of the cash being detected by law enforcement as it travels the highways across the country, and it also saves much time. From there the money is then physically transported across the border.

Gold
Gold is used as an alternative means of moving drug proceeds out of the country. Gold is purchased with illicit funds from gold refiners or wholesalers. The gold is then melted down and molded into the shape of various low-value objects such as nuts, bolts, a variety of auto parts or tools, and so on. The items are further disguised by being painted gray or silver. The disguised gold is then transported by courier or air cargo to Colombia, Venezuela, or Ecuador. The gold can be sold at any point, but it is typically held by the organization until the selling price is satisfactory.

Money Service Businesses

Money service businesses, including the U.S. Postal Service (USPS), Western Union–style money transmitters, issuers of traveler’s checks or stored values, and others, are often used to move money from point A to point B.

Money Orders
Money orders, many issued by financial institutions such as the USPS, WU, AMEX, Travelers Express, and MoneyGram. Money order agents are required to obtain a copy of the purchaser’s identification if the purchase is in excess of $3,000, and they must maintain a file that may be reviewed by the IRS.

Money Service Business
A money service business usually offers a wide array of services that can be used to launder money. Airline tickets and foreign currency exchanges are extensively used techniques. A money remitter’s services, in the form of wire, fax, draft, check, or courier, exist expressly for the purpose of allowing people who are unable to use the traditional financial institutions a means to transfer money. The legitimate business consists of wiring small amounts of money that foreign nationals want to send to relatives in their homeland. Until recently, customer anonymity was a principal feature of these services.

Regulations Involving Money Service Businesses
Beginning on January 1, 2002, money transmitters, issuers of money orders and traveler’s checks, and the U.S. Postal Service are required to report to the Department of the Treasury certain transactions that meet particular dollar thresholds. The reportable transactions include the following:
► Transactions involving funds derived from illegal activity
► Transactions structured to evade the reporting requirements
► Transactions that appear to serve no business or lawful purpose
► The regulation includes two different dollar threshold: for transactions conducted at a money service business, a $2,000 ceiling applies, for transactions conducted by issuers of money orders from a review of clearance records of orders sold or processed, a ceiling of $5,000 applies.

Wire Transfer

The most common system for transferring large sums of money all around the world is through bank wire transfers. A wire transfer is part of the layering process. The cash has already been “placed” in the bank, and now it is time to move it and begin a cycle of deception aimed at confusing law enforcement. Wire transfers are an essential part of the legitimate global business community. Wire transfers used by launderers are mostly used in conjunction with shell or nominee companies.

A person who wants to send a wire transfer provides the financial institutions with the name of a particular receiving financial institution and its specific assigned number, an International Bank Account Number (IBAN) or a Business Identifier Code (BIC). The financial institution sending the funds transmits a message—using either SWIFT if it’s international or Fedwire if it is domestic—to the receiving financial institution. The message requests that the receiving financial institution pay out as per the wire instructions. The financial institutions involved must have a communal account with each other, or the payment must be sent to a bank with such an account, called a correspondent bank.

Casinos

Money laundering through casinos is a valuable method of placing and layering ill-gotten gains. The technique of laundering money via a casino historically has been quite simple. Buy in with dirty money (for example, purchasing casino chips) – cash out (if being asked about money, just say “I won big at the tables at the casino”).
Currently, any cash purchases of chips in amounts larger than $10,000 are subject to being reported to the IRS on a currency transaction report. Casinos in Nevada are exempt from this particular reporting requirement, yet they complete their own reports with the Nevada Gaming Commission. Part of the Nevada regulations are that cash purchases less than $10,000 are to be aggregated if they exceed $10,000 in the same gaming area within one gaming day (24 hours).

Trade-Based Money Laundering

Trade-based money laundering is known as an alternate remittance system. According to the Financial Action Task Force (FATF), trade-based money laundering is defined as follows: “The process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimize their illicit origins. In practice, this can be achieved through the misrepresentation of the price, quantity, or quality of imports or exports. Moreover, trade-based money laundering techniques vary in complexity and are frequently used in combination with other money laundering techniques to further obscure the money trail.”

There are three methods of trade-based money laundering.

1. Over- and under-invoicing
The core of this particular method is the falsification of the actual price of the good or service in order to indicate a higher or lower value of the good or service between the importer and exporter. Here are two examples:
◘ Over- and under-shipments of goods: Mr. X has in his possession $1 million of drug proceeds. He goes to the auto auction and purchases 25 vehicles at $40,000 each, for a total of $1 million. Mr. X exports all the cars to an importer in Manila for the price of $10,000 each, and he has the fraudulent documents to indicate the volume and amount. Obviously, the exported price is much lower than the price he paid for the vehicles. However, the importer in Manila is working with Mr. X. As soon as the importer in Manila receives the cars, he sells them for the actual price of $40,000 each (plus a little something for himself). The Manila importer then deposits the “profit” into various accounts as directed by Mr. X. Mr. X has successfully laundered $30,000 on each vehicle.
◘ Falsely described goods: This technique requires the misrepresentation of value or the quality of a particular product. Mr. X may purchase hard-to-determine value products such as fine art or antiques. Since the actual price is hard to determine, it is easier to doctor up phony paperwork indicating that the product is of a much higher or lower price than actual.

2. Black Market Peso Exchange
The BMPE is one of the most widely used schemes for money laundering. Say a Colombian drug dealer has U.S. dollars in the United States as profit from his dealing. He needs to get the money to Colombia and in the form of Colombian pesos. The BMPE involves the purchase of U.S. products, primarily home appliances, consumer electronics, used auto parts, and other products for export to Colombia. A third party, commonly called a money broker or exchanger, takes charge of the process.
For example, the Colombian cartel arranges for the shipment of cocaine to New York. The drugs are sold to a major dealer in the Washington Heights section of Manhattan in exchange for U.S. currency. The cartel sells its U.S. dollars to a Black Market Peso Broker in New York. The money is sold at a rate that reflects the risk the broker undertakes of evading the BSA reporting requirements while placing the money into the U.S. banking system. When the dollars are delivered to the U.S.-based broker or his agent, pesos are then deposited into the account of the cartel in Columbia.The broker then uses the laundered U.S. currency to sell to Colombian importers, who in turn purchase goods from the United States or elsewhere. Lastly, the goods are imported to Colombia and sold for Colombian pesos.

3. Hawala

The underground banking system (also called the parallel banking system) is called by different names in various parts of the world. In Asia it is called Hawala. In India, it is called Hundi, and in Far East, it is called fei ch’ien or the Chinese Underground Banking System (CUBS). It is totaly unregulated and completely void of any reporting requirements. It is a system that operates outside of the traditional banking system of regulation and supervision. The system is inherently ethnic.

Red-flag indicators of trade-based money laundering include the following:
► Transactions from unrelated third partiesUnable to produce proper documentation
► Ghost shipments where no goods are traded and the documentation is fictitious
► Unusual shipping routes or product is shipped either to or from a high-risk country or through various jurisdictions for no known reason
► The use of shell companies
► Carousel transactions where the same product is repeatedly imported and exported
► Activity not consistent with the business
► Inconsistencies between the price of the product and the actual value
► Frequently amended transactions or extended letters of credit contrary to the normal business practice

Cyber Banking

Cyber banking is one of the newer methods of payment systems that provides for the electronic transfer of value. Cyber banking has the possibility to eradicate a money launderer’s biggest nightmare, which is the actual physical movement of large sums of cash. Transfers of value are completed in one of two ways: Internet or prepaid cards. These systems provide new dilemmas for law enforcement because they have the capability to merge the speed of bank wire transfers with anonymity—a dangerous duo.

Smart Cards

A smart card is a credit card–sized plastic card that incorporates an implanted integrated circuit chip that can be programmed to accept, store, and send data. A smart card can be used to “load” money onto the card from a client’s account from an automatic teller machine (ATM) or even a telephone. The cards store a dollar value, and the owner can redeem some of that value at a merchant location. Then the holder can “reload” it and use it some more.

Internet

Cyber banks, which blossomed on the Internet, are not banks in the typical, traditional sense of the word. In fact, it is a good possibility that a cyber bank has no “brick-and-mortar” location. It exists only on the Internet and on someone’s laptop computer. Most cyber banks are totally unregulated and unprotected. As a launderer, the positive side of this is that there are no reporting requirements and not much record keeping, virtually assuring your anonymity. The negative side is that there is no insurance, such as Federal Deposit Insurance Corporation (FDIC). If the bank should fold up and disappear, then so does your money. On the bright side, these cyber banks in the Unites States have all but folded up. It should be noted that online banking is not the same as cyber banking. Online banking is usually a legitimate financial institution with a form of drive-up window available via the Internet. There are only the usual AML concerns with online banking and, of course, any type of fraudulent hacking issue.

ATMs

Automatic teller machines are divided into two sectors, a bank-owned/operated machine and a privately owned/operated machine. A bank-owned ATM may be positioned as a drive-up/walk-up at your favorite bank. A bank-owned ATM may also be situated at an offsite location such as a mall or at the ballpark, but it is still maintained by the bank. A private ATM, also known as a private or white-label machine, can be purchased by an individual or entity and set up in any location.
A launderer may purchase numerous white-label ATM machines and establish them in various locations. The places of business that the ATMs are placed in may or may not be a co-conspirator in the crime. The laundering bottom line is that the bad guy loads his ATMs with the cash proceeds from whatever criminal enterprise he is engaged in, or at the least, the money is co-mingled with clean cash. Subsequently, as cash in the ATM is withdrawn, the ATM is continually replenished by the launderer using his dirty money. Cash is withdrawn by unsuspecting cardholders who are making a legitimate use of the ATM, or cash is withdrawn by smurfs who are working for the criminal enterprise and making multiple withdrawals.

ATM red flags:
► The numbers of withdrawals from a particular machine exceed average for that location.
► The amounts of cash withdrawn from a particular machine exceed the average.
► The noticeable lack of any replenishment withdrawals. Follow the money trail. Where does the money come from that replenishes the ATM?
► Surcharges that are above average. The surcharge could be the payment back to the business owner for the use of his business to place the ATM there.
► The times of the day that the transaction occurred.

Real Estate

Laundering via real estate has become quite popular in the last few years, mostly because of the ease at which the laundering can be accomplished and the ability to fly under the government radar. In many cases, it is as simple as buying property using a unscrupulous appraiser who significantly lowers the appraised price of the property. The launder purchases the property via a bank loan for the deflated price and then makes payments using dirty money. Eventually the launderer sells the property for the actual value of the property. Another popular method is using limited-liability companies (LLCs) to purchase property. Of course, the veil of the corporate structure comes into play. The LLC is a good choice for tax evaders and money launderers because the true identity of the beneficial owner of the company may be hidden. An LLC can be owned by sub-LLCs, which in turn may be owned by sub-sub-LLCs, and so on, and so on.

Cash-Intense Business

A cash-intense business is an actual storefront that deals in a certain amount of legitimate goods (a shell company or a front company may not have any brick or mortar). A cash-intense business is an enterprise that is almost predominately cash based (such as a bar, pizza shop, or car wash). The true ownership of the business may be cloudy because the business may have been purchased/registered to a nominee, particularly one who has a clean track record and would not arouse suspicion. Laundering cash through a cash-intense front means comingling the dirty funds with the legitimate funds. Because of the nature of a cash-intense business, it becomes difficult to determine exactly how much money the business actually made on any given date or dates. For example, the daily proceeds of a bar may come from selling booze. However, once dirty cash is comingled into the profits, it is easy for the bar to claim higher proceeds were earned. Without a detailed audit, it is difficult to determine where the legit and illegal funds begin or end. More profits could be explained in several ways—the drinks are more expensive, more customers are buying booze, bottom-shelf booze is being sold at top-shelf prices, there is a cover charge at the door, or perhaps there is a band fee.

The biggest red flag concerning cash-intense businesses is an unusual amount of profit that does not appear to be consistent with an entity in that particular line of business or inconsistent with that particular storefront.

Insurance

Certain insurance products can be used to launder money, particularly life insurance products. This is most often accomplished by using dirty funds in the form of checks, money orders, or wire transfers to purchase a life insurance policy and then cashing out the product prematurely. In the situation of using a general insurance policy, the fraud is added to the equation. The launderer would insure some high-priced goods and then make a fraudulent claim against the policy. In both circumstances, the end result is the launderer receiving a clean check that tends to legitimatize his funds being deposited into his bank account.

Some of the red flags might be the early termination of the policy and the refund check being directed to an apparent unrelated third party. Another method is, much like a credit card, over-funding the policy or borrowing the maximum amount available as soon as possible after purchasing the policy.

Digital Currencies

Digital currency is purchased via a virtual currency exchange and then can be redeemed at any store that accepts digital currency as payment. The digital currency is maintained in what is referred to as an electronic wallet. Unfortunately, digital currency is not regulated or insured by any entity. One of the major concerns is the anonymity of the accounts. Accounts can be created via the Internet, so any documentation is suspect.

To fight the good fight, the United States (and other countries) has created guidance (often in the form of laws) to help prevent money laundering. The Bank Secrecy Act mandates financial institutions to develop and maintain anti-money laundering programs. We have many laws, rules, and regulations to assist in the fight against money laundering, which is, in reality, a fight against the bad guys who commit various heinous crimes.

1970: Bank Secrecy Act (BSA)

The BSA requires banks and other financial institutions to maintain records to ensure that the details of financial transactions can be traced by investigators if they need to do so. Further, this regulation establishes economic guidelines for which reports are to be completed. Any cash transaction in excess of $10,000 has to be reported on a currency transaction report (CTR; IRS form 4789). In addition, anyone who physically transports currency and bearer instruments greater than $10,000 into or out of the United States is required to complete a report of international transportation of currency or monetary instruments (CMIR; U.S. Customs form 4790).

What Constitutes a Financial Institution

The BSA is clear about what it deems a financial institution. It is an agent, agency, branch, or office within the United States of any person doing business, whether or not on a regular basis or as an organized business concern, in one of the following capacities:
► Bank (except bank credit card systems)
► Broker or dealer in securities
► Money services business (MSB)
► Telegraph company
► Casino
► Card
► Person subjet to supervision by any state or federal bank supervisory authority
► Futures commission merchant (FCM)
► Introducing broker (IB) in commodities

Currency Transaction Report

A CTR, created by the Bank Secrecy Act, is a report that must be filed by a financial institution for a cash transaction of more than $10,000 in one business day. Multiple transactions must be treated as a single transaction (aggregated) if the financial institution has knowledge that they are by or on behalf of the same person and result in cash in or cash out totaling more than $10,000 in any one business day.

The following are transactions that require a CTR:
► Cash withdrawals
► Cash deposits
► Foreign currency exchange
► Check cashing paid in cash
► Cash payments
► Cash purchase of monetary instruments
► Automated teller machine (ATM) cash transactions (usually deposit only)
► Incoming or outgoing wire transactions paid in cash

Note: If you have a business in which some customers occasionally pay large amounts in cash for goods, you will need to fill out IRS form 8300.

1986: Money Laundering Control Act (MLCA)

Launderers found ways to circumvent the Bank Secrecy Act, which led to the Money Laundering Control Act (MLCA). One way to circumvent the BSA was to structure cash deposits (dividing up dirty money and making multiple cash transactions at numerous different banks all under the $10,000 report requirement limit). The MLCA made structuring a crime. The financial statute made it a crime for anyone to knowingly engage in a monetary transaction with criminally derived property of more than $10,000 with knowledge that the property came from unlawful activity (drug dealing, credit card fraud, counterfeiting, and so on) and is used in financial transactions to accomplish one of the following purposes:
► To further the criminal activity that generated the property
► To conceal or hide the ownership of the property obtained from the criminal activity
► To deliberately avoid a government-mandated transaction reporting requirement (CTR, for example) under state or federal law

1990: FinCEN

The Financial Crimes Enforcement Network (FinCEN) was originally developed to assist law enforcement with investigations. Subsequently in 1994, FinCEN was given BSA regulatory responsibilities. The mission of FinCEN is to support law enforcement investigative efforts and foster interagency and global cooperation against domestic and international financial crimes and to provide U.S. policy makers with strategic analyses of domestic and worldwide trends and patterns. FinCEN works toward those ends through information collection, analysis, and sharing; technological assistance, and innovative, cost-effective implementation of the Bank Secrecy Act and other U.S. Treasury authorities (FinCEN, 2002).

1992: Annunzio-Wylie Act

The Annunzio-Wylie Anti-Money Laundering Act amended the Bank Secrecy Act. Financial institutions are now required to report any suspicious transactions that could be a violation of a law or regulation. The report that is completed by the financial institution is called a suspicious activity report.To prevent financial institutions from any civil liability, a safe harbor provision was included. This enables the banks to report suspicious activity, through the use of a SAR, to law enforcement, without any legal repercussions. However, the disclosure of any information or even the existence of a SAR other than to appropriate law enforcement and regulating authority was deemed illegal. Further, Annunzio-Wylie made the operation of a money-transmitting business without a license a crime.

1994: Money Laundering Suppression Act

The Money Laundering Suppression Act (MLSA) of 1994 created a Bank Secrecy Act Advisory Group consisting of 30 individuals from the financial community who offer their advice and expertise in AML endeavors. The MLSA also eases the exemptions of transactions from the CTR reporting requirements. Numerous businesses that commonly deal with large sums of money on a daily basis, such as hotels, bars, restaurants, parking lots, convenience stores, and car washes, were not required to complete a CTR. While casinos normally deal with large sums of money on a daily basis, they were not exempt. In fact, the regulations increased with reference to the identification of players.The regulation requires MSBs to register with the Department of the Treasury and at the state level. Further, it requires MSBs to establish and maintain a list of their agents. It became a federal crime to operate an unlicensed MSB.

1998: Money Laundering and Financial Crimes Strategy Act

The Money Laundering and Financial Crimes Act of 1998 designated certain high-risk geographical areas of the United States as high-intensity financial crime areas (HIFCAs). This was established to assist with the AML efforts of local, state, and federal law enforcement agencies.

There are seven HIFCA zones in the United States:
► New York
► South Florida
► Puerto Rico
► Chicago
► San Francisco
► Los Angeles
► Southwest Border

2001: USA PATRIOT Act

After the terrorist attacks on September 11, 2001, Congress enacted new anti-terrorism and AML legislation called the USA PATRIOT Act.

There are several sections of the USA PATRIOT Act. Those sections are as follows:
► Enhancing domestic security against terrorism
► Enhancing surveillance procedures
► International money-laundering abatement and anti-terrorist financing
► Protecting the border
► Removing obstacles to investigating terrorism
► Providing for victims of terrorism, public safety officers, and their families
► Increased information sharing and critical infrastructure protection
► Strengthening the criminal laws against terrorism
► Improved intelligence
► Miscellaneous

Office of Foreign Assets and Control

The Office of Foreign Assets and Control (OFAC) is an agency of the U.S. Department of Treasury. The purpose of OFAC is to administer and enforce economic and trade sanctions against certain individuals, entities, vessels, aircraft, ports, foreign government agencies, and countries whose interests are considered to be at odds with U.S. policy. Additionally, the OFAC sanctions program targets terrorists, terrorist organizations, terrorist nations, drug traffickers, and those engaged in the proliferation of weapons of mass destruction.For all you AML purists out there, technically OFAC is not part of the AML unit. Many larger financial institutions have a separate OFAC officer and unit. However, many of the responsibilities are so closely related to AML that it is often bound together with AML or at least works in conjunction with the AML unit.OFAC publishes a list of individuals and entities that may be operating on behalf of a targeted county and subjects that might not be country specific. This list is known as the specially designated nationals (SDN) list.

Foreign Account Tax Compliance Act

The Foreign Account Tax Compliance Act (FATCA) is designed to combat tax evasion by U.S. taxpayers who have assets outside of the United States. FATCA requires foreign financial institutions (FFIs) to report to the Internal Revenue Service (IRS) information about financial accounts held by U.S. taxpayers or by foreign entities in which U.S. taxpayers hold a substantial ownership interest. FATCA imposes new requirements on three primary groups:
► FFIs that maintain accounts for U.S. account holders or foreign entities substantially owned by U.S. individuals
► U.S. taxpayers holding specified financial assets outside of the United States
► U.S. financial institutions acting as withholding agents

The anti-money laundering (AML) universe basically consists of three entities that attempt to fight the good fight against the bad guys.
◘ Financial institutions (including designated nonfinancial institutions)
Financial institutions take the laws developed by the lawmakers and the U.S. Treasury Department. They then follow established procedures that allow the regulators to maintain oversight, and they advise law enforcement of the required items. Sometimes the efforts of all three work smoothly and harmoniously, and money launderers are captured, criminal organizations are taken down, and everyone high-fives each other for a job well done.Other times, there is a bit of a family feud. Financial institutions may object to what they perceive as too many regulations and contradicting oversight by their regulators. (Many financial institutions have more than one regulating body governing them).

◘ Regulators
Regulators sometimes have a different opinion and may even believe that there are not enough regulations. That would be evidenced by the fact that some financial institutions have issues maintaining a compliance program, and if it were not for the regulators, they would do little or nothing at all. One can somewhat understand their reluctance; 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 the investment. Hence, that alone is reason for some financial institutions to be hesitant to invest and develop a compliance unit any more than the bare minimum (if that even). Evading regulatory fines sometimes seems to be the only reason that some financial institutions will develop a compliance or AML unit.

◘ Law enforcement
Law enforcement walks a line between the financial institutions and the regulators. It is not law enforcement’s position to create policy. However, on occasion, because of their “hands-on” and “on the front lines” duties, they sometimes do work with both financial institutions and regulators to advise them and make suggestions based upon what they see at the street level. This is particularly true whenever some new value-moving method is developed and implemented.

Recommended Elements of a Quality AML Program

An AML program is constructed by each financial institution. No two programs will be the same because no two institutions are the same. JP Morgan Chase will have a different system than the local credit union or a mom-and-pop money service business. A broker/dealer will have a different program than a casino. While the scope and depth of the AML program might be different in various different institutions, they do all have to follow the laws, rules, and regulations as set forth in the Bank Secrecy Act.

There are three goals of a quality AML program:

◘ To prevent money laundering and terrorist financing
The first goal, preventing money laundering and terrorist financing, could be considered the mission statement for any quality AML program. The biggest issue with this part is getting the financial institution to buy in to the reasoning.

◘ To report suspicious activity
Reporting suspicious activity is when the financial institution reviews the circumstances surrounding a particular account, transaction, or attempted transaction, and those circumstances are similar to known red flags for money laundering or the circumstances make little sense and are quite odd or unusual. A form called a suspicious activity report (SAR)—internationally known as a suspicious transaction report (STR)—details the incident and is forwarded to the government (FinCEN) for review. Because this is such a huge part of an AML program and one of the areas that regulators almost always recognize as an issue in any action against a financial institution, I will dedicate a section on SARs later in this book.

◘ To train all personnel on legal and internal procedures
Training personnel is bit of a gray area because there are no specific standards for length and time of training. However, all personnel must be trained, usually on an annual basis. The length and constitution of the training methods are left up to each individual institution. All financial institutions must have regulatory oversight, and the regulator may determine that the financial institution’s training program is lacking. Almost all regulatory actions against financial institutions note lack of training as one of the reasons for the action.

The Four Pillars

The generally accepted mantra of an AML compliance program is also set forth in section 352 of the USA PATRIOT Act in what is known as the four pillars of an AML program.

Pillar 1: Internal policies and procedures

If you were operating a retail business, you would develop your business structure and create a business plan. Similarly, that is what your internal policies and procedures represent for the AML program. These policies and procedures should include the risks that face the institution and detail how the institution plans on addressing those issues. This document should list all the components (inventory if this were a retail shop). It would include all of the financial institution’s products, services provided, and geographical location. In general, the financial institution needs to establish the risks associated with the aforementioned services, products, and geography and develop a compliance program specifically designed for those risks.

Account opening procedures should be detailed, and all associated customer information should be obtained and memorialized. The policy should also establish the guidelines for the “know your customer” (KYC) program.The policy should detail how the financial institution plans to monitor for any odd, unusual, or suspicious activity. It should explain what circumstances would require “enhanced due diligence” and how those procedures would be implemented.

The financial institution must address exactly how it plans to cooperate with law enforcement and handle the requests made by same. All policies and procedures manuals should be reviewed and updated at least on a yearly basis. Special circumstances may require the policies and procedures to be updated even more frequently.

Pillar 2: Designated compliance officer

Every financial institution must have a designated compliance officer (DCO). The DCO, depending on the financial institution, may have other responsibilities. However, it must be a person in a responsible position and possess the capabilities to perform such a job. The DCO, anti-money laundering compliance officer (AMLCO), or money-laundering compliance officer (MLCO) is responsible for the daily compliance operations involving all anti-money laundering laws and regulations and the training program.
A DCO should be selected based upon the following guidelines:
◘ The designated compliance officer is appointed by the board of directors.
◘ The designated compliance officer must possess sufficient authority within the financial institution to accomplish the job.
◘ The designated compliance officer must be fully knowledgeable and experienced on the Bank Secrecy Act and financial institution activities.
◘ The designated compliance officer must report any Bank Secrecy Act issues and any SARS filed to the board of directors.

Pillar 3: Independent audit function

To properly evaluate its success, it must be appropriately monitored. A review of the program should be conducted internally by an individual or a unit that is not governed by the AMLCO. Additionally, an audit, commonly called a review, should be completed by a totally independent source or outside agency. Many of the large financial institutions use large accounting firms, such as one of the Big Four. Smaller institutions will usually employ smaller accounting firms, law firms, or private consulting firms. It is worth noting that almost every regulatory enforcement action taken against financial institutions observed that internal controls were weak or nonexistent. The main purpose of an audit is to make sure that the AML program is operating as it has been designed.

The following items should therefore be considered when establishing or overhauling the independent audit function:
◘ The entire AML compliance program should be subject to an independent review every 12 to 18 months depending upon the institution’s risk profile.
◘ Written risk assessment should be the first area to be audited.
◘ Qualified internal auditors, outside auditors, or consultants who are not responsible for the monitoring of the program should be used to perform the audit.
◘ Internal auditors should not be in the same management silo as the AML department.

Pillar 4: Training

Setting up the best AML program in the world does you no good if the employees are not aware of or follow the program. That’s why there’s the need to establish a training regime. The following items should be considered when developing, overhauling, or reviewing your institution’s training program:
◘ All employees must be trained, including senior management.
◘ The AML compliance officer must have the appropriate funds to provide training. (There’s a gray area here. The meaning of the word appropriate may differ greatly depending upon who in the institution is defining it. However, the final determination will be delivered by the regulator. It may be a good idea to determine what a particular financial institution’s regulator believes is sufficient for the scope of that institution by simply asking the regulator.)
◘ Training should be conducted annually and updated when appropriate. (There are always new laws, regulations, methods, policies, and examples that can be provided.)
◘ All employees need to be aware of the policies they specifically need to follow and how it affects their particular job. Having employees sign a document saying that they have read and understand the policies is a good idea.
◘ New hires should be trained immediately. Do not wait until the next training session. New hires need to be aware of the policies and procedures immediately, not when it is convenient to the institution’s schedule.
◘ Document and memorialize the training.

The training program should consider the following elements:
◘ A history of money laundering, anti-money laundering, and terrorist financingA review of all pertinent AML laws and regulatory expectations
◘ Obligations of the financial institution to maintain compliance
◘ How to construct a SAR and how you get to the level of needing a SAR
◘ The consequences for an inability to abide by any of the rules

Risk Management

A risk assessment is an analysis of potential threats and vulnerabilities to money laundering and terrorist financing to which a financial institution is exposed. The complexity of the risk assessment will depend on the nature, size, scope, and risk factors of the reporting entity. To accomplish this, a financial institution first must have a solid AML program in place as detailed earlier.

There are four stages of a risk-based approach to AML.
1. Identification: Identifying the AML risk to a specific financial institution and the general risks to all institutions. This can include either customer-related or issue-related risks.
2. Analysis: Understanding the risk. What is the financial institution’s risk appetite? Is the risk high, medium, or low? The formula used to decide the level of risk should be included in the policies and procedures.
3. Management: Constructing and implementing the policies and procedures.
4. Review: Considering whether the arrangements are effective, whether they are being adhered to, whether the risks are being addressed, and whether they could be improved.

Conducting Due Diligence

If you consider the four pillars as the foundation and framework of a quality AML program, then the meat and potatoes lie in its customer due diligence plan.

There are three silos under the risk management concept:

Silo 1. Customer risk

Customer risk details and exemplifies each current customer and potential new customer by employing basic due diligence and enhanced due diligence criteria. In other words, the assessment of risk begins the second a customer first walks in the door (or first goes online) to open an account. The first step in the procedure is known as the know your customer program. Knowing your customer is quite possibly the chokepoint of the AML program and perhaps the single best method to prevent money launderers and terrorist financiers from abusing your financial institution. The ongoing review of the customer’s financial proceedings and the transaction volume and number of accounts should be reviewed.

Consider the delivery methods of the product or services. The following are some classic higher-risk customer profiles:
◘ Foreign financial institutions
◘ Politically exposed persons (PEPS)
◘ Foreign corporationsDomestic shell companies
◘ Cash-intensive businesses (such as bars, restaurants, car washes, and so on)

Silo 2. Product and services risk

Product and service risk comprises reviewing and analyzing the products and services that the customer is engaged with. It is also important to be cognizant of the products and services that the financial institution offers and understand how they can be used by money launderers. The financial institution should comprehend the potential risk posed by any new product or service.

The following are some products that are considered a higher level of risk:
◘ Electronic funds transfers
◘ Private banking
◘ Trust services
◘ Foreign correspondent accounts
◘ Lending
◘ Trade finance
The underlying high-risk reasons for each of the previous products are many and can apply to various situations. The concept is for a financial institution to be well versed in its products and all the potential vulnerabilities that each product may present. This would be one of the categories in any risk matrix developed for a customer and, as such, part of a formula that will ultimately determine what risk category (high, medium or low) the customer would fall into, the amount of review that the customer receives, and if the account should be closed or not even opened in the first place.

Silo 3. Geographic risk

Geographic risk is a consideration of the location. Is the business in an HIDTA or HIFCA area? Foreign? Does the product meet the expectations of the geography? Generally, the following should be considered higher risk:
◘ Any OFAC8-sanctioned country
◘ Jurisdictions of primary money-laundering concern (as deemed by the U.S. Secretary of the Treasury, Department of State, or FATF)
Offshore financial center

Common Program Deficiencies

A review of numerous regulatory actions reveals that there are several common program deficiencies. Here’s an analysis of some of those deficiencies:

◘ Improper SAR filing procedures: Some problems arise from downright negligence and some from lack of understanding. This includes everything from burying information to not picking up on what is truly suspicious. Additional reasons are a lack of enhanced due diligence, sometimes due to a lack of manpower, lack of qualified manpower, or a concerted effort to not find suspicious activity.
◘ Weak customer identification program: This starts right at the moment a customer walks into a financial institution. Without proper ID and truly knowing who the customer is, then all the following due diligence is moot.
◘ Lack of suspicious transaction monitoring: This stems more from a lack of proper parameters being set on an institution’s automatic AML solutions software.
◘ Inadequate policies and procedures: Usually the policies and procedures just don’t cover enough. Sometimes this is just an oversight. Sometimes this is because of new information, rules, or government notices that were never updated.
◘ Lack of training: This issue seems to always make it to the list on just about every regulatory action. Go figure. It’s not difficult. It always seems to come down to budgetary concerns. Having a well-trained staff can alleviate so many problems down the road.
◘ The inability to identify high-risk customers: This is an off-shoot of the customer identification/due diligence issue.

The Importance of KYC/CIP

What is difference between CIP and KYC?

Purists will provide you with this explanation: A CIP identifies the individual or entity that is attempting to establish an account or transact business with the financial institution. A KYC program takes that a step further and demands that you continuously have good intelligence about your customer, his source of income, his pattern of transactions, the products that the customer deals with, the geography of the customer, and those who he may be dealing with. In other words, the CIP allows the financial institution to know and understand who you are conducting business with and identify the customer at the start of the financial relationship. KYC allows the financial institution to understand that particular customer relationship throughout the life of the association between the financial institution and the customer.

Elements of a KYC Program

The first element of a KYC program is customer identification. The second element is the due diligence required to gather the information required. The third element is enhanced due diligence if the risk requires it.

Element 1: Customer Identification

The process of knowing your customer begins at the onset of the customer/financial institution relationship. The first day a potential new customer walks into or submits an online application to a financial institution is when the KYC process starts. The best place to prevent money laundering is at this beginning, the onboarding process. With some effective CIP jiu-jitsu, you just might save yourself a whole lot of trouble down the road. Regardless if the customer is an individual, corporation, private banking client, or correspondent relationship, the KYC starts at the onset of the relationship. Consequently, the KYC process is not finished once those initial forms are completed. KYC concepts should last for the lifetime of the relationship. As an individual or company moves, changes jobs, alters products, enters new partnerships, and so on, then the KYC must develop with it to maintain an up-to-date status.

Financial institutions, by law, must have a written CIP and incorporate it into its Bank Secrecy Act (BSA) policy and procedures that in turn are approved by the bank’s board of directors. The financial institution should consider a risk assessment of the customer to consider the following:
◘ The types of accounts offered by the bank
◘ The bank’s method of opening the account (in-person or online)
◘ The types of identifying information available
◘ The bank’s size, location, and customer base, including the types of products and services used in different locations

The minimum responsibilities of any financial institution with reference to a customer identification program are as follows:
◘ Verify the identity of any person seeking to open an account to the extent that is reasonable.
◘ Maintain records of the information used to verify a person’s identity.
◘ Maintain a description of the type of information it will obtain from the customer.
◘ Have procedures for verifying the identity of those customers to the extent that is reasonable and practicable and within a reasonable period of time before or after account opening.
◘ Have procedures for making and maintaining records related to the CIP.
◘ Have procedures for determining whether the prospective customer appears on any government list of known or suspected terrorists or terrorist organizations.
◘ Have procedures for providing notice to customers prior to account opening that additional information may be necessary to verify their identity.
◘ Have procedures detailing the actions the institution will take when it cannot adequately verify the identity of the prospective customer.
◘ Consult government lists of known or suspected terrorists or terrorist organizations.

Element 2: Basic Customer Due Diligence

Customer due diligence (CDD) is essentially performing basic background checks of the customer, client, entity, or subject. (Any of those terms may apply). Enhanced due diligence (EDD) is a deeper dive to gather more intelligence about your particular customer.

Each financial institution should have written procedures that establish the acceptable documents that they will allow for the CIP. The following are the usual primary documents (any one will do the job):
◘ State driver’s license
◘ State ID card
◘ Passport
◘ Military ID card
◘ Resident alien card

Secondary documents, such as work IDs, health insurance cards, check stubs, and school records, should be determined based upon the type, size, and location of the institution involved. In addition, the financial institution should establish procedures for what they will do when they cannot identify the subject. For example, when the account cannot not be opened? Can the customer use the account until the ID can be verified? Should a suspicious activity report (SAR) be filed?

Beware Shell Companies

Be wary of the possibility of a shell company. First, keep in mind that there is nothing illegal about a shell company. A shell company has legal status and renders few if any services or products. However, because of the limited amount of ownership-disclosure requirements, it can be an attractive venue for money launderers, terrorist financiers, or tax evaders. The use of enhanced due diligence techniques may be required to screen these entities appropriately.

Further, be aware that bad guys will most certainly use counterfeit or forged documentation.This is a huge problem. All the due diligence in the world is useless if it is being conducted on a ghost or someone being impersonated. While no one expects you to be an FBI forensic document expert, it is incumbent upon the financial institution to form a reasonable belief that it has established the true identity of the subject.

Element 3: Identifying Customers Online

Online banking presents a unique set of problems. You typically won’t have a face-to-face meeting to verify pictures of the person. For online account opening then, the financial institution should deem single-factor authentication techniques insufficient. The financial institution may consider the following:
◘ Requesting both primary and secondary documents for identification purposes.
◘ Requesting more than one identifying type of document and making independent contact with the subject.
◘ Making a phone call to one of the numbers the subject provided to verify the authenticity of the information. (I’d also verify the phone number via the phone book because anyone can provide a phone number and subsequently answer posing as a fictitious business. Call from a phone that won’t provide caller ID information.)
◘ Verification of information cross-checked by the subject’s credit report verifying documents sent along with a signed notarized form.

The Diligence

Due Diligence

Definition
Usually this is the minimum investigative process that will satisfy the regulations. Note that this can be different from financial institution to financial institution depending upon the risk factor.

Enhanced due diligence

Definition
A deeper investigative dive into the background of a person or entity. Usually this is because the customer may pose a higher risk of money laundering or it provides a higher degree of clarity of exactly who the customer is or the purpose of his transactions or the source of his funds.

When to perform

Due diligence will be part of the financial institution–customer relationship from the second someone wants to open an account to the day the account is closed. Without exception!
Obviously, upon application for an account, the investigative process begins. This may be started by some customer-facing employee (such as a teller or customer service rep) or a relationship manager or even a call center worker. Asking the right questions at this moment is paramount (each institution depending upon its demographics will have similar but different questions accordingly). Then that application will usually be vetted by the compliance unit depending upon where that customer/entity rates on that particular financial institution’s risk matrix. If the customer/entity rates a low risk, then the investigation (due diligence) may be minimal. If the customer/entity is rated medium or high, then the level and thoroughness of the investigation will increase (enhanced due diligence.)
Another time that the diligences will be rolled out could be if there is a material change in the customer’s information, such as a new job or additional account holder.Certainly if there is a trigger event, an investigation must commence.

Beware of “Voo-Due” Diligence

A financial institution may choose to use an outside vendor to conduct its CIP and due diligence. There is nothing wrong with doing so. However, the onus is still on the original financial institution to make the right decision. If the hired hand screws up, it’s on you. You and you alone are responsible. I refer to this type of situation as “voo-due diligence.” When a financial institution contracts to use a third-party vendor for due diligence, you darn well better know exactly who it is that will be performing the services. Knowing who the CEO is does not cut it. I want to know who the people are performing the work. Are they low-paid analysts with zero experience in the field of investigations or financial crimes?

The Investigate Mind-Set

It’s important to use your instincts. Good instincts are part of developing the investigative mind-set. Your instincts come from your environment, experience, knowledge, and ability. We are not born with investigative instincts; they are developed.

Here are some thoughts on developing your investigative mind:
◘ Be suspicious, be suspicious, be suspicious: The job of investigators is to discover the facts as best they can. Each case should be approached with suspicion on the mind but with neutrality and evenhandedness as your course of action.
◘ Implement the smell test: 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. You are probably right. Don’t be too quick to dismiss your gut feelings. If you can’t figure it out, ask a new set of eyes to take a look. Don’t be embarrassed to ask.
◘ Consider multiple theories: Understand one thing: If you consider only one hypothesis, you may be missing the boat. You must begin the case entertaining numerous possible hypotheses. The more knowledge you have about current trends and patterns, then the more hypotheses become available. Keeping up with and abreast of the latest and greatest techniques and methods is important.

Perform Risk-Based Due Diligence

When you begin the KYC process, you will be creating a financial profile of an individual, business, product, or geography. The depth to which you create the profile depends on the risk involved. The concept is that the resources of the financial institution should be steered in the direction of the greatest risks presented. This is similar to an analysis review in police work and what is referred to as COMPSTAT (computer statistics). Essentially that is a Six Sigma–style statistical review of all angles of crime within a certain geographical area. The NYPD has used this method and is credited for the turnaround in NYC crime from the pits of the late 1970s to the thriving metropolis of today.
There are four principles of the COMPSTAT process:
◘ Accurate and timely intelligence
◘ Rapid deployment of resources
◘ Effective tactics
◘ Relentless follow-up and assessment

Using that style of risk compliance has finally filtered its way to financial institutions. While financial institutions do not use the term COMPSTAT, a quality risk-based AML program mirrors the same principles. Once again, there are similar functions between public and private organizations, yet the names and titles are different.
Four types of risk are involved with financial institutions. They are as follows:
◘ Individual risk
Individual risk is determined by the customers. Are they domestic or foreign? Is the account to be opened online or in person? What is their net worth? What do they do, and where do they do it? Do any red flags arise from the answers to these questions?
◘ Business risk
Business risk is reviewed by analyzing the type of business the subject is involved in. Is that type of business a known method for laundering money? What is the source of the funds? What type of banking will the subject be involved in? Does it make sense for the subject or the business?
◘ Geography risk
Geography risk is all about the location of where the funds are coming from and where they are going to, where the subject is, and where the account is.
◘ Product risk
Product risk is determined by what the subject reports regarding the company’s output

SAR Filing

The SAR (referred to as a suspicious transaction report in many countries outside of the United States) is the bane of the anti-money laundering (AML) process. The SAR is the handshake between the financial institutions and law enforcement, considering that much of the financial institution’s AML efforts are performed with the intention of providing law enforcement with a heads-up if suspicious behavior is afoot. Writing a complete and through SAR becomes one of the most important functions that a financial institution can perform.

Once the financial institution has completed its investigation, the results should be reviewed by senior management or the legal staff before they are sent to FinCEN. The SAR is now a completely online document that, once completed, is directly transmitted to FinCEN. The new online format has made things a bit easier for both the filers and the reviewers. Every box has a corresponding drop-down list. There should be no empty boxes on a SAR that you think is ready to go. The more difficult part is the narrative section.
A fundamentally good SAR narrative should contain the following:
◘ The basic Ws and H: who, what, when, where, why (although the why might not be clear), and how
– Who is conducting the suspicious activity?
– What is the activity that is suspicious? What instruments were used? Wire transfers, ATMs, shell companies, or foreign currency? Identify the source of funds.
– When was the activity detected? When did the suspicious activity occur? Over what period of time? Any previous filings?
– Where did the activity occur? Identify all the locations impacted by this activity. Identify all accounts involved.
– Why is the activity suspicious? Is it unusual for the customer, product type, or services offered by the institution? Is there any legitimate business purpose for the transaction?
◘ Do not use acronyms. Each financial institution has its own vernacular and jargon that may be used only by that institution. I can’t tell you how many times I read a SAR and had no idea of what the writer was talking about. Don’t use in-house acronyms. Write it so your mother could understand it.
◘ If the basis of the SAR is money coming in, elaborate on how it goes out. The same goes for outgoing funds: Tell how they got into the account in the first place.
◘ Try to write the body in chronological order.
◘ Include spreadsheets when necessary; with the new on-line SAR forms, spreadsheets can now be added to the SAR as attachments.
◘ If you are listing numerous transactions, dates, locations, and other numbers, I suggest you summarize. Nothing will cause the reviewer’s eyes to glaze over faster than pages of numbers. If law enforcement would like further specifics on the dates and times, they will contact you.
◘ Be short but informative. No need to rewrite War and Peace. Conversely, one or two sentences are not quite enough. Write to inform, not to impress.
◘ FinCEN has published a detailed report on constructing a SAR, available on the agency’s web site.

Why Financial Institutions Need to File

There have been many incidents in the last few years where SARs, or lack thereof, have been the crux of regulatory fines for numerous institutions. Financial institutions have been hammered for failing to file SARs, failing to file SARs in a timely manner, failing to have complete and thorough SARs, and failing to train AML personnel properly. Further, a poorly written SAR can sap manpower time and effort when it has to be rewritten and reviewed. If this happens frequently, regulators may have a jaded view of your institution’s ability to maintain a quality AML program. Hence, precious resources are expended to rectify the issue.

What Happens After You File

All SARs are forwarded to FinCEN, which will categorize and review the SARs. FinCEN will create statistics based upon the information provided in the various drop-down boxes on the SAR online form. Those results are detailed and published in FinCEN’s SAR Activity Review and are available to anyone via FinCEN’s web site.

Who Are the Regulators?

There are many regulators, and sometimes it is difficult to figure out exactly who is responsible for the various entities. The following are general guidelines:
◘ The Federal Reserve Bank: Responsible for supervising and regulating bank holding companies, foreign banks with U.S. operations, and state-chartered banks that are members of the Federal Reserve System.
◘ The Office of the Comptroller of the Currency (OCC): Charters, regulates, and supervises all national commercial banks and federal savings associations.
◘ Federal Deposit Insurance Company (FDIC): Regulates state-chartered banks that are not members of the Federal Reserve System. Additionally, the FDIC sells insurance to depository institutions, insuring a customer’s account up to $250,000.
◘ State bank: Falls under the domain of both the state banking department of that particular state and also federal regulation.
◘ National Credit Union Administration: Regulates all credit unions.
◘ Securities Exchange Commission (SEC): Regulates all corporations that sell securities to the public and all securities broker/dealers.
◘ Commodities Futures Trading Commission (CFTC): Regulates derivative trading. Its main goal is to prevent excessive speculation and manipulation of commodity prices.
◘ Financial Industry Regulatory Authority (FINRA): Safeguards investors from fraud and bad practices. It regulates every brokerage firm and broker in the United States.

Regulators provide guidance on rules and regulations, and they conduct audits (reviews) of the financial institutions they supervise. Usually, this is performed on a yearly basis. It is up to the regulating authority to sample the work of the institution and determine whether the financial institution is doing its job appropriately. Regulators have the authority to impose a fine on the financial institution or even pull its charter and put them out of business.

There are many guidelines, measures, and specifications created by numerous organizations and associations to assist in the anti-money laundering (AML) arena. Many are geared to the overall AML regime of a particular country. Each has its own unique mission and purpose.

While the United States has the benefit of the Bank Secrecy Act (BSA), there are many countries around the globe that have no AML policies/laws or have limited ones. Several organizations exist to assist the global financial community in creating, developing, updating, and maintaining an AML position. The following sections discuss several of these organizations.

The Financial Action Task Force (FATF)

The Financial Action Task Force (FATF) is a Paris-based membership association made up of various countries. Currently, there are 34 member counties, 2 regional bodies, and 29 regional associate members (observers). Each member country has representation within the ranks. In the United States, the lead authority in the FATF delegation is the U.S. Department of the Treasury. One of its goals is to create a multigovernment AML and counterterrorist financing (CTF) policy and procedures guideline, something that would be implemented at the national and global levels.

Some recommendations deal with the following issues:
◘ Money laundering and confiscation
◘ Terrorist financing
◘ Preventative measures
◘ Transparency and beneficial ownership
◘ Powers and responsibilities of competent authorities
◘ International cooperation

Basel Committee on Banking Supervision

The Basel Committee on Banking Supervision was developed in 1974 and is a subgroup of the Bank for International Settlements (BIS). The BIS has 60 member central banks representing various countries globally. The Basel Committee on Banking Supervision provides a forum for cooperation on banking supervisory issues such as regulations, supervision, and the practices of banks globally to enhance financial stability. The Basel Committee is located in Basel, Switzerland, where the members meet four times per year. They are central supervising banks. (The U.S. central supervising bank is the Federal Reserve.) Much like the FATF 40, the BIS makes suggestions and creates guidelines. There are no legally binding documents, nor does it possess any legislative authority. However, it strongly and successfully encourages general cooperation among countries.

Wolfsberg

Wolfsberg is an association of 11 global banks with the concept of developing industry standards and helping shape guidelines for banks and regulators. It started out addressing money-laundering risks in the world of private banking. In 1999, at Chateau Wolfsberg in Switzerland, it began to construct the draft for private banking AML guidelines. Subsequently, Wolfsberg has published numerous papers with reference to various money-laundering topics. Perhaps best-known are the following papers:
◘ “AML Principles for Private Banking”
◘ “AML Principals for Correspondent Banking”
◘ “Beneficial Ownership”
◘ “Anti-Corruption”
◘ “AML Questionnaire”

The wolfsburg eleven: Banco Santander, Bank of Tokyo-Mitsubishi, Barclays, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, J.P. Morgan Chase, Societe Generale, UBS.

Egmont

The financial intelligence units of various countries (in the United States, that would be FinCEN) first met at Egmont Arenberg Palace in Brussels, Belgium, in 1995. Its mission was simply to establish an informal method of international cooperation. The goal was to figure out a way for information to be shared. If you consider that many organized criminal enterprises are transnational, it only makes sense that the good guys should have a way to communicate and share intelligence in a cross-border context. This concept is important because the law enforcement community in country A has no legal authority in country B. A subpoena or search warrant would have no legal merit in a foreign jurisdiction. Therefore, assistance with intelligence gathering may be conducted via a reciprocal method from one financial intelligence unit (of a country) to another. This should happen without any uneccesary delay or without undue restrictions being placed on the information.

Over the years the membership has grown to 139 member nations. Egmont addressed the issues of not only sharing information with law enforcement and regulators but also creating and maintaining an effective platform for that exchange of information to occur and to develop new and additional effective financial intelligence units.

European Union (EU)

The European directive is the rule of law in Europe, first adopted in 1991. Unlike the previously mentioned standards, the EU financial regulations have the full weight of law behind them. The EU’s goal is to protect the financial system from money laundering and terrorist financing. It is a version of the U.S. Bank Secrecy Act.

Each directive subsequently updated the previous directive. The current directives require the following:
◘ Conducting due-diligence checks prior to onboarding a new customer at a financial institution
◘ Gathering and maintaining ID documents
◘ Defining money laundering for legal purposes
◘ Adding money service businesses to covered institutions
◘ Including lawyers in the scope of directive
◘ Extending reporting requirements to transactions over 15,000 euros
◘ Ensuring institutions take a risk-based approach to customer due diligence
◘ Monitoring politically exposed persons (PEPS) and their close associates

International Monetary Fund (IMF)

The IMF has been incorporating AML concepts into its procedures since February 2001 by disseminating papers such as “Financial System Abuse, Financial Crime and Money Laundering.” It also approaches its AML campaign with a focus on anticorruption programs. Before it will assist any developing nation with financial help, the IMF insists on the application of international AML standards.

In 2006, the IMF published a manual called “The World Bank Reference Guide.” Besides providing a good basic money-laundering primer, it also details AML and the CFT framework for a country. It is, in its own words, a “step-by-step approach to achieve compliance with international standards.

Transparency International

Transparency International is a nongovernment entity based in Berlin, Germany, with offices in more than 100 countries. Transparency International takes a stance against corruption. It believes in transparency, accountability, and integrity at all levels and in public and private service.

Where there is corruption, there is money laundering. Transparency International provides a helpful tool called the Corruption Perception Index (CPI). This comes in handy when performing due diligence and attempting to risk rate a customer or prospective customer. The CPI measures the perceived levels of public-sector corruption in 175 countries and territories. Hence, a country with a low score on the CPI may then be issued a higher risk rating.

Transparency International is not an AML policy maker, its recommendations do not carry the weight of law, and they are not government-binding; however, Transparency International provides an excellent source of intelligence that should provide a heads-up to any possible money-laundering activity.

Economic Sanctions

Economic sanctions are actions, such as trade restrictions and diminished commercial activity, taken by countries against other countries, entities, individuals, or vessels strictly for political reasons. Those underlying reasons might well be various forms of organized criminal enterprises and money launderers.

Usually a sanction is created to punish or to attempt to have the sanctionee change their ways or submit to the thinking or methods of the sanctioning country. Sanctions are not universally implemented, and they are effective only by the country that establishes them. Each country may establish its own sanctions against a common subject. However, many of the sanctions have a United Nations nexus and may include similar mandates from other governments.

Types of sanctions programs:
◘ Comprehensive Programs
Prohibits all exports, imports, financing, trade, brokering, facilitation, and all commercial activity. Countries affected include Cuba, Iran, Sudan, and Syria.
◘ Limited Programs
Prohibitions vary based on program; countries include Myanmar, North Korea, and Ukraine.
◘ Activity-Based Programs
Prohibits transactions involving an interest with an individual, entity, or vessel appearing on the OFAC SND list based on certain activities. Categories include narcotics trafficking, terrorism, and transnational organized crime.
◘ Regime Based Programs
Prohibits transactions based on an interest with an individual, entity, or vessel appearing on the OFAC SDN list depending on governmental involvement.

Some of the more common types of fraudulent crimes that might be seen by the financial institution and documented as such are as follows:
• Bribery
• Credit card/debit card/stored value card
• Embezzlement
• Extortion
• Forgery
• Healthcare fraud
• Identity theft
• Insurance fraud
• Mail fraud
• Mortgage fraud
• Ponzi schemes
• Securities fraud
• Tax evasion
• Telemarketing fraud
• Wire fraud

Potentially suspicious activity that may indicate money laundering:

Customers Who Provide Insufficient or Suspicious Information

• A customer uses unusual or suspicious identification documents that cannot be readily verified.
• A customer provides an individual taxpayer identification number after having previously used a Social Security number.
• A customer uses different taxpayer identification numbers with variations of his or her name.
• A business is reluctant, when establishing a new account, to provide complete information about the nature and purpose of its business, anticipated account activity, prior banking relationships, the names of its officers and directors, or information on its business location.
• A customer’s home or business telephone is disconnected.
• The customer’s background differs from that which would be expected on the basis of his or her business activities.
• A customer makes frequent or large transactions and has no record of past or present employment experience.
• A customer is a trust, shell company, or Private Investment Company that is reluctant to provide information on controlling parties and underlying beneficaries.

Efforts to Avoid Reporting or Record-keeping Requirement

• A customer or group tries to persuade a bank employee not to file required reports or maintain required records.
• A customer is reluctant to provide information needed to file a mandatory report, to have the report filed, or to proceed with a transaction after being informed that the report must be filed.
• A customer is reluctant to furnish identification when purchasing negotiable instruments in recordable amounts.
• A business or customer asks to be exempted from reporting or record keeping requirements.
• A person customarily uses the automated teller machine to make several bank deposits below a specified threshold.
• A customer deposits funds into several accounts, usually in amounts of less than $3,000, which are subsequently consolidated into a master account and transferred outside of the country, particularly to or through a location of specific concern.
• A customer accesses a safe deposit box after completing a transaction involving a large withdrawal of currency, or accesses a safe deposit box before making currency deposits structured at or just under $10,000, to evade CTR filing requirements.

Funds Transers

• Many funds transfers are sent in large, round dollar, hundred dollar, or thousand dollar amounts.
• Funds transfer activity occurs to or from a financial secrecy haven, or to or from a higher- risk geographic location without an apparent business reason or when the activity is inconsistent with the customer’s business or history.
• Funds transfer activity occurs to or from a financial institution located in a higher risk jurisdiction distant from the customer’s operations.
• Many small, incoming transfers of funds are received, or deposits are made using checks and money orders. Almost immediately, all or most of the transfers or deposits are wired to another city or country in a manner inconsistent with the customer’s business or history.
• Large, incoming funds transfers are received on behalf of a foreign client, with little or no explicit reason.
• Funds transfer activity is unexplained, repetitive, or shows unusual patterns.
• Payments or receipts with no apparent links to legitimate contracts, goods, or services are received.
• Funds transfers are sent or received from the same person to or from different accounts.
• Funds transfers contain limited content and lack related party information.

Automated Clearing House Transactions

• Large-value, automated clearing house (ACH) transactions are frequently initiated through third-party service providers (TPSP) by originators that are not bank customers and for which the bank has no or insufficient due diligence.
• TPSPs have a history of violating ACH network rules or generating illegal transactions, or processing manipulated or fraudulent transactions on behalf of their customers.
• Multiple layers of TPSPs that appear to be unnecessarily involved in transactions.
• Unusually high level of transactions initiated over the Internet or by telephone.NACHA — The Electronic Payments Association (NACHA) information requests indicate potential concerns with the bank’s usage of the ACH system.

Activity Inconsistent with the Customer’s Business

• The currency transaction patterns of a business show a sudden change inconsistent with normal activities.
• A large volume of cashier’s checks, money orders, or funds transfers is deposited into, or purchased through, an account when the nature of the accountholder’s business would not appear to justify such activity.
• A retail business has dramatically different patterns of currency deposits from similar businesses in the same general location.
• Unusual transfers of funds occur among related accounts or among accounts that involve the same or related principals.
• The owner of both a retail business and a check-cashing service does not ask for currency when depositing checks, possibly indicating the availability of another source of currency.
• Goods or services purchased by the business do not match the customer’s stated line of business.
• Payments for goods or services are made by checks, money orders, or bank drafts not drawn from the account of the entity that made the purchase.

Lending Activity

• Loans secured by pledged assets held by third parties unrelated to the borrower.
• Loan secured by deposits or other readily marketable assets, such as securities, particularly when owned by apparently unrelated third parties.
• Borrower defaults on a cash-secured loan or any loan that is secured by assets that are readily convertible into currency.
• Loans are made for, or are paid on behalf of, a third party with no reasonable explanation.
• To secure a loan, the customer purchases a certificate of deposit using an unknown source of funds, particularly when funds are provide via currency or multiple monetary instruments.Loans that lack a legitimate business purpose, provide the bank with significant fees for assuming little or no risk, or tend to obscure the movement of funds.

Changes in Bank-to-Bank Transactions

• The size and frequency of currency deposits increases rapidly with no corresponding increase in non-currency deposits.
• A bank is unable to track the true accountholder of correspondent or concentration account transactions.
• The turnover in large-denomination bills is significant and appears uncharacteristic, given the bank’s location.
• Changes in currency-shipment patterns between correspondent banks are significant.

Cross-Border Financial Institution Transactions

• U.S. bank increases sales or exchanges of large denomination U.S. bank notes to Mexican financial institution(s).
• Large volumes of small denomination U.S. banknotes being sent from Mexican casas de cambio to their U.S. accounts via armored transport or sold directly to U.S. banks. These sales or exchanges may involve jurisdictions outside of Mexico.
• Casas de cambio direct the remittance of funds via multiple funds transfers to jurisdictions outside of Mexico that bear no apparent business relationship with the casas de cambio. Funds transfer recipients may include individuals, businesses, and other entities in free trade zones.
• Casas de cambio deposit numerous third-party items, including sequentially numbered monetary instruments, to their accounts at U.S. banks.Casas de cambio direct the remittance of funds transfers from their accounts at Mexican financial institutions to accounts at U.S. banks. These funds transfers follow the deposit of currency and third-party items by the casas de cambio into their Mexican financial institution.

Bulk Currency Shipments

• An increase in the sale of large denomination U.S. bank notes to foreign financial institutions by U.S. banks.
• Large volumes of small denomination U.S. bank notes being sent from foreign nonbank financial institutions to their accounts in the United States via armored transport, or sold directly to U.S. banks.
• Multiple wire transfers initiated by foreign nonbank financial institutions that direct U.S. banks to remit funds to other jurisdictions that bear no apparent business relationship with that foreign nonbank financial institution. Recipients may include individuals, businesses, and other entities in free trade zones and other locations.
• The exchange of small denomination U.S. bank notes for large denomination U.S. bank notes that may be sent to foreign countries.
• Deposits by foreign nonbank financial institutions to their accounts at U.S. banks that include third-party items, including sequentially numbered monetary instruments.
• Deposits of currency and third-party items by foreign nonbank financial institutions to their accounts at foreign financial institutions and thereafter direct wire transfers to the foreign nonbank financial institution’s accounts at U.S. banks.

Trade Finance

• Items shipped that are inconsistent with the nature of the customer’s business (e.g., a steel company that starts dealing in paper products, or an information technology company that starts dealing in bulk pharmaceuticals).
• Customers conducting business in higher-risk jurisdictions.
• Customers shipping items through higher-risk jurisdictions, including transit through non-cooperative countries.
• Customers involved in potentially higher-risk activities, including activities that may be subject to export/import restrictions (e.g., equipment for military or police organizations of foreign governments, weapons, ammunition, chemical mixtures, classified defense articles, sensitive technical data, nuclear materials, precious gems, or certain natural resources such as metals, ore, and crude oil).
• Obvious over, or, under-pricing of goods and services.
• Obvious misrepresentation of quantity or type of goods imported or exported.
• Transaction structure appears unnecessarily complex and designed to obscure the true nature of the transaction.
• Customer requests payment of proceeds to an unrelated third party.
• Shipment locations or description of goods not consistent with letter of credit.
• Significantly amended letters of credit without reasonable justification or changes to the beneficiary or location of payment. Any changes in the names of parties should prompt additional OFAC review.

Privately Owned Automated Teller Machines

• Automated teller machine (ATM) activity levels are high in comparison with other privately owned or bank-owned ATMs in comparable geographic and demographic locations.
• Sources of currency for the ATM cannot be identified or confirmed through withdrawals from account, armored car contracts, lending arrangements, or other appropriate documentation.

Insurance

• A customer purchases products with termination features without concern for the product’s investment performance.
• A customer purchases insurance products using a single, large premium payment, particularly when payment is made through unusual methods such as currency or currency equivalents.
• A customer purchases a product that appears outside the customer’s normal range of financial wealth or estate planning needs.
• A customer borrows against the cash surrender value of permanent life insurance policies, particularly when payments are made to apparently unrelated third parties.
• Policies are purchased that allow for the transfer of beneficial ownership interests without the knowledge and consent of the insurance issuer. This would include secondhand endowment and bearer insurance policies.
• A customer is known to purchase several insurance products and uses the proceeds from an early policy surrender to purchase other financial assets.
• A customer uses multiple currency equivalents (e.g., cashier’s checks and money orders) from different banks and money services businesses to make insurance policy or annuity payments.

Shell Company Activity

• A bank is unable to obtain sufficient information or information is unavailable to positively identify originators or beneficiaries of accounts or other banking activity (using Internet, commercial database searches, or direct inquiries to a respondent bank).
• Payments to or from the company have no stated purpose, do not reference goods or services, or identify only a contract or invoice number.
• Goods or services, if identified, do not match profile of company provided by respondent bank or character of the financial activity; a company references remarkably dissimilar goods and services in related funds transfers; explanation given by foreign respondent bank is inconsistent with observed funds transfer activity.
• Transacting businesses share the same address, provide only a registered agent’s address, or have other address inconsistencies.
• Unusually large number and variety of beneficiaries are receiving funds transfers from one company.
• Frequent involvement of multiple jurisdictions or beneficiaries located in higher-risk offshore financial centers.
• A foreign correspondent bank exceeds the expected volume in its client profile for funds transfers, or an individual company exhibits a high volume and pattern of funds transfers that is inconsistent with its normal business activity.
• Multiple high-value payments or transfers between shell companies with no apparent legitimate business purpose.
• Purpose of the shell company is unknown or unclear.

Embassy and Foreign Consulate Accounts

• Official embassy business is conducted through personal accounts.
• Account activity is not consistent with the purpose of the account, such as pouch activity or payable upon proper identification transactions.
• Accounts are funded through substantial currency transactions.
• Accounts directly fund personal expenses of foreign nationals without appropriate controls, including, but not limited to, expenses for college students.
• Employee exhibits a lavish lifestyle that cannot be supported by his or her salary.
• Employee fails to conform to recognized policies, procedures, and processes, particularly in private banking.
• Employee is reluctant to take a vacation.
• Employee overrides a hold placed on an account identified as suspicious so that transactions can occur in the account.

Other Unusual or Suspicious Customer Activity

• Customer frequently exchanges small-dollar denominations for large-dollar denominations.
• Customer frequently deposits currency wrapped in currency straps or currency wrapped in rubber bands that is disorganized and does not balance when counted.
• Customer purchases a number of cashier’s checks, money orders, or traveler’s checks for large amounts under a specified threshold.
• Customer purchases a number of open-end prepaid cards for large amounts. Purchases of prepaid cards are not commensurate with normal business activities.
• Customer receives large and frequent deposits from online payments systems yet has no apparent online or auction business.
• Monetary instruments deposited by mail are numbered sequentially or have unusual symbols or stamps on them.
• Suspicious movements of funds occur from one bank to another, and then funds are moved back to the first bank.
• Deposits are structured through multiple branches of the same bank or by groups of people who enter a single branch at the same time.
• Currency is deposited or withdrawn in amounts just below identification or reporting thresholds.
• Customer visits a safe deposit box or uses a safe custody account on an unusually frequent basis.
• Safe deposit boxes or safe custody accounts opened by individuals who do not reside or work in the institution’s service area, despite the availability of such services at an institution closer to them.
• Customer repeatedly uses a bank or branch location that is geographically distant from the customer’s home or office without sufficient business purpose.
• Customer exhibits unusual traffic patterns in the safe deposit box area or unusual use of safe custody accounts. For example, several individuals arrive together, enter frequently, or carry bags or other containers that could conceal large amounts of currency, monetary instruments, or small valuable items.
• Customer rents multiple safe deposit boxes to store large amounts of currency, monetary instruments, or high-value assets awaiting conversion to currency, for placement into the banking system. Similarly, a customer establishes multiple safe custody accounts to park large amounts of securities awaiting sale and conversion into currency, monetary instruments, outgoing funds transfers, or a combination thereof, for placement into the banking system.
• Unusual use of trust funds in business transactions or other financial activity.
• Customer uses a personal account for business purposes.
• Customer has established multiple accounts in various corporate or individual names that lack sufficient business purpose for the account complexities or appear to be an effort to hide the beneficial ownership from the bank.
• Customer makes multiple and frequent currency deposits to various accounts that are purportedly unrelated.
• Customer conducts large deposits and withdrawals during a short time period after opening and then subsequently closes the account or the account becomes dormant. Conversely, an account with little activity may suddenly experience large deposit and withdrawal activity.
• Customer makes high-value transactions not commensurate with the customer’s known incomes.