Chapter 1 Risks of ML and TF-Overview Flashcards
When was the FATF formed?
Formed in 1989, the Financial Action Task Force (FATF) is an intergovernmental body created by the Group of Seven industrialized nations to set standards and foster international action against money laundering
Insurance Companies Overview
The insurance industry provides risk transfer, savings, and investment
products to a variety of consumers worldwide, ranging from individuals to
large corporations to governments
An important aspect of the way the
insurance industry operates is that most of the business conducted by
insurance companies is transacted through intermediaries, such as agents
and independent brokers. Insurers, with some exceptions, are subject to AML
requirements
Insurance Companies Risks
The susceptibility of the insurance industry to money laundering is not as high
as that for other types of financial organizations
certain sectors of the insurance industry, such as life insurance and annuities, are a
primary target of criminals who engage in money laundering and terrorist
financing
Insurance Companies Risks Part 2
the sector’s vulnerability to money laundering is
similar to that of the securities sector; in some jurisdictions, life insurance
policies are even viewed as investment vehicles similar to securities.
What is the highest risk product for Insurance?
life insurance is by far the most attractive area of the insurance sector to money launderers. Substantial sums can be invested in widely available life insurance products, and many feature a high degree of flexibility, while at the same time ensuring nonnegligible rates of return
Other life insurance products such as whole and permanent life insurance have an investment value which in turn can create an cash value above the original investment when the policy is cancelled
Lowest risk product for insurance
Life insurance products with no cash
surrender value
Products that feature payments of
cash surrender value and the opportunity to nominate beneficiaries from the
first day of the policy are the most attractive and therefore higher risk.
Insurance-Annuities
An annuity is an investment that provides a defined series of payments in the future in
exchange for an up-front sum of money. Annuity contracts can allow criminals
to exchange illicit funds for an immediate or deferred income stream, which
typically takes the form of monthly payments starting on a specified date
A policyholder can place a large sum of money into a policy with
the expectation that it will grow based on the underlying investment, which
can be fixed or variable. Unit-linked policies and insurance wrappers are also
high-risk insurance products because of their high value accumulation and
flexibility in adding and managing assets
Features of High Risk Insurance Products
- Offers the ability to fold funds and assets into the policy
- Full or partial underlying investments under the control of the customer
- Can offer the option of asset transfers
- Can have a high upper limit for the amount of funds held
What is a strong indicator of ML in the Insurance field?
A potential policyholder is more interested in a policy’s cancellation
terms than its benefits
Vulnerabilities in the insurance sector
- Lack of oversight/controls over intermediaries
- Decentralized oversight over aspects of the sales force
- Sales-driven objectives
Examples of ML in the Insurance industry part 1-Overfunding policy
- The customer can overfund the policy and move funds into and out of the policy while paying early withdrawal penalties. When such funds are reimbursed by the insurance company (e.g., by check), the
launderer has successfully obscured the link between the crime and the
generated funds.
Examples of ML in the Insurance industry part 2-Single premium insurance bonds
- The purchase and redemption of single premium insurance bonds are key
laundering vehicles. The bonds can be purchased from insurance
companies and then redeemed prior to their full term at a discount. In such
cases, the balance of the bond is paid to a launderer in the form of a
sanitized check from the insurance compan
Examples of ML in the Insurance industry part 3-Free look period
- A free-look period is a feature that allows investors—for a short period of
time after the policy is signed and the premium paid—to back out of a policy
without penalty. This process allows the money launderer to receive an
insurance check, which represents cleaned funds. However, as more
insurance companies are subject to AML program requirements, this type of
money laundering is more readily detected and reported.
Examples of ML in the Insurance industry part 4-Cancellation
One indicator of possible money laundering is when a potential policyholder
is more interested in the cancellation terms of a policy than the benefits of
the policy. The launderer buys a policy with illicit money and then tells the
insurance company that he has changed his mind and does not need the
policy. After paying a penalty, the launderer redeems the policy and
receives a clean check from a respected insurer
Examples of ML in the Insurance industry part 5-Third parties
Third parties that fund insurance policies (i.e., not the policyholder) have not
been subject to regular identification procedures when the insurance
contract was concluded. The source of funds and the relationship between
policyholder and the third party might be unclear to the insurance company
Examples of ML in the Insurance industry part 6- Investment opportunities using large deposits
Money laundering is enabled by using large sums of money to make substantial payments into single-premium life insurance policies, which serve as wrapped investment policies.
A variation on this method is the use of large premium deposits to fund annual premiums. Such policies, which are comparable to single-premium policies, also enable the customer to invest substantial amounts of money with an insurance
company. Because the annual premiums are paid from an account that
must be funded with the total amount, a life insurance product with apparently lower money laundering risk will bear the features of the higher risk single-premium polic
Factors to consider for Insurance companies ML risks
- Use cash or cash equivalents to purchase insurance products
- Purchase an insurance product with a single premium or lump-sum
payment - Borrow money against an insurance product’s value
Securities Broker-Dealers Overview
The world’s capital markets are vast in size,
dwarfing deposit banking
FATF has strongly recommended money laundering controls for the securities field since 1992, in conjunction with the Madrid-based International Organization of Securities Commissions (IOSCO), a global association of governmental bodies that includes the Commodity Futures Trading
Commission (CFTC), which regulates the securities and futures markets. The
difficulty in dealing with money laundering in the securities field is that typically
little currency is involved.
Concentration Accounts
Concentration accounts are internal accounts established to facilitate the processing and settlement of multiple or individual customer transactions
Concentration accounts are also known as special-use, omnibus,
settlement, suspense, intraday, sweep, and collection accounts
Audit trail can be lost when ID info is seperate from transaction info
- Requiring dual signatures on general ledger tickets
- Prohibiting direct customer access to concentration accounts
- Capturing customer transactions in the customers’ account statements
- Prohibiting customers’ knowledge of concentration accounts and their ability to direct employees to conduct transactions through these accounts
- Retaining appropriate transaction and customer identification information
- Frequently reconciling accounts by an individual who is independent of the transactions
- Establishing a timely discrepancy-resolution process
- Identifying and monitoring recurring customer names
Securities Industry ML risks
- International nature
- Speed of transactions
- Ability to conduct free-of-payment asset transfers, in which securities are transferred without a corresponding transfer of funds
- Ease of conversion of holdings to cash without significant loss of principal
- Routine use of wire transfers to, from, and through multiple jurisdictions
- Competitive, commission-driven environment
- Practice of brokerage firms of maintaining securities accounts as nominees or trustees, thus permitting concealment of the identities of the true beneficiaries
- Weak AML programs that do not have effective CDD, suspicious activity
monitoring, and other controls.
Securities Industry risks-Layering
For illegal funds originating outside the sector, securities transactions for the creation of legal entities can be used to conceal or obscure the source of these fund
In the case of illegal activities within the securities market itself (e.g., embezzlement, insider trading, securities fraud, and market manipulation), the transactions and manipulations generate illegal funds that must then be laundered
In either case the dual advantage is ML plus profit
Securites Industry-ML indicators
1.Use of customer accounts to hold funds and that can bypass more stringent ML controls
2.Wash Trading and offsetting transactions- the process of matching buys and sells to create the illusion of trading
Securities Industry-Greatest ML vulnerabilities
The FATF Money Laundering and Terrorist Financing in the Securities Sector typologies report identifies the following
- Wholesale markets
- Unregulated funds
- Wealth management
- Investment funds
- Bearer securities
- Bills of exchange
Securities Industry-Unique challenges
1.Variety and complexity of securities: Security offerings are broad, with some products tailored to the needs of a single customer and others designed for sale to the general public
2.High-risk securities: Although most securities are issued by legitimate
companies, securities that are underregulated or established for illegitimate purposes pose risks. In the United States, securities that are not traded on regulated exchanges are typically sold over-the-counter, with tiers such as “pink sheets” that require only minimal reporting
3.Multiple layers and third-party risk: The securities industry involves many
participants, including financial organizations and broker-dealers, financial
advisors, transfer agents, securities lenders, custodians, introducing brokers, and sales agents.
Securities Industry-ML Indicators
1.A customer with a significant history with the securities firm who abruptly
liquidates all of her assets in order to remove wealth from the jurisdiction
- A customer who opens an account or purchases a product without regard
to loss, commissions, or other costs
Securities Industry-ML Indicators part 2
- A securities account that is used for payments or outgoing wires with little
or no securities activity (e.g., account appears to be used as a depository
account or a conduit for transfers)
4.A customer’s transactions that include a pattern of sustained losses, which
might indicate the transfer of value from one party to another
Securities Industry-ML Indicators-part 3
5.Transactions in which one party purchases securities at a high price and
then sells them at a considerable loss to another party, which might indicate the transfer of value from one party to another
- A customer who is unfamiliar with a financial product’s performance and
specifications but wants to invest in it nonetheless
Securities Industry-ML Indicators-part 4
7.A customer who is known to have friends or family who work for the securities issuer, or a trading pattern that suggests he might have nonpublic information
- Two or more unrelated accounts at a securities firm that trade an illiquid or
low-priced security, or “penny stock,” suddenly and simultaneously - A customer who deposits physical securities that (1) are in large quantities;
(2) are titled differently from the name of the account; (3) do not bear a
restrictive legend, even though the history suggests that they should; or (4)
lack sense in terms of the method by which they were acquired
Securities Industry-Retail Brokers
Retail broker-dealers are the industry’s frontline defense—and its most
vulnerable access point.
pressure to expand their client base and manage more assets. The more assets in a
client’s account, the more commission will be generated.
Money launderers can promise a large or steady commission stream. Therefore, it is important for broker-dealers to understand their customers and monitor transactions.
Securities Industry-Retail Brokers requirements
Requirements established by the SEC, FINRA (Financial Industry Regulatory Authority) which compel brokers to have AML programs.
These include appointed BSA officer,CDD,SARs monitoring ,training, transaction monitoring, and independent audits.
Oversight also done by SEC and/or FINRA
Securities Industy-Case Study
Financial Conduct Authority fined Duestche Bank 163m GBP for inadequate ML controls between 2012-2015
The infractions and resulting loopholes allowed the front office of Deutsche Bank’s Russia-based subsidiary, DB Moscow, to
execute more than 2,400 pairs of mirror trades between April 2012 and October 2015, these trades were used to transfer USD 6 Billion from Russia , funds went through various locations including Cyprus,Estonia and Latvia. DB Moscow executed the mirror trades. Investigations found connections between DB Moscow and DB London customers.Rubles were changed into USD and withdrawn.
Securities Industy-Case Study part 2
The deficiencies included:
* Inadequate KYC and customer due diligence (CDD)
* Failure to ensure that the CB&S front office took responsibility for its KYC obligations
* Flawed customer and country risk-rating methodologies
* Deficient AML policies and procedures
* Inadequate AML information technology infrastructure
* Lack of automated AML systems for detecting suspicious trades
* Failure to provide adequate oversight of trades booked in the UK by
traders in non-UK jurisdictions
Securities Industy-Key Takeaways
- Inadequate AML/CFT frameworks allow abuse of the financial system by
criminals. - Real-time mirror trades involve the rapid transfer of significant sums of
money around the world. - It is critical to have adequate KYC and CDD procedures in place to identify
suspicious activity. - Organizations need to undertake continuous risk assessment and ensure
controls are in place to mitigate against existing, new, and emerging risks.
Securities Industry Case Study 2:
In June 2020 SFC (Hong Kong Securities and Futures Commission) fined Guotai Junan Securities HK 25M
From 2014-15 GJS failed to account for 15,600 3rd party deposits and withdrawals totalling HK 37.5 Billion
Failure to respond to several red flags , more than 5000 deposits made into accounts with knowing the depositor identities
HK 28.8M used by 5 clients to purchase shares of a HK listed company were deposited by the same 3rd party that exceeded their self declared net worth.
Securities Industry Case Study 2: Takeaways
- Ongoing transaction monitoring is a key component of an effective
AML/CFT compliance program. - Share offerings have associated risks for money laundering, insider trading, and wash trades.
- Both potential and confirmed breaches should be promptly disclosed to
the relevant regulator.
Casinos-Overview
Casinos and other businesses associated with gambling, such as bookmaking,
lotteries, and horse racing, are associated with money laundering because they
provide an excuse for recently acquired wealth with no apparent legitimate
source.
Casinos- ML
ML in casinos generally occures in the layering and placement stages
Buying chips with illegal cash, request repayment by check drawn on casino’s account or can request a casino to provide credit.
One laundering technique involves the person actually gambling the money to be laundered, but in such a way that he is reasonably sure of ultimately recovering his stake in theform of checks issued or funds transferred by the gambling or betting agency and reflecting verifiable winnings
Casinos-Junkets
Junkets, a form of casino-based tourism, also present significant money
laundering risk, because junket participants largely rely on third parties, or junket
operators, to move the funds across borders and through multiple casinos creating a layer of obscurity.
In some countries Junkets can rent private gaming rooms, monitor player activity,collect credit, operate pool funds.
In certain regions, licensed junket operators act as fronts for junket operators in another country. The front operators supply
players to a casino through the casino’s licensed junket companies, which
might not qualify for a license in the country where the players will be gambling
several jurisdictions do not require licensing of junket operators and their agents, further increasing the risks of money laundering.
FATF emphasizes the need to ensure that junket operators are not under criminal influence and that financial transactions are transparent and subject to
relevant AML/CFT measures.
Casinos- Suspicious behaviours part 1
FinCEN and FATF have identified specific behaviors to watch for, including:
- Attempts to evade AML reporting and recordkeeping requirements, such
as
1.Paying of large debt without triggering threshold
2. Two or more customers combining funds after minimal gambling to request for a casino check
3.Customer receives payout in excess of USD 10k but requests less and takes the remaining in cash
4.Structuring transactions to avoid tax filings or CTR
5. Reducing the presented chips when asked for ID
Casinos- Suspicious behaviours part 2
Using the cashier’s cage solely for its banking-like financial services, such as:
1.Wiring of funds originated from nongaming proceeds to another country
2.Using the casino as a temporary repository of funds by depositing money and requesting transfers.
Casinos- Suspicious behaviours part 3
Minimal gaming activity without a reasonable explanation, such as:
- Purchasing many chips, doing a bit of gambling then redeeming chips
2.Using credit to purchase chips, doing minimal gambling, pay off credit in currency and redeems chips for a casino check - Large deposit using small denomination bills, withdraws at the chips table–> minimal gambling–>exchanges chips for large denominations
4.Inserting a high # of small bills into slot machine engaging in minimal play and exchanges the voucher for large denom bills or casino check - Purchasing chips under a reporting threshold, engages in minimal play, leaves casino without cashing out
6.Customer transfers funds to a casino into a front account, withdraws it as chips in a table then asks chips to be exchange for casino check
Casinos- Suspicious behaviours part 4
- Unusual gaming and transaction patterns, such as:
- 2 customers both sides of a bet to cover each other
2.Customer requests casino check issued to 3rd parties
3.Using multiple fin instruments to pay off large markers - Requesting casino checks under reporting threshold
5.Establish high value deposit then remain dormant.
Casinos-High Rollers
It is a serious mistake for casinos to allow play and accept the revenue without
reasonably determining the source of a customer’s gaming funds. FinCEN
expects US casinos to know the source of high rollers’ funds.
Casinos-Examples of failures of AML/CTF programs
Tinian Dynasty Hotel & Casino fined US$75 million (2015)-Failed to file CTRs,assisted in structuring transactions
Caesars Palace fined US$9.5 million (2015):
Promoted private salons without proper monitoring transactions
Sparks Nugget fined US$1 million (2016): Failed to file STRs and instructed it’s compliance manager to avoid interacting with regulatory auditors
Artichoke Joe’s Casino (AJC) fined US$8million (2017). Failed to file STRs despite knowing that loan sharks were using chips for money laundering
Casinos-use of tools and online gambling
Casinos can use AML tools specifically designed for casinos for their AML needs.
Online gambling provides an effective method of money laundering for cybercriminals, because transactions are conducted principally
through credit and debit cards. Site operators are typically unregulated
offshore organizations Site operators also may have accounts in reputable banks
Casinos-Onling Gambling
Due to the regulatory environment and framework some credit card issuers do not allow online gambling, banks screen the types of org the accepting the card and thus can block it from conducting a transaction
However other methods such as prepaid cards, wire transfers, peer to peer , virtual currencies can fund online gambling
Casinos-ML Indicators
- A ML colludes with a site operator to deposit illicit funds into an account and then withdraws them as winnings, the launderer declares the winnings with the tax authorities and uses funds for a legit purpose
2.ML deposits funds into an account using stolen identity
- ML logs into the account from multiple countries
4.Player is a PEP
Casinos- Case Study
ILGA (Australian Independent Liquor and Gaming Authority) investigated Crown Melbourne
Crown accepted large deposits by Chinese nationals at a VIP room operated by a Junkey agency, they also used shell companies to facilitate transactions with China that were not reported to the regulator, the Australian Transaction Reports and Analysis Center
Vids showed bricks of cash being exchanged for chips which happened regulary in the VIP rooms.
Crown used two shell companies to enable VIP gamblers and Junket agents and circumvent
Casino Case Study-Key Takeaways
Casino cashiers can be exploited for placement.
* Intermediaries, such as junket agents and shell companies, can be used to
place, layer, and integrate funds through casino operations.
* A VIP customer’s commercial value must not protect them from suspicion,
scrutiny, or AML controls.
Dealers in High-Value Items-Overview
The USA PATRIOT Act requires certain dealers including precious metals, stones, and jewels, to establish AML programs.
However, in many other jurisdictions, these are not required.
Gold has high value and can be bought and sold easily.
Dealers in High Value Items-FATF Report Takeways
- Gold is an extremely attractive vehicle for laundering money.
- The gold market is a target for criminal activity because it is lucrative.
Understanding and knowing the various stages of the gold market and types
of predicate offenses is critical in identifying money laundering
Dealers in High Value Items-ML Indicators
1.Payments or returns to persons other than the owner-owner of the metal directs payments to a third party
2.Precious Metal Pool Accounts-Group of companies that hold precious metal credits for a company which can be used by a customer.(Monetary/delivery etc)
Dealers in High Value Items-Diamonds
Diamonds are commonly used for TF/ML
Direct purchase of gems with illegal money
Common type of activities:
FX Transactions
Fraudulent Invoicing
Commingling proceeds
International fund transfers
Dealers in High Value Items-Fine Art
Anonymous agents at art auction houses bid millions of dollars for priceless works. Payment is later wired to the auction house by the agents’ principals from accounts in offshore havens.
Dealers in High Value Items-Fine Art-How to decrease ML Risks
- Require all art vendors to provide names and addresses and sign on a form stating the art is not stolen
2.Verify addresses of new vendors and customers
3.Contact the Art loss register if the art is believed to be stolen
4. Be wary of customers wanting to deal in cash
5.Appoint a staff to which people can report STRs
Precious metals- Case Study-Operation Apex
12 people arrested in relation to the Wu Gang , engaged in criminal activities
Established a shark finning business, legal in Florida not in California using fake ID, fake invoices and paperwork used
Proceeds from shark finning and drug trafficking put into 3rd party accounts around the world
Precious metals- Case Study-Operation Apex-Key Takeaways
Converting illicit proceeds into precious metals and gems is attractive to
financial criminals because:
* They have high value in a compact form, and their value tends to hold for long periods of time.
* They are easy to transport, so value can be transferred across borders without customs declarations.
* Their origins are difficult to trace.
* They can be easily exchanged for cash or used as currency in most areas of the world.
Precious metals- Case Study-Elemetal
Firm did not undertake basic KYC procedures
Refined billions of dollars worth of gold
Forfeited USD $ 15 Million
US Federal law requires precious metal dealers to have an AML program
Firm did not have confirmation on supplier identities and accepted gold which was most likely smuggled
3 employees pled guilty to importing illicit gold, Elemetal removed from London Bullion and COMEX-gold futures market
Precious metals- Case Study-Elemetal-Takeaways
1.AML risks inherent in the gold trade include heavy reliance on cash,
anonymity, and difficulty tracing the source and origin of gold
2.The BSA requires precious metals dealers to perform KYC on suppliers and
identify the source and origin of metals
3.In addition to KYC, AML programs must also implement Know Your
Employee controls
Fine Art Case Study-Philip Rivkin
In 2016, US biodiesel businessman Philip Rivkin pled guilty in Houston, Texas, to
laundering US$78 million through many avenues, including purchasing over
2,000 pieces of art
10 years imprisonment and $138m fine
Investigators determined that
Rivkin’s company Green Diesel was not in fact producing biodiesel, but merely
selling certificates and defrauding its customers
He bought a collection of Photos worth $15M to legitimize his income
within months of the US
imposing sanctions on the Russian brothers Arkady and Boris Rotenberg, they
illegally spent more than US$18 million on art in the US using shell companies
linked to Russian oligarchs to evade sanctions
Fine Art Case Study-Philip Rivkin-Key Takeaways
1.Art markets are high risk
2. Shell companies are used to enhance secrecy
3. Following legislation in place for art markets
The responsible art market initiative/the AML act of 2020/the EU fifth directive
4.Art participants should understand AML law and are liabile
Travel Agencies and Websites-Overview
ML can occur in the following ways
1.Purchasing an expensive ticket for another person who then asks for a refund
2.Paying for services in installments that are actually structured wire
transfers in amounts small enough to avoid recordkeeping requirements, a
method used especially by criminals from foreign countries
3.Establishing tour operator networks with false bookings and
documentation to justify significant payments from foreign travel groups
Travel Agencies-Case Study-ISIS-Malaysia
In 2015, Indonesian militant suspect Gigih Rahmat Dewe opened a travel
agency on Bintan Island, Indonesia, as a cover for the terrorist organization the
Islamic State of Iraq and Syria (ISIS).
Cash intensive business can allow for comingling of funds, such transfer of funds raise minimal suspicion.
Travel Agencies-Case Study-ISIS-Malaysia-Key Takeaways
- Travel agencies are cash-intensive businesses.
- Travel agencies solve logistics problems for terrorists.
- Travel agencies can allow the use of false identities.
- Travel agencies can be used to commingle legitimate and illegitimate fund.
- Travel agencies can be used in all three stages of money laundering.
Vehicle Sales-Overview-ML indicators
1.Structuring cash deposits below the threshold
2.Purchasing vehicles with sequentially # cheques or pay orders
3.Trading in vehicles and conducting successive transactions in buying/selling
4.Accepting 3rd party payments from jurisdictions with low controls
Cases have also occurred in which car dealers laundered money by allowing
drug dealers to trade in cars for less expensive models and to be paid in
checks, not cash, for the difference
Vehicle Sales-Case Study-Luxury Vehicles
Leontaritis was the owner and operator of Vanderhall Exotics of Houston LLC,
which specialized in exotic luxury automobiles. He used his car dealership to
launder drug money for a large Houston-based drug trafficking organization
that smuggled drugs from Mexico into the US
Accepted cash from drug dealers for high luxury vehicles, used fraudulent dealer invoices to hide IDs and did not report cash payments.
Vehicle Sales-Case Study-Luxury Vehicles-Key Takeaways
- Cash-intensive businesses, such as car dealerships, are particularly
vulnerable to money laundering. - Fraudulent invoices can be used to hide buyers’ identities.
- The purchase of luxury vehicles and other assets can be used to place
large amounts of illicit money into the financial system seemingly
legitimately
Gatekeepers: Notaries, Accountants,
Auditors, and Lawyers-Overview
FATF identified the following functions provided by lawyers, notaries,
accountants, and other professionals as the most useful to potential money
launderers
- Creating and managing corporate vehicles and other complex legal
arrangements, such as trusts - Buying or selling property: Property transfers can serve as the cover for
illegal fund transfers - Performing financial transactions: These professionals might carry out
various financial operations on behalf of a client - Providing introductions to financial organizations
- Undertaking certain litigation
- Setting up and managing charities
Gatekeepers: Notaries, Accountants,
Auditors, and Lawyers-Overview-red flag indicators - part 1
The FATF report also describes five categories of red flag indicators of money
laundering or terrorism financing:
1.Characteristics of a client:
Overly secretive
* Uses an agent or an intermediary or avoids personal contact without a
logical reason
* Reluctant to provide or refuses to provide information or documents
usually required to enable the execution of a transaction
* Holds or has previously held a senior public position or has professional
or family ties to such individuals
* Known to have been the subject of investigation for an acquisitive crime
(i.e., one in which the offender derives material gain from the crime,
such as theft or embezzlement)
* Known to have ties to criminals
* Shows unusual interest and asks repeated questions on the procedures for applying ordinary standards
Gatekeepers: Notaries, Accountants,
Auditors, and Lawyers-Overview-red flag indicators - part 2
- Characteristics of the involved parties:
* Native to, residents in, or incorporated in a high-risk country
* Connected without an apparent business reason; that is, tied in a way
that generates doubts as to the real nature of the transaction
* Appear in multiple transactions over a short period of time
* Incapacitated or under legal age, with no logical explanation for their
involvement
* Attempt to disguise the real owner or parties to the transaction
* Not directing the transaction, (i.e., the person directing the operation is
not one of the formal parties to the transaction)
* Do not appear to be suitable representatives
Gatekeepers: Notaries, Accountants,
Auditors, and Lawyers-Overview-red flag indicators - part 3
- Characteristics of the source of funds:
* Provided using unusual payment arrangements
* Collateral located in a high-risk jurisdiction
* Represents a significant increase in capital for a recently incorporated
company, including foreign capital, without a logical explanation
* Represents unusually high capital in comparison with similar businesses
* Stems from a security transferred with an excessively high or low price
attached
* Stems from large financial transactions that cannot be justified by the
corporate purpose
Gatekeepers: Notaries, Accountants,
Auditors, and Lawyers-Overview-red flag indicators - part 4
- Characteristics of the lawyer:
* Located at a significant distance from the client or transaction without a
legitimate or economic reason
* Little or no experience in providing the specific services needed
* Being paid substantially higher than usual fees without a legitimate reason
* Frequently changed by the client, or the client has multiple legal
advisors without legitimate reason
* Provides services previous refused by another professional
Gatekeepers: Notaries, Accountants,
Auditors, and Lawyers-Overview-red flag indicators - part 5
- Characteristics of the retainer:
* Transactions that are unusual with regard to the type of operation and
the transaction’s typical size, frequency, or execution
* Transactions that do not correspond to the client’s normal business
activities and show that he does not have a suitable knowledge of the
nature, object, or purpose of the professional performance requested
* Creation of complicated ownership structures or structures with
involvement of multiple jurisdictions without a legitimate or economic
reason
* Client transaction history with no documentation to support company
activities
* Inconsistencies and unexplained last-minute changes to instructions
* No sensible commercial, financial, or tax reason for the transactions or
increased complexity that unnecessarily results in higher taxes or fees
* Exclusively keeping documents or other goods, or holding large
deposits or otherwise using the client account without provision of legal
services
* Abandoned transactions without concern for fee level or after the
receipt of funds
* Power of attorney sought for the administration or disposal of assets
under unusual circumstances without logical reason
* Litigation that is settled too easily or quickly with little or no involvement
of legal professional retained
* Requests for payments to third parties without substantiating reason or
corresponding transaction
Gatekeepers-Alternatives to Lawyers
- Deferring regulation until adequate education is conducted
- Imposing internal controls and due diligence duties on lawyers regarding
unprivileged communications - Using a joint government-private sector body to regulate lawyers who
engage in financial activities, requiring registration with and regulation by
an agency - Devising a new hybrid approach, such as through guidance notes and best
practices standards from FATF
Many regulators within the United States want the scope to coincide with the European Union Directive, which requires EU members to ensure that obligations are imposed on a wide range of professionals, including auditors, attorneys, tax advisors, real estate agents, and notaries.
Gatekeepers (Case example: Role of
gatekeepers in facilitating money
laundering)
Jan 2019,Ross Mckay,7 years prison, 1450 GBP
McKay was a “go-to,” or preferred, lawyer for criminals because he did not
conduct basic KYC checks, including understanding the nature of the client’s
business, inquiring about the source of funds, or understanding connections
between the parties and transactions
McKay conducted more than 80 criminal transactions that helped a buy-tolease landlord use illicit money to fraudulently build a £10.8 million property
empire.
McKay committed mortgage fraud by disguising the source of funds
for property deposits and used nominee names instead of the names of the
legitimate purchasers on mortgage applications
Gatekeepers (Case example: Role of
gatekeepers in facilitating money
laundering)-Key Takeaways
- Lawyers, accountants, financiers, and other “professional enablers” can
abuse their positions to facilitate financial crimes via seemingly legitimate
means. - Professional service providers need to be aware of their responsibilities to
identify, report, and avoid money laundering risks. - Professional service providers need to ensure that they understand all the
laws and regulations that apply to them, particularly when involved in
multijurisdictional business. - Professional enablers who commit crimes can be imprisoned and will likely
be unable to operate again within their chosen profession
Role of Gatekeepers (Case example:
Special skills)
The attorney had helped to invest his client’s drug proceeds by
forming a corporation in the name of the client’s wife and arranging a loan
from the corporation to another (noncriminal) client
He then drafted a fake
construction work contract, making the repayment of the loan appear to be
payment for construction work performed by the company
Role of Gatekeepers (Case example:
Special skills)-Key Takeaways
Key takeaways
* Gatekeepers can help disguise the source of illicit funds so they appear to
originate from a legitimate business activity, such as a sale or loan.
* Money laundering schemes facilitated by gatekeepers can involve multiple
parties, some of whom might not be aware of their own involvement.
* The special skills of gatekeepers enable them to help their clients evade
detection using sophisticated money laundering schemes
Investment and Commodity Advisors
- Commodities: Goods such as food, grains, and metals through futures contracts
- Futures/futures contracts:
- Options/options contracts:
- Commodity pool: A combination of funds from various investors to trade in
futures or options contracts - Omnibus accounts: Accounts held by one futures commission merchant
(FCM) for another, in which case transactions of multiple account holders
are combined, and their identities are unknown to the holding FCM
Other commodity advisors
- Commodity pool operator: Operator or solicitor of funds for a commodity
pool, which combines funds from members and trades futures or options contracts - Futures commission merchant (FCM):
- Introducing broker-dealer in commodities (IB-C): A firm or person that
solicits and accepts orders for commodity futures from customers but
does not accept funds. IB-Cs can be guaranteed or independent:
o Guaranteed introducing broker-dealer: An IB-C with an exclusive written
agreement with a futures commission merchant, which obligates the
FCM to assume responsibility for the IB-C’s performance
o Independent introducing broker-dealer: An IB-C who is subject to
minimum capital and financial reporting requirements, and who may
introduce accounts to any FCM
- Investment advisor: Provides advice on securities and investments and
manages client assets
The investment and commodity advising industry-ML risks
- Withdrawal of assets through transfers to unrelated accounts or high-risk
jurisdictions - Frequent additions to or withdrawals from accounts
- Clients invest via checks drawn on, or wire transfers from, accounts of third
parties with no relation to them - Clients request custodial arrangements that allow them to remain anonymous
- Transfers of funds to the investment advisor, followed by transfers to
accounts at other institutions that suggest a layering scheme - CTAs or other professionals invest illegal proceeds for a client
- Movement of funds to disguise their origin
Trust and Company Service Providers
-Overview
Trust and company service providers (TCSPs) are gatekeepers who set up
trusts between parties and provide certain legal and administrative functions
for corporations
TCSPs include any
person or business that provides any of the following services to third parties:
1.Acting as agent on behalf of third parties
2.Acting as a director or sec of a company,partners etc
3.Providing registered office,correspondence for a company
4.Acting as a trustee of an express trust
5.Acting as nominee shareholder
FATF report mentions that trust companies must obtain detailed info on customers and source of funds and identify UBOs
Some countries regulate TCSPs like Lawyers in which clients can request confidentiality
Trust and Company Service Providers
-Red Flags
- Unknown or inconsistent application of regulatory guidelines regarding
identification and reporting requirements - Limited market restriction on practitioners to ensure adequate skills,
competence, and integrity - Inconsistent recordkeeping across the industry
- Potential for TCSPs to operate in an unlicensed environment
- Potential for a TCSP’s CDD to be performed by other financial
organizations, depending on the jurisdictional requirements
Trust and Company Service Providers
-ML indicators
1.Complex Transactions
2.Payments to shell companies
3. Use of TCSP in countries that have lax UBO laws
4.Legal arrangements in jurisdictions with weak AML laws and/or strict secrecy laws
5.Intercompany loan transactions and multijurisdictional wire transfers that serve no legal purpose.
According to Transparency International, a global coalition working to end the
injustice of corruption, it is important to focus on service providers, rather than
the company or trust, because the latter is merely the tool through which
money launderers operate
Real Estate-Overview
Investing illegal proceeds into real estate is very common
Escrow accounts, generally maintained by real estate agents, brokers, and other fiduciaries, are designed to hold funds entrusted to someone for protection and proper disbursement
escrow accounts can facilitate the movement of funds by
cashier’s checks, wire transfers, and company checks to seemingly legitimate
individuals and companies
Cash is common but large checks are also used,
Real Estate-Overview-Closing
A money laundering title insurance agent can make multiple deposits of cash on a given day at several banks in amounts under the currency reporting threshold,
credited to different, nonexistent closings
Each closing also entails numerous routine disbursements for payment of the
proceeds to the seller, payoff of the mortgage, real estate commissions,
taxes, satisfaction of liens, and other payments
Property seller may accept lower money than valuation and take the rest in cash
Loan back method, criminal provides fund to an associate who then provides a loan in the same amount
Real Estate-FinCEN published Suspected Money Laundering in the Real Estate Industry
The report makes a distinction
between fraudsters and money launderers
Lenders are likely to file a SAR
when they are the target of failed or successful mortgage fraud schemes that
threaten their organization’s revenues
However it can be tough to detect Mortgage loan fraud
Only 20% of SARs pertained to ML
Real Estate-Attractiveness for ML
The Australian Transaction Reports and Analysis Centre (AUSTRAC)
real estate is an attractive channel for laundering illicit funds because:
* It can be purchased with cash.
* The ultimate beneficial ownership can be disguised.
* It is a relatively stable and reliable investment.
* Value can be increased through renovations and improvements.
Money laundering through real estate can be relatively uncomplicated
compared with other methods and requires little planning or expertise
Real Estate- ML methods
In Australia, common money laundering methods involving real estate include:
* Using third-party straw buyers described as “cleanskins”
* Using loans and mortgages as a cover for laundering
* Manipulating property values to disguise undisclosed cash payments
through overvaluing, undervaluing, or flipping
* Generating rental income to legitimize illicit funds
* Conducting criminal activity, such as the production of cannabis or
synthetic drugs, at the purchased property
* Using illicit cash to make property improvements to increase the value and
profits at sale
* Using front companies, shell companies, trusts, and other company
structures to hide beneficial ownership and obvious links to criminals
* Using gatekeepers, such as real estate agents, conveyancers, and
solicitors, to conceal criminal involvement, complicate the money
laundering process, and provide a veneer of legitimacy to the transaction
* Investing by overseas-based criminals to conceal assets and avoid
confiscation from authorities in their home jurisdiction
Real Estate- Red Flag indicators
- Various uses of cash to aggregate funds for property purchase, down
payment, and loan repayment - Multiple purchases and sales in a short period of time, possibly involving
property overvaluation, undervaluation, or straw buyers - Use of offshore lenders
- Unknown sources of funds for purchase, such as incoming foreign wires in
which the originator and beneficiary customer are the same - Ownership being the customer’s only link to the country in which the real
estate is being purchased
Real Estate-Towers of Secrecy- NYT
Half of the most expensive properties are bought via shell companies in the US
37% Non American owners in the Time Warner Center at least 16 have been investigated
Property docs were not properly singned
There was no requirement for Real Estate firms to identify UBOs
Subsequently in 2016 , FinCEN
began issuing a series of geographic targeting orders (GTOs) to help law
enforcement identify individuals acquiring luxury residential properties
Now Natural persons are required to be identified behind shell companies within 180 days(Geographic Targeting Orders)
International Trade
Trade-based money laundering and
the Black-Market Peso Exchange (BMPE) are two significant money laundering techniques that have proven successful in illicit finance
International Trade Free Trade Zones
According to FATF, systemic weaknesses for FTZs include:
* Inadequate AML/CFT safeguards
* Minimal oversight by local authorities
* Weak procedures to inspect goods and legal entities, including inadequate
recordkeeping and information technology systems
* Lack of cooperation between FTZs and local customs authorities
Some FTZs are as large as cities
Trade-Based Money Laundering
FATF defines trade-based money laundering (TBML) as the process of
disguising the proceeds of crime and moving value by using trade
transactions to legitimize their illicit origins
TBML techniques vary in complexity and are frequently used in combination with other money laundering techniques to further
obscure the money trail
Money launderers can move money out of one country by using their illicit
funds to purchase high-value products and then exporting them at low prices
to a colluding foreign partner, who then sells them in the open market at their
true value
Trade Based ML-Guidance Paper
According to the Guidance Paper on Combating Trade-based Money
Laundering, developed by the Hong Kong Association of Banks, understanding
the commercial purpose of any trade transaction is a key requirement in
determining its money laundering risk
1.Over and under invoicing
2.Over shipping/Short shipping quantities
3. Ghost Shipping-ficticious buy and sell
4.Shell Companies
5.Multiple invoices for shipment
6.Black Market Trades
Letters of credit are also used
Trade Based ML-Letters of Credit
transferring money from a country with lax exchange controls, thus creating
the appearance that an import transaction is involved
Manipulation of prices
LCs can be used with wire transfers to bolster appearance of real transaction
TBML-Tackling TBML
The Asia/Pacific Group on Money Laundering (APG) cited the lack of reliable
statistics relating to TBML as a major obstacle in devising strategies to tackle it.
Strategies should be based on dismantling TBML
Interagency cooperation, training and further research
TBML-Fincen and Funnel Accounts
The advisory was the result of the possible impact of the 2010 Mexican law that
restricted cash deposits of US dollars in Mexican banks then in exchange houses and brokerages
FinCEN defines a funnel account as “an individual or business account in one
geographic area that receives multiple cash deposits, often in amounts below
the cash reporting threshold, and from which the funds are withdrawn in a
different geographic area with little time elapsing between the deposits and
withdrawals.
TBML-Funnel Accounts-Red Flags
- An account opened in one US state receives numerous cash deposits of
less than $10,000 outside of the geographic region - Business account deposits take place in a different geographic region from where the business operates
3.Individuals opening or making deposits to funnel accounts lack information
about the stated activity of the account, the account owner, or the source of the cash
4.Business account receives deposits out of state and debits not related to business purpose
5.Differences in amount and signatures on checks issued from an account receving out of state deposits
6.Wire transfers or checks issued from a funnel account deposited/cleared via US correspondent bank in Mexico
TBML-Case Study
-Sophisticated Organized Crime Groups-OCG
-They had created a network of companies to launder the proceeds of drug trafficking via TBML activity and legitimize the illegal proceeds
-Faked invoicing and used tax fraud scheme
-Scheme began by buying luxury cars in Germany and then faking paper trails for sales and purchases
-Convinced a legitimate supplier to supply vehicles to bolster image
-Import/Export companies owned by OCG used to import various other items to supply to drug traffickers
-Used TBML to launder criminal proceeds
TBML-Case Study-Key Takeaways
- Criminals use international trade to disguise illegal activities.
- Shell companies and fake invoicing are common techniques.
- Joint investigations mitigate cross-border and jurisdictional challenges.
- Criminals add complexity to cross border trade by commingling with
legitimate activity
Black Market Peso Exchange
the BMPE is a process by which money in the United States derived from illegal activity is purchased by Colombian peso brokers and deposited in US bank accounts established by the brokers
Colombian importers created the BMPE in the 1950s as a mechanism for
buying US dollars on the black market to avoid domestic taxes and duties on
the official purchase of US dollars and imported goods purchased with dollars.
FinCEN reported that black market currency exchange systems have evolved
beyond the Colombian BMPE method, mainly because of increased diligence
by US banks.
Black Market Peso Exchange Part 2
A common method of placement is structured deposits in the form of cash and other instruments , ML use account holders to smuggle cash in bulk from the US which is then placed in foreign instituitions.
BMPE Typical transaction
A BMPE employee is in contact with a drug trafficker who wants to bring over his USD to Mexico and convert to pesos.
Peso broker finds businesses in Mexico willing to buy goods from the US and needs USD.
Peso broker arranges for the illegal USD to be given to US vendors to pay for the goods purchased.
Once goods are shipped and sold by the Mexico based business , the pesos are given to the broker who then pays the trafficker in Mexico.
Links of TMBL and BMPE schemes (Case
example: Methods of money laundering)
The DEA found that the network ran operations in the US and Columbia that
enabled drug traffickers to move funds into the banking system. They then
laundered the funds and moved them across the border, using a blackmarket peso exchange (BMPE) scheme. Among the charges was operating
an MSB without a license
In January 2020, an investigation by the Offices of the United States Attorneys
and the DEA discovered that drug dealers in the US were connected to
Columbian drug cartels. These dealers generated US dollars by selling
Columbian drugs in the US
The US based Agarwal Electronics Business exported consumer electronics
globally, including to Columbia. Its CEO knowingly participated in the scheme
and worked with the money broker by offering use of his bank account to
receive the funds in the US
This account was then used to transfer the
proceeds of drug sales to accounts in Middle and South America. Upon
receiving the funds into his bank account, the CEO arranged for the export of
the roughly equivalent value of electronics products to certain Colombian
suppliers. They in turn arranged to pay for the products by delivering pesos to
an individual in Colombia
Links of TMBL and BMPE schemes (Case
example: Methods of money laundering)
Key takeaways
* The BMPE scheme enabled the cartels to place the money into the
banking system and move it across borders.
* A TBML scheme was used to pay the money brokers in Columbian pesos.
* Cash intensive business and cross border activity are at higher risk of being
used to facilitate money laundering
Complex TBML/BMPE schemes (Case
example: Methods of money laundering)
In April 2015, FinCEN issued a GTO that lowered cash-reporting thresholds and
implemented additional recordkeeping requirements for certain financial
transactions for approximately 700 Miami-based electronics exporters
drug proceeds in the United States are converted into goods that are shipped to South America, sold for local currency, and ultimately transferred to drug cartels
Key takeaways
* DTOs (Drug Trafficking Organisations) take advantage of complex BMPE schemes involving the export of
goods across the US/Mexico border to help move funds from the US back
to the country where the DTO is based.
* Lower cash-reporting requirements can help enforcement agencies
detect BMPE schemes and alert regulated organizations to potentially suspicious activity.
* Robust recordkeeping can help to detecting BMPE schemes, so that
enforcement officers can access a regulated organization’s transaction
records.
Wildlife Trafficking
Wildlife trafficking is defined as the illegal trade, smuggling, poaching, capture,
and collection of endangered species and protected wildlife. It also includes
wildlife derivatives and byproducts, such as leather, food, medicines, and
exotic pets
Wildlife Trafficking-Stages
1.Source-Location where poaching takes place, lowest profit generation
2.Transit-Movement of wildlife these can clear customs
3.Destination-Arriving at final destination
Wildlife Trafficking-How to fight it
- Joining the United for Wildlife Financial Taskforce and signing the Mansion House Declaration
- Using current suspicious activity reporting mechanisms to report potential wildlife trafficking
- Reviewing United for Wildlife Financial Taskforce intelligence alerts and
implementing policies and procedures to support the detection and
reporting of wildlife trafficking - Reviewing FATF’s Money Laundering and the Illegal Wildlife Trade report
for valuable insights and red flags
Risk Associated with New
Payment Products and Services-
Prepaid Cards, Mobile Payments, and
Internet-Based Payment Services
In October 2006, FATF first published a report that examined the ways in
which money can be laundered through the exploitation of new payment
methods, such as prepaid cards, internet payment systems, mobile payments,
and digital precious metals. The report found that, although there is a legitimate
market demand for these payment methods, money laundering and terrorist
financing vulnerabilities exist
Since 2006, FATF has published additional guidance on
new payment methods, typologies, and the risk-based approach
Prepaid cards
They are portable, valuable, exchangeable, and anonymous.
Typically, prepaid products require the consumer to pay in advance for future
purchases of goods and services
Open or close loop. Openloop prepaid cards, many of which are network branded by American Express, Visa, or MasterCard, can be purchased and loaded with money by one person and used like regular debit cards by the same person or another
person to make purchases or ATM withdrawals anywhere in the world
Closed-loop prepaid products are of limited use for a specific purpose or
service, such as with a certain merchant or retailer
There might be an account for
each card that is issued or, alternatively, a pooled account that holds the
prepaid funds for all cards issued.
Prepaid cards-Risk Factors
- Anonymous cardholders
- Anonymous funding
- Anonymous access to funds
- High value limits and no limits on the number of cards individuals can
acquire - Global access to cash through ATMs
- Offshore card issuers that might not observe laws in all jurisdictions
- Use as substitute for bulk-cash smuggling
5th AML directive 2020: EU
the monthly transaction limit and maximum amount that can be stored on prepaid cards not subject to due diligence is €150. Online
transactions associated with such cards have similarly been limited to €50. Geographic restrictions also used.
Electronic money
JMLSG’s sectoral guidance
E-money products can be card-based,
app-based, or online account-based
All UK e-money institutions are regulated by the FCA and governed under the Electronic Money Regulations (2011), which require
compliance with all AML/CFT and sanctions requirements. In the UK, this means all e-money institutions are subject to the Money Laundering Regulations 2017
Electronic money-Risk Factors
- High transaction or purse limits
- The ability of a customer to hold numerous purses or cards
- E-money issuers using complex business models (e.g., “white-label”
products and outsourcing, particularly to overseas jurisdictions), resulting in
a complex AML/CFT control environment - Certain merchant activity with high-risk businesses, such as gambling,
which allows for the movement of higher amounts of funds - Funding with unverified persons, whether customers or third parties
- Funding with cash that leaves no electronic trail to the source of funds, as
well as the ability for cash withdrawal - Funding with other e-money that lacks verified persons and/or source of
funds - Non-face-to-face transactional activity
- Features that increase the functionality of the card in terms of how to
execute transactions, such as person-to-person, business-to-person,
business-to-business, and person-to-business transactions
Electronic money-Controls
- Conducting robust oversight of outsourced functions
- Placing limits on storage values, transactions, and turnover
- Implementing transaction monitoring systems
- Implementing systems to detect individuals holding multiple
purses, accounts, and cards, including across multiple e-money issuers - Utilizing geolocation, device-related information, and IP addresses to
identify discrepancies in customer activity - Cooperating with merchants that accept e-money to better detect
suspicious activity - Instituting geographic restrictions on the use and function of e-money
products
FATF guidance paper Digital
Identity, non-face-to-face onboarding can be just as robust, if not more so, as
face-to-face onboarding when the appropriate systems and controls are in
place to verify identities using reliable, independent sources
Virtual Currency
Although a simplification, VCs often fall into two categories: centralized and decentralized
the Bahamian Sand Dollar, the first fully launched central bank digital currency)
or a non-government administrator (e.g., Facebook’s Diem). Decentralized
VCs (e.g., Bitcoin) have no repositories or administrators, but they work as a
peer-to-peer media of exchange without the need for an intermediary
VCs can be convertible or non convertible
VCs allow value to be transmitted anywhere in the world without the requirement of a centralized bank or institutional authority.
For most coins, there is a value that is
expressed in fiat currency that is based upon economic and market
forces
it can be difficult to identify who is
behind a specific wallet address, where the funds originated, and the
destination of the funds in the “fiat” space
Virtual Currencies-Guidance
FinCEN was one of the first FIUs to offer interpretative guidance on VCs and to
clarify their regulatory status. FinCEN categorized participants in the
ecosystem into three segments:
- A User is a person who obtains VC to purchase goods or services.
- An Exchanger is a person engaged as a business in the exchange of VC for
real currency, funds, or other virtual currency. - An Administrator is a person engaged as a business in issuing VC and who
has the authority to redeem such virtual currency
Admins/Exchangers are considered MSB and must comply with AML laws
VC kiosks use distributed ledger technology not controlled by a single administrator
FATF Recommendation 15- VASPs to be regulated
Corporate Vehicles- IBC
International business corporations (IBCs) are entities formed outside a
person’s or business’s country of residence, typically in offshore jurisdictions
IBCs permit the person to
reduce transparency between the owner in her home country and the
offshore entity where the company is registered
IBC typically require registration via agent in jurisdiction which may reduce transparency
Private investment
companies are established and used in a similar manner; however, they are
typically limited to holding investment assets in tax-neutral offshore financial
jurisdictions
Virtual currency (Case example: Dark web)
Operation DisrupTor’s actions in the US and Europe resulted in the arrest of 179 darknet drug traffickers and other criminals
seizure of over US$6.5 million in cash and virtual currency, mainly Bitcoin, 500 kilograms of drugs worldwide, and 63 firearms.
conducted by the US Joint Criminal Opioid and Darknet Enforcement (JCODE) and Europol
One criminal group operating in the US city of Los Angeles completed more than 18,000
individual drug sales on several darknet sites
Key takeaways
* Cryptocurrency is the preferred payment method for darknet.
- Law enforcement is increasingly capable of countering encryption and identifying anonymous data sources and transactions.
- Criminals will always search for new avenues of communication to avoid
detection
Use of virtual currency (Case example:
Methods of money laundering)
2017 Investigation BTC-e, users were allowed to
- Operate with high levels of anonymity, limited ID requirements
- Obscure and anonymize transactions
- Openly discuss criminality on the BTC-e user chat
- Obtain advice from BTC-e on how to access illegally obtained money from
drug sales
Alexander Vinnik charged by Paris for ML
BTC-e was seized with 38% of user funds , ML worth USD 4 Billion
Vinnik linked to corruption and organized crime
Virtual Currencies-FATF
The Second 12-Month Review of the
Revised FATF Standards, released in July 2021, noted that significant progress
had been made globally in implementing the revised Recommendations, but
that more work was still needed. Of 128 jurisdictions assessed in 2021, 70 (55%)
had yet to implement the revised Recommendations into national law
The report noted that the most
common misuse of VCs was connected to sales of illicit substances,
particularly through activity on the “dark web.”
FATF updated guidance to include risk indicators which include, peer to peer VC exchanges and the travel rule
Guidance addresses how FATF applied to specific Fiat currency or commodity this followed a report to te G 20, guidance also takes about Decentralized Finance-DeFi
Use of virtual currency (Case example:
Methods of money laundering)-Key Takeaways
1.Crypto exchanges offer anonymity
2.VCs tough to track as only done via user exchange account or wallet address
3.Crypto transactions conducted within seconds
4.VC Risk assessments should be done
Corporate Vehicles Used to
Facilitate Illicit Finance-Public Companies and Private Limited
Companies-LLC
LLCs are an attractive vehicle because they can be owned or managed anonymously
FinCEN has undertaken a number of activities to better monitor LLCs
Shell and Shelf Companies
FATF offers the following definitions:
* Shelf company: A corporation that has had no activity; it has been created and “put on the shelf.” This corporation is then later sold to someone who prefers a previously registered corporation over a new one.
- Shell company or corporation: A company that at the time of incorporation has no significant assets or operations
FATF issued a report called The Misuse of Corporate Vehicles, Including Trust and Company Service Providers
it states that the ease with which
corporate vehicles can be created and dissolved in some jurisdictions is of particular concern. This allows the vehicles to be used not only for legitimate purposes (e.g., business finance, mergers and acquisitions, and estate and tax
planning), but also by financial criminals to conceal the sources of funds, while keeping their ownership concealed
Shell Companies
Shell companies can be set up in onshore as well as offshore locations, and their ownership structures can take several forms
Shell companies are often legally incorporated and registered by the criminal organization, but they have no legitimate business
Sometimes, the stock of these shell corporations is issued in
bearer shares, which means that whoever carries them is the purported owner
The Money Laundering in Canada report
offered four related purposes for establishing or controlling a shell company for money laundering:
1.Convert cash proceeds of crime into alternative assets
2.Create illusion that illicit funds generated from legal source, the shell company can then create commercial accounts with other businesses to further layer and place the illicit funds
3.Can be used to hire criminals, lend money to criminals buy real estate etc
4.Effective in concealing ownership, Nominees can be used as directors,officers and shareholders. Can be established as an offshore subsidiary of another company.Can register assets in their own name.
The Money Laundering in Canada report part 2
The Canadian report identifies the following money laundering techniques used in conjunction with criminally controlled companies:
1.Using nominees as owners or directors:Nominees will often, but not always, have no criminal record. Further, companies established by lawyers are often registered in the lawyers’ names
2.Layering: Several companies are established to create a complex structure
3.Loans: Lending money between criminal organizations to avoid detection
4.Fake invoicing/business: Use of double invoicing , an org owns both companies and uses a purchase/sale fake transaction to make the transaction appear legitimate.
- Sale of business: Becomes a legitimate source of capital
6.Buying a company already owned by the enterprise: Used to repatriate illicit money sent to tax havens , criminal proceeds from offhsore are used to buy a company already owned by the enterprise.
7.Paying out fake salaries
Trusts
Trusts are private fiduciary arrangements that allow a grantor, or settlor, to place assets for future distribution to beneficiaries
The grantor/settlor will usually appoint a third party, a trustee, to administer the assets in accordance with the instructions provided in the trust document
Revocable and Irrevocable
Trust assets can flow to the beneficiaries in a variety of ways
Trusts also name “remaindermen,” who are designated to receive any residual assets after the conclusion of the trust’s term
Trusts can be used to conceal ownership via secrecy rules in some jurisdictions , can hide assets from creditors ,protect property from seizure
Asset Protection Trusts
an asset protection trust (APT) is a form of irrevocable
trust that is usually created (i.e., settled) offshore for the principal purposes of preserving and protecting part of one’s wealth from creditors
APTs are generally used for asset protection and are usually tax neutral. Their ultimate function is to provide for beneficiaries. Some proponents advertise APTs as allowing foreign trustees to ignore US court orders and simply transfer the trust to another jurisdiction in response to legal action threatening the trust’s assets.
Lawyers often serve as trustees by holding money or assets “in trust” for clients. This enables lawyers to conduct transactions and administer the client’s affairs.
Terrorist Financing
FATF issued the first eight of its Special
Recommendations, which have since been incorporated into the current
FATF Recommendations. (See the chapter “International AML/CFT Standards”
for more detail.)
Recommendation 5 encourages countries to criminalize terrorist financing
and the financing of terrorist organizations and individual terrorists with or
without a link to a specific terrorist act, as well as ensuring these crimes are
designated as money laundering predicate offenses
Differences and Similarities between
Terrorist Financing and Money Laundering
The most basic difference between the two crimes involves the origin of the
funds. Terrorist financing uses funds for an illegal political purpose, but the
money is not necessarily derived from illicit proceeds
Although it would seem logical that funding from legitimate sources does not need to be laundered, terrorist groups do need to
disguise the link between them and their legitimate funding sources
Hawala System
The hawala system is an informal value-transfer system involving the
international transfer of value outside the legitimate banking system. Based on
a trusted network of individuals, this system has also played a role in moving
terrorist-related funds.
money raised for terrorist groups can be
used for mundane expenses
Detecting Terrorist Financing
To avoid becoming conduits for terrorist financing, organizations must
consider, among other things, the following factors:
* Use of an account as a front for a person with suspected terrorist links
* Appearance of an account holder’s name on a list of suspected terrorists
* Frequent large cash deposits in accounts of nonprofit organizations
* High volumes of transactions in accounts
* Lack of a clear relationship between the banking activity and the nature of
the account holder’s business
Detecting terrorist financing (Case
example: The Maute Group)
The 2018 Analyst Exchange Program (AEP) was a multinational project
involving financial intelligence analysts from Australia, the Philippines, Malaysia,
and Indonesia
The Maute terrorists were trained by the Islamic State of Iraq and Syria (ISIS) and gained experience in Syria and Iraq, or they were trained locally by a wealthy Muslim
family, the Maute family. They were funded by:
* The Maute family
* ISIS
* The sale of shabu, a slang term for methamphetamine
* Anonymous mobile payments
Detecting terrorist financing (Case
example: The Maute Group)-Key Takeaways
Key takeaways
* Terrorists need to raise, move, store, and use funds in order to sustain their
operations.
* Countries must identify, assess, and understand terrorist financing risk as
an essential part of dismantling and disrupting terrorist networks.
* Engaging with foreign counterparts is important in detecting and assessing
cross-border terrorist financing risks.
* It’s important to establish procedures and mechanisms to handle the
exchange of sensitive information at an early stage in collaboration.
How Terrorists Raise, Move, and Store
Funds
They have forged destructive and very profitable links with drug and criminal
syndicates—among others. And they abuse charitable causes to trick individuals to contribute
oil trade, extortion, undetected cash couriers, kidnapping for ransom, trafficking
of humans and arms, and racketeering
Use of Hawala and Other Informal Value
Transfer Systems
Alternative remittance systems, or informal value transfer systems (IVTSs), are
often associated with ethnic groups from Africa, Asia, and the Middle East.
Hawala was created centuries ago in India and China for the movement of funds
Merchant traders would deposit funds with a hawala broker or hawaladar, who typically owned a trading business. The hawaldar for a fee would make sure the funds are available for withdrawal from another hawaldar.
Nowadays, deposits and withdrawals are made through hawala bankers rather than traditional financial institutions. The third parties are typically immigrants or visiting workers who send small sums to their homelands to avoid bank fees for wire transfers
Why use Hawala?
Reasons for legitimate use of hawala and other IVTS include less expensive and faster money transmission, lack of banking access in the remittance-receiving country, cultural preference, and lack of trust in the
formal banking system
No physical movement of currency
and poor controls regarding verification and recordkeeping. The money transfer takes place by coded information that is passed through chits, couriers, letters, faxes, emails, text messages, and online chat systems, followed by some form of telecommunications confirmation
FATF has said that regulation and supervision of hawalas and other similar service providers remains a key challenge to authorities
Because hawala is a remittance system, it can be used at any phase of the money laundering cycle
Hawala System in the ML stages
Placement: Broker receives cash and deposits in the banks
Layering: Account to account transfer using several brokers to make the money trail more difficult
Intergration: The money can be
reinvested in a legitimate (or legitimate-appearing) business. A hawaladar
could, for example, very easily arrange for the transfer of money from the
United States to Pakistan and then back to the United States, apparently as
part of an investment in a business there
Hawalas are not subject to formal goverment oversight, Al Qaeda used 12 trusted brokers before 9/11
Detecting terrorist financing (Case
example: Use of hawala and other informal
value transfer systems)
Mohammad Younis pled guilty in Manhattan federal court to operating an unlicensed money transfer business between the United States and Pakistan
January to May 2010, Younis provided money transmitting services to individuals in the New York City area by assisting in the operation of a hawala
Younis provided thousands of dollars in cash to the individuals at the direction of a coconspirator in Pakistan, but without
knowledge of how the customers were planning to use the funds. At no time
did Younis have the license to operate a money transmitting business from
either state or federal authorities
Detecting terrorist financing (Case
example: Use of hawala and other informal
value transfer systems)-Key Takeaways
- Hawalas can be used to transfer funds out of some countries
- Hawalas are useful for moving funds for illicit purposes
- Limited scrutiny makes Hawaldars attractive
Use of Charities and Nonprofit
Organizations (NPOs)
the US government initiated the
Terrorist Finance Tracking Program (TFTP) to identify, track, and pursue the
funding sources of terrorist groups.
FATF acknowledges the importance of the nonprofit organization (NPO) sector to the global community. However, FATF found that more than a decade after the abuse of NPOs by terrorists and terrorist
organizations was formally recognized as a concern, the terrorism threat to
the sector remains.
Charities and NPOs attractiveness for ML
- Enjoying the public trust
- Having access to considerable sources of funds
- Being cash-intensive
- Frequently having a global presence, often in or next to areas exposed to
terrorist activity - Often being subject to little or no regulation and/or having few obstacles to
their creation
FATF issued guidelines on best practices for charities in combating the abuse of NPOs,recommendation 8 says to use a risk based approach when providing service to NPOs to ensure NPOs not abused by Terrorist groups and cannot be exploited
Charities and NPOs attractiveness for ML-FATF and Charity commission recommendations
1.NPOs to maintain a full budget accounting for everything
2.Use formal bank accounts to store and transfer funds
The Charity Commission is an independent regulator of charities in England
and Wales which states a 4 pronged approach
- Cooperation with regulators national and international
- Raising awareness in the sector of the risks charities face from terrorism
- Proactive monitoring of the sector in
areas identified as being at higher risk - Intervention when abuse, or the risk of abuse, related to terrorist activity is
apparent
Detecting terrorist financing (Case
example: Using NPOs)
NPO collecting funds for humanitarian purposes outside religious instituitions , funds held in bank account
NPO was assisting Terrorists
NPOs can also collect in one country and transfer to another in another country to aid Terrorists there
Detecting terrorist financing (Case
example: Using NPOs)-Key Takeaways
- NPOs are at high risk for exploitation by terrorists.
- The diversion of funds occurs when funds raised for charitable purposes are redirected to support terrorist activity.
- The diversion of funds can be perpetrated internal or external individuals to the org.
- Diverted funds are used to support terrorist activities both domestically
and abroad
Detecting terrorist financing (Case
example: NPOs and Islamic Defenders Front
of Indonesia)
One method exploitation of NPOs to support terrorism is to form an operational affiliation between an NPO and a terrorist entity. These affiliations can range from informal personal connections involving NPO directors and terrorist entities to more formalized relationships
The Islamic Defenders Front (FPI), conducted vigilante operations.
FPI gained support by appearing to be an NPO that provided voluntary-based welfare services in disaster-struck and poverty-ridden regions and neighborhoods
On Dec 30, 2020 the FPI was banned , 29 convicted of terrorism.
Detecting terrorist financing (Case
example: NPOs and Islamic Defenders Front
of Indonesia)-Key Takeaways
- A key risk that NPOs face is that they operate in the same vulnerable environments in which terrorists operate.
- Affiliations between NPOs and terrorists can range from informal personal connections to more formalized relationships.
- In NPOs that are exploited by internal actors affiliated with terrorist entities, these individuals are able to exercise influence over the NPO’s operations to ultimately support terrorist activities.
- Organizations must know their NPO customers, their staff members, and the individuals and entities with whom the NPO affiliates.
Emerging Risks for Terrorist Financing
FATF warns of several rising threats and vulnerabilities, including:
* Self-funding by foreign terrorist fighters (FTFs)
* Raising funds through social media
* New payment products and services
* Exploitation of natural resources
Self-funding by FTFs
FTFs and terrorist sympathizers can self-radicalize and communicate with terrorist organizations more efficiently than ever before
Self funding can be family, employment, social assistance, bank loans.
Terrorists have leveraged social media through
methods such as crowdfunding and sharing of virtual and prepaid account information
Exploitation of natural resources
Gas, oil, timber, diamonds, gold and other
precious metals, wildlife (e.g., ivory trading), and historical artifacts, or extort companies that extract those resources to both fund terrorist acts and support day-to-day activities.
Regulators must be aware in which terrotories terrorists operate
Red flags include the association of a customer with
PEPs, complex legal entities structures with multiple internal transactions, and the rapid shipment of resources to distant jurisdictions
Detecting terrorist financing (Case
example: Islamic State and cryptocurrency)
Chaudhary received money from supporters and transferred over £50,000 abroad using Bitcoin
These funds paid smugglers to help captured ISIS militants escape from Kurdish-controlled prison camps in northern Syria
Chaudhary immersed himself online on encrypted chat and video platforms, from which he spread terrorist propaganda and solicited funds
Detecting terrorist financing (Case
example: Islamic State and cryptocurrency)-Key Takeaways
- Terrorists are adapting to technology and increasingly conducting
transactions digitally, including through cryptocurrency. - Terrorists also use cyber-enabled tools to communicate.
- Law enforcement employs tools and investigative techniques to identify terrorist funding through misuse of cryptocurrency.
- Criminals often attempt to disguise terrorist funding as humanitarian activity.
- The first line of defense (LOD) is responsible for identifying and reporting suspicious cryptocurrency activity.
Detecting terrorist financing (Case
example: Use of social media)
According to the “Social Media & Terrorist Financing Report,” by the
Asia/Pacific Group on Money Laundering (APG) and the Middle East & North Africa Financial Action Task Force (MENAFATF), multiple platforms have been exploited by organized networks to collect donations for extremist organizations
One case was detected through suspicious matter reports (SMRs) received by the Kuwait financial intelligence unit (FIU)
Social media services, including Facebook, YouTube, Telegram, Twitter, and Instagram, were used to collect donations for extremist organizations
Cash, ATM deposits, bank transfers, bank websites, and exchange companies were used for funding
Monitoring and surveillance of social media platforms by law enforcement can
greatly enhance the detection of social media abuse by terrorists
Detecting terrorist financing (Case
example: Use of social media)-Key Takeaways
- Social media can serve as a tool to facilitate and enable terrorist funding,
recruitment, and propaganda. - Social media services are commonly used as communication channels by
terrorists and their financiers to solicit funding. - Multiple social media platforms are exploited by organized networks.
- Monitoring and surveillance of social media platforms by law enforcement
can greatly enhance the detection of social media abuse by terrorists.
Electronic Transfer of Funds
- Funds transfers occur to or from a financial secrecy haven or high-risk geographic location without an apparent business reason or when the activity is inconsistent with the customer’s business or history.
- Large incoming funds transfers are received on behalf of a foreign client, with little or no explanation or apparent reason.
- Checks and money orders are used to receive many small, incoming
transfers of funds or to make deposits. Upon credit to the account, all or most of the transfers or deposits are wired to another account in a
different geographic location in a manner inconsistent with the customer’s business or history. - Funds activity is unexplained, repetitive, or reveals unusual patterns.
- Payments or receipts are received that have no apparent link to legitimate contracts, goods, or services.
- Funds transfers are sent or received from the same person to or from different accounts
Remote Deposit Capture
efforts must be made to integrate RDC processing into other controls, such as monitoring and fraud-prevention systems.
sequentially numbered checks and money orders
total volume of activity processed for an account via RDC is
incorporated into the overall transaction monitoring system
limits are placed on a customer’s ability to deposit checks via RDC
Correspondent Banking
Correspondent banking is vulnerable to financial crime, especially because correspondent banks do not know the customers of the respondent directly and rely on the respondent bank’s internal controls
Before establishing correspondent accounts, a bank should identify the respondent bank’s owners and understand the nature of its regulatory oversight
a bank’s due diligence on a respondent bank should be based on the respondent’s risk profile and the nature of the business relationship with that respondent bank
If the parent does not exercise substantial and
effective control, due diligence should be conducted on both the respondent
The risks of correspondent banking
- The correspondent does not or cannot conduct typical due diligence to know the customers of the respondent
- The correspondent does not have data on respondent transactions that typically enable transaction monitoring controls
- The correspondent can identify the respondent’s regulators, but not
always the degree of supervision - The correspondent might have limited information on the respondent’s anti-financial crime controls—perhaps through a questionnaire—yet still needs to rely on the respondent
- Some respondents are, themselves, correspondents to third banks, a practice called “nesting.” Nested accounts further shield correspondent banks from knowing the parties involved
Correspondent banking (Case example:
Methods of money laundering)
July 2020,New York State Department of Financial Services (DFS) ,US$150 million,
significant compliance failures in connection with the bank’s relationship with disgraced American financier Jeffrey Epstein
and its correspondent banking relationships, including those with Danske Bank Estonia (Danske) and FBME Bank
Billions of dollars in suspicious transactions passed through Deutsche Bank’s accounts and, in the case of Danske, significant flows were linked to money laundering by Russian oligarchs
nternal compliance controls had flagged concerns with
FBME as early as 2005 and with Danske Bank Estonia from the start of the relationship in 2007,Deutsche Bank identified 826 suspicious transactions associated with FBME Bank after that rating
FBME Bank declined to respond to Deutsche Bank’s queries regarding UBOs,UBO was a Russian businessman associated with a Syrian military research and development organization
In 2013 and 2014, Deutsche Bank compliance staff recommended that the relationship be exited, but no action was taken until 2015.Over US$150 billion was routed from Danske Bank Estonia through Deutsche Bank. Deutsche Bank identified 340 suspicious transactions
Correspondent banking (Case example: Methods of money laundering)-Key takeaways
- Senior management support is essential for compliance officers to
effectively execute their duties. - Organizations that ignore red flags associated with a customer relationship can suffer significant reputational, regulatory, and financial consequences.
- Nested accounts are high-risk because
o Correspondent banks should include periodic reviews of their
respondent bank’s AML/CFT framework as part of their larger AML/CFT framework.
o Correspondent banks need to undertake risk assessments and ensure that their policies and procedures regarding respondent bank
relationships and their transactions are adequate to mitigate against
identified risks, especially in high-risk relationships.
Payable-Through Accounts
the respondent bank’s customers are permitted to conduct their own transactions
PTAs differ from typical correspondent accounts in that the foreign bank’s customers have the ability to directly control funds at the correspondent bank
PTAs can have a virtually unlimited number of subaccount holders
Sometimes, however, the identification of the subaccount holders is not given to the correspondent bank.
Payable-Through Accounts-Risks
- PTAs with foreign institutions licensed in offshore financial service centers with weak or under-developed bank supervision and licensing laws
- PTA arrangements in which the correspondent bank regards the
respondent bank as its sole customer and fails to apply its customer due diligence (CDD) policies - PTA arrangements in which subaccount holders have currency deposit and withdrawal privileges
- PTAs used in conjunction with a subsidiary, representative, or other office of the respondent bank, which might enable the respondent bank to offer the same services as a branch without being subject to supervision
Use of payable-through accounts (Case example: Methods of money laundering)
Lombard Bank Ltd, a bank licensed by the South Pacific island of Vanuatu, opened a correspondent PTA at American Express Bank International (AEBI)
Lombard offered its Central American customers nearly full banking
services through its PTA at AEBI
Lombard’s PTA subaccount holders brought cash deposits to Lombard representatives in four Central American countries. Lombard couriers would then transport the cash to the bank’s Miami affiliate, Lombard Credit Corporation, for deposit in the PTA at AEBI. Lombard customers also brought cash to the Lombard office in Miami, which was located in the same building as AEBI. That cash was also deposited in AEBI’s PTA
June 1993, as much as US$200,000 in cash was received by Lombard’s Miami affiliate on 104 occasions
Use of payable-through accounts (Case example: Methods of money laundering)-Key takeaways
- PTAs often do not know the source of funds and customers’ identities.
- Because PTAs can be offered to an unlimited number of subaccount
holders, the exposure of correspondent banks to financial crime is very high. - When correspondent banks offer PTAs, they should set clear limits on their use, depending on internal policies and the risk profile of the respondent
Private Banking
The following factors can contribute to the vulnerabilities of private banking to
money laundering:
* Perceived high profitability
* Intense competition
* Powerful clientele
* High level of confidentiality
* Close trust developed between relationship managers and their clients
* Commission-based compensation for relationship managers
* Culture of secrecy and discretion developed by the relationship managers for their clients
* Role of relationship managers as client advocates to protect their clients
* Use of private investment companies by clients to reduce transparency of their beneficial owners
* Clients maintaining personal and business wealth in numerous jurisdictions,
including offshore jurisdictions
* Clients’ ability to utilize and control numerous legal entities for personal and family estate planning purposes
Private banking (Case example)
FCA,2015,These regulatory breaches related to a £1.88 billion transaction that Barclays arranged
customers involved were politically exposed persons (PEPs)
The FCA fined Barclays more than £72 million
it assessed the transaction as high risk due to the involvement
of private banking, ultra-high net-worth customers, and PEPs, among other factors
Barclays did not obtain the necessary information from the customers to comply with financial crime requirements.
Barclays agreed to keep details of the transactions strictly confidential, even within the firm, and to compensate the customers up to £37.7 million if it failed to comply with these confidentiality restrictions
Private banking (Case example)-Key Takeaways
- Business interests should never take precedence over compliance with laws and regulations.
- The close relationships established in private banking often require a higher degree of confidentiality, but this should not reduce or minimize the required compliance checks.
- Strong AML/CFT compliance programs need organizations to follow the policies and procedures that support them.
- Failure to follow a robust compliance plan can lead to fines, even if no actual financial crime event occurred.
Use of Private Investment Companies in
Private Banking
PICs are corporations established by individual bank customers and others in offshore jurisdictions to hold assets
They are shell companies formed to maintain clients’ confidentiality and serve various tax- and trust-related purposes
Secrecy laws of offshore havens can conceal UBOs
some PICs are established by company formation agents with nominee directors who hold titles to companies for the benefit of individuals
Use of PICs in private banking (Case
example: Methods of money laundering)
In 2014, Israeli-based Bank Leumi admitted that it had assisted more than 1,500 US taxpayers in hiding their assets in Bank Leumi’s offshore affiliates in Switzerland and Luxembourg
the bank assisted in organizing nominee corporate entities
registered in Belize and other offshore jurisdictions to hide their clients’ private offshore accounts and maintained several US clients’ accounts under
assumed names or numbered accounts
Key takeaways
Nominee corporate entities registered in high-risk offshore jurisdictions are an attractive vehicle for evading tax obligations.
* Care should be taken when dealing with assets associated with nonnationals to reduce the risk of them being moved or placed to deliberately avoid tax.
* Facilitating tax evasion is a serious offense that can lead to large fines and negatively impact a regulated firm’s ability to do business with certain customers and jurisdictions.
Politically Exposed Persons
Relatives and close associates of PEPs are also considered to be PEPs. The definition of PEPs is not intended to cover middle ranking and more junior individuals in the above categories
Structuring
It is a crime in many countries and must be reported by filing a suspicious activity report (SAR).
The individuals engaged in structuring may be “runners” hired by the launderers, that is, individuals who travel from bank to bank depositing cash and purchasing monetary instruments in amounts under reporting thresholds
“Smurfing” is a common structuring technique that involves multiple individuals making multiple cash deposits and/or buying multiple monetary instruments or bank drafts in amounts under the reporting threshold to evade detection.
Structuring (Case example: Methods of
money laundering)
In June 2018, Commonwealth Bank (CBA) agreed to pay a AUD700 million settlement plus legal costs
In Australia, banks are required to file threshold transaction reports (TTRs) to AUSTRAC for transactions of AUD10,000 or more within 10 business days. CBA failed to report over 53,000 transactions Intelligent deposit machines (IDMs)
AUSTRAC alleged that CBA did not limit the number of transactions a customer could make per day; its IDMs allowed up to 200 bills per transaction. A criminal who inserted AUD100 bills could deposit up
to AUD20,000 in one transaction
In May and June 2016, more than AUD1 billion in cash moved through CBA’s IDMs
Structuring (Case example: Methods of
money laundering)-Key takeaways
- Structuring can involve many channels, such as IDMs.
- Adequate controls must be in place to ensure proper monitoring and reporting.
- New technologies need to be critically assessed for AML/CFT risks.
- Organizations need to limit the number of customers’ daily transactions and the number of bills per transaction
Microstructuring
the cash proceeds of US drug sales were deposited into accounts in New York with linked ATM cards, which were provided to associates in Colombia. Deposits were made on a regular schedule, with the Colombian associates withdrawing the funds as they were deposited and giving them to the drug lords
Microstructuring red flags include:
* The use of counter deposit slips instead of preprinted deposit slips
* Frequent activity in an account immediately following the opening of the account with only preliminary and incomplete documentation
* Frequent visits to make cash deposits of nominal amounts that are
inconsistent with typical business or personal banking activity
* Cash deposits followed by ATM withdrawals, particularly in high-risk
countries
* Cash deposits made into business accounts by third parties with no
apparent connection to the company
Credit Unions and Building Societies
In general, they help to negotiate shared contracts for common services, allowing many smaller credit unions to leverage economies of scale that they would not otherwise be able to do
credit unions operate very similarly to banks in most jurisdictions. They have capital, liquidity, riskmanagement, recordkeeping, and reporting obligations similar to banks, although there might be minor differences between institutions that are subject to the oversight of regional versus federal regulators and regulations.
Joint Money Laundering Steering Group (JMLSG),credit unions potentially pose lower money laundering and terrorist financing risks, because they typically have a restricted or localized customer base and offer fewer products and services, with more limitations, than retail banks
One risk factor highlighted is adult parents or guardians who
use a child’s account to launder funds
Credit Card Industry
- Credit card associations, such as American Express, MasterCard, and Visa,
- Issuing banks, which solicit potential customers and issue the credit cards
- Acquiring banks, which process transactions for merchants who accept credit cards
Third-party payment processors (TPPP), which contract with issuing and acquiring banks to provide payment-processing services to merchants and other business entities
Third-Party Payment Processors
provide payment-processing services to merchants and other business entities
Often, they are not subject to AML/CFT requirements.
TPPPs traditionally contracted with US retailers (i.e., merchants) that had physical locations in the United States in order to help collect monies owed by customers
also covered ACH debits and creating and depositing remotely created checks (RCCs)
risks posed by TPPP
- Multiple financial organization relationships: The TPPP might maintain relationships at multiple organizations, which hinders the organizations’ ability to know the entire customer relationship
- Money laundering: TPPPs can be used by criminals to mask transactions and launder the proceeds of crime
- High return rates from unauthorized transactions: TPPPs engaged in suspicious activity, and those being used by criminals might have higher than average return rates related to unauthorized transactions
Money Services Business
(MSB) or money or value transfer service (MVTS), as defined by FATF, transmits or converts currencies
* Dealer in foreign exchange
* Check casher:
* Issuer of traveler’s checks or money orders:
* Money transmitter:
* Provider and seller of prepaid access:
* US Postal Service:
Traditional MSBs typically provide services to the underserved or unbanked individuals
In the United States, principal MSBs are required to have written AML policies, procedures, and internal controls; appoint a BSA officer; provide education and training; conduct independent reviews and audits; and monitor transactions for suspicious activity.
Agents of a principal MSB are required to follow regulations as a principal MSB
Use of MSBs (Case example: Methods of money laundering)
Bangko Sentral ng Pilipinas (BSP), in its
campaign to combat illegal money movement via MSBs, revoked the licenses
of three MSB companies, due to “significant violations” in AML compliance
Key takeaways
* MSBs must comply with the same AML requirements as banks.
* Small MSBs might lack resources and experience, leading to compliance
issues.
* The cash-intensive and transactional nature of MSBs can facilitate money
laundering.
* MSBs offer valuable services and are important for financial inclusion
