Chapter 4, 5, 7

Question 1

DECISION TO PROSECUTE
Identify the factors a prosecutor many consider when determining whether or not to bring a case against an institution involving money laundering-related charges.

Answer 1

• The institution has a criminal history,
• The institution has cooperated with the investigation,
• The institution discovered and self-reported the money laundering-related issues,
• The institution has had a comprehensive and effective AML program,
• The institution has taken timely and effective remedial action,
• There are civil remedies available that can serve as punishment, or
• Deterring wrongdoing by others is needed and will
be served by a prosecution.

Question 2

SUMMONSES AND SUBPOENAS
ABC Bank was served with a subpoena compelling the production of certain documents on a personal checking account. Describe the steps the bank should consider taking upon receipt of the subpoena.

Answer 2

If an institution is served with a summons or subpoena compelling the production of certain documents, the institution should have its senior management and/or counsel review the summons or subpoena. If there are no grounds for contesting the summons or subpoena, the institution should take all appropriate measures to comply with the summons or subpoena on a timely and complete basis.
Failure to do so can result in adverse action and penalties for the institution. Also, the financial institution should not notify the customer who is being investigated. If the government asks the bank to keep certain accounts open, such a request should be obtained in writing under proper letterhead and authority from the government.

Question 3

SEARCH WARRANTS

ABC Bank was served with a search warrant. What next steps should the Bank consider?

Answer 3

1. Call the financial institution’s in-house or outside counsel,
2. Review the warrant to understand its scope,
3. Ask for and obtain a copy of the warrant,
4. Ask for a copy of the affidavit that supports the search warrant (the agents are not obligated to provide a copy of the affidavit, but, if a financial institution is allowed to see the affidavit, the financial institution can learn more about the purpose of the investigation),
5. Remain present while the agents record an inventory of all items they seize and remove from the premises. Keep track of the records taken by the agents,
6. Ask for a copy of law enforcement’s inventory of what they have seized, and
7. Write down the names and agency affiliations of the agents who conduct the search.

Question 4

MONITORING THE INSTITUTION’S RESPONSE TO A LAW ENFORCEMENT INVESTIGATION
How should a financial institution monitor the receipt of a subpoena, summons, or other government request?

Answer 4

When an institution receives a subpoena, summons or other government request, the institution should do more than just produce the records or information being sought. Financial institutions should ensure that all grand jury subpoenas, as well as other information requests from government agencies, are reviewed by senior management, an investigations group or counsel to determine how best to respond to the inquiry and to determine if the inquiry or the underlying activity might pose a risk to the institution.
In addition, the institution should maintain a centralized control over all requests and responses in order to ensure that the requests are responded to on a complete and timely basis and to establish a complete record of what is provided. This centralized record will also assist with regard to the institution’s own internal investigation.

Question 5

NOTICE TO EMPLOYEES
If a bank is under investigation by a government agency for possible money laundering, what steps should the Bank have for its employees follow?

Answer 5

With regard to investigations conducted by the government, employees should be informed of the investigation and should be instructed not to produce corporate documents directly, but, rather, should inform senior management or counsel of all requests for documentation and should provide the documents to them for production.
In that way, the institution will know what is being requested and what has been produced. In addition, the institution can determine what, if any, requests should be contested. The same procedure should be followed with regard to requests for employee interviews.

Question 6

INTERNAL INVESTIGATIONS

Identify several situations that may require a financial institution to initiate an internal investigation?

Answer 6

• A report of examination from the regulators,
• Information from third parties, such as customers,
• Information derived from surveillance or monitoring systems,
• Information from employees or a company hotline,
• Receipt of a governmental subpoena or search warrant,
• Learning that government investigators are asking questions of institution employees, business associates, customers or even competitors, and
• The filing of a civil lawsuit against the institution or a customer of the institution.

Question 7

INTERNAL INVESTIGATIONS

What is the purpose of conducting an internal investigation?

Answer 7

The purpose of the investigation will be to learn the nature and extent of any potential wrongdoing, to develop information sufficient to report—when necessary—to the authorities, to enable the institution to minimize its liability, and to stop any potential money laundering.

Question 8

CLOSING THE ACCOUNT
The checking account for XYZ Trading LTD, a company registered in the British Virgin Islands, was identified on a government subpoena issued to International Bank. The Bank has initiated an internal investigation on the account and its beneficial owners. What factors should the Bank consider on whether to close the account?

Answer 8

Based on its internal investigation, the institution should make an independent determination as to hether to close the account in issue. Some of the factors that the institution should consider are as follows:
• The legal basis for closing an account,
• The institution’s stated policies and procedures for closing an account,
• How serious is the underlying conduct. If the conduct is serious and rises to the level where the account would ordinarily be closed, then the institution should consider closing the account, or
• As stated above, if law enforcement requests the institution to keep the account open, the institution should request that the investigator or prosecutor make that request in writing on roper government agency letterhead with the appropriate
authorized signature.

Question 9

FILING AN STR

If an institution decides to file an STR, what should they do as soon as possible?

Answer 9

Notify the investigators or prosecutors.

Question 10

THE IMPORTANCE OF GATHERING AND PRODUCING DOCUMENTS
What type of documents would a financial institution have that could assist a financial investigator in tracking money movements?

Answer 10

A financial investigator’s main objective is to track the movement of money, whether through a bank, broker-dealer, money services business or casino. For example, banks maintain signature cards, which are collected at the opening of an account, account statements, deposit tickets, checks and withdrawal items and credit and debit memorandums.
Banks also keep records on loans, cashier’s checks, certified checks, traveler’s checks and money orders. They exchange currency, cash third-party checks, and conduct wire transfers, as do most money services businesses. Banks also keep safe-deposit boxes and issue credit cards.

Question 11

INTERVIEWING EMPLOYEES

Why is it important to interview knowledgeable employees as soon as practical?

Answer 11

When performing an internal investigation, it is important to secure and review all relevant documentation and to interview all knowledgeable employees. It is important to interview these employees as soon as practicable so that their memories are the freshest and so that they can direct management or counsel to relevant documents and people on a timely basis.

Question 12

DISSEMINATION OF A WRITTEN REPORT BY COUNSEL
What steps should the institution take to ensure a written report on the internal investigation retains the attorney-client privilege?

Answer 12

If counsel for the institution prepares a written report of an investigation, the institution should take steps to not inadvertently waive the attorney-client privilege by distributing the report to persons who should not receive it. Every page of the report should contain a statement that it is confidential and is subject to the attorney-client privilege and work-product privilege.
Copies of the report should be numbered, and a list of persons who are given copies to read should be maintained. After a set period of time, all copies should be returned. Persons obtaining the report should be instructed not to make notes on their copies. All copies should be maintained in a file separate from regular institution files in a further effort to maintain the highest level of protection.

Question 13

MUTUAL LEGAL ASSISTANCE TREATIES

What are the steps commonly taken to obtain mutual legal assistance?

Answer 13

1. The central authority of the requesting country sends a “commission rogatoire” (letter rogatory, or letter of request) to the central authority of the other country. The letter includes the information sought, the nature of the request, the criminal charges in the requesting country and the legal provision under which the request is made,
2. The central authority that receives the request sends it to a local financial investigator to find out if the information is available,
3. An investigator from the requesting country then visits the country where the information is sought, and accompanies the local investigator during visits or when statements are taken,
4. The investigator asks the central authority for permission to remove the evidence to the requesting country,
5. The central authority sends the evidence to the requesting central authority, thereby satisfying the request for mutual legal assistance, and 6. Local witnesses may need to attend court hearings in the requesting country.

Question 14

AML COOPERATION BETWEEN COUNTRIES

Identify the three gateways that assist with the AML cooperation between countries.

Answer 14

• Mutual Legal Assistance Treaties,
• Financial Intelligence Units, and
• The Supervisory Channel.

Question 15

FATF RECOMMENDATIONS ON COOPERATION BETWEEN COUNTRIES
Recommendations 36-40 from FATF’s 40 Recommendations pertain specifically to the international aspects of money laundering and terrorist financing investigations. What are Recommendations 36-40?

Answer 15

Recommendations 36-40 deal with mutual legal assistance treaties, extradition, confiscation of assets and mechanisms to exchange information internationally.

Question 16

NEGOTIABLE INSTRUMENTS

What are bearer negotiable instruments?

Answer 16

Bearer negotiable instruments Include monetary instruments in bearer form such as: negotiable instruments (including checks, promissory notes and money orders) that are either in bearer form, are endorsed without restriction, are made out to a fictitious payee, or are otherwise in such form that title thereto passes upon delivery.

Question 17

MEMORANDUM OF UNDERSTANDING

What is a Memorandum of Understanding (MOU)?

Answer 17

An agreement between two parties establishing a set of principles that govern their relationship on a particular matter. An MOU is often used by countries to govern their sharing of assets in international asset-forfeiture cases or to set out their respective duties in anti-money laundering initiatives.
Financial Intelligence Units (FIUs), with the task of receiving and analyzing suspicious transaction reports on an ongoing basis and maintaining close links with police and customs authorities, share information among themselves informally in the context of investigations, usually on the basis of an MOU. The Egmont Group of FIUs has established a model for such MOUs. Unlike the Mutual Legal Assistance Treaty (see below), this gateway is ordinarily used not for obtaining evidence, but for obtaining intelligence that might lead to evidence.

Question 18

COMMISSION ROGATOIRE

What is a commission rogatoire?

Answer 18

Also known as letter rogatory, commission rogatoire is a written request for legal or judicial assistance sent by the central authority of one country to the central authority of another when seeking evidence from the foreign jurisdiction.
The letter typically specifies the nature of the request, the relevant criminal charges in the requesting country, the legal provision under which the request is made, and the information sought.

Question 19

EXTRATERRITORIAL REACH

What is a country’s extraterritorial reach?

Answer 19

The extension of one country’s policies and laws to the citizens and institutions of another. U.S. money laundering laws contain several provisions that extend its prohibitions and sanctions into other countries.
For example, the “extraterritorial jurisdiction” of the principal U.S. anti-money laundering law can apply to a non-U.S. citizen if the “conduct” occurs “in part” in the U.S. (Title 18, USC Sec. 1956(f)).

Question 20

FINANCIAL INTELLIGENCE UNIT
Describe a Financial Intelligence
Unit (FIU).

Answer 20

A central governmental office that obtains information from financial reports, processes it and then discloses it to an appropriate government authority in support of a national anti-money laundering effort.
The activities performed by an FIU include receiving, analyzing and disseminating information and, sometimes, investigating violations and prosecuting individuals indicated in the disclosures.

Question 21

FRONT COMPANY

Describe a Financial Intelligence Unit (FIU).

Answer 21

A business that commingles illicit funds with revenue generated from the sale of legitimate products or services. Criminals use front companies to launder illicit money by giving the funds the appearance of legitimate origin. Organized crime has used pizza parlors to mask proceeds from heroin trafficking.
Front companies may have access to substantial illicit funds, allowing them to subsidize front company products and services at levels well below market rates or even below manufacturing costs. Front companies have a competitive advantage over legitimate firms that must borrow from financial markets, making it difficult for legitimate businesses to compete with front companies.

Question 22

INTERNATIONAL BUSINESS COMPANY

What is an International Business Company (IBC)?

Answer 22

A variety of offshore corporate structures, alternately called “exempt companies,” which are dedicated to business use outside the incorporating jurisdiction, rapid formation, secrecy, broad powers, low cost, low to zero taxation, and minimal filing рreporting requirements.

Question 23

KNOW YOUR CUSTOMER

Describe Know Your Customer (KYC).

Answer 23

Know Your Customer (KYC) refers to anti-money laundering policies and procedures used to determine the true identity of a customer and the type of activity that is “normal and expected,” and to detect activity that is “unusual” for a particular customer. Many experts believe that a sound KYC program is one of the best tools in an effective anti-money laundering program.

Question 24

MUTUAL LEGAL ASSISTANCE TREATY

What is a Mutual Legal Assistance Treaty (MLAT)?

Answer 24

An agreement among countries allowing for mutual assistance in legal proceedings and access to documents and witnesses and other legal and judicial resources in the respective countries, in private and public sectors, for use in official investigations and prosecutions.

Question 25

PHYSICAL CROSS-BORDER TRANSPORTATION OF CURRENCY

Define physical cross-border transportation of currency.

Answer 25

The physical cross-border transportation of currency is defined as any in-bound or out-bound transportation of currency or bearer negotiable instruments from one country to another. The term includes:

(1) physical transportation by a natural person, or in that person’s accompanying luggage or vehicle;
(2) shipment of currency through cargo containers; and
(3) the mailing of currency or bearer negotiable instruments.

Question 26

RED FLAG

Define a red flag.

Answer 26

A warning signal that should bring attention to a potentially suspicious situation, transaction or activity

Question 27

REMITTANCE SERVICES

What are remittance services?

Answer 27

Remittance services are also referred to as giro houses or casas de cambio. Remittance services are businesses that receive cash or other funds that they transfer through the banking system to another account. The account is held by an associated company in a foreign jurisdiction where the money is made available to the ultimate recipient.

Question 28

PONZI SCHEME

Describe a Ponzi Scheme.

Answer 28

A money laundering system named after Charles Ponzi, an Italian immigrant who spent 10 years in jail in the U.S. for a scheme that defrauded 40,000 people out of $15,000,000. Ponzi’s name became synonymous with the use of new investors’ money to pay off prior investors. Ponzi schemes involve fake, non-existent investment schemes in which the investors are tricked into investing on the promise of unusually attractive returns.
The operator of the scheme can keep the operation going by paying off early investors with the money from new investors until the scheme collapses under its own weight and/or the promoter vanishes with the remaining money. The scheme recently engaged in by Berх entice investors into participating in Ponzi schemes.

Question 29

SAFE HARBOR

What is a safe harbor for reporting suspicious activity?

Answer 29

Safe harbor is defined as legal protection for financial institutions, their directors, officers and employees from criminal and civil liability for breach of any restriction on disclosing information imposed by contract or by any legislative, regulatory or administrative prohibition, if they report their suspicions in good faith to the Financial Investigation Unit (FIU), even if they did not know precisely what the underlying criminal activity was, and regardless of whether illegal activity actually occurred.

Question 30

SMURFING

Define smurfing.

Answer 30

A commonly used money laundering method, smurfing involves the use of multiple individuals and/or multiple transactions for making cash deposits, buying monetary instruments or bank drafts in amounts under the reporting threshold.

Question 31

TAX HAVEN

Describe a tax haven.

Answer 31

Countries that offer special tax incentives or tax avoidance to foreign investors and depositors.

Question 32

TIPPING OFF

What is tipping off?

Answer 32

The improper or illegal act of notifying a suspect that he or she is the subject of a Suspicious Transaction Report or is otherwise being investigated or pursued by the authorities.

Question 33

TRUSTEE

Describe a trustee.

Answer 33

A trustee may be a paid professional or company or unpaid person that holds the assets in a trust fund separate from the trustee’s own assets. The trustee invests and disposes of the assets in accordance with the settlor’s trust deed, taking into consideration any letter of wishes.

Question 34

HAWALA

What is hawala?

Answer 34

A funds exchange system in Indian and Chinese civilizations used to facilitate the secure and convenient cross-border movement of funds. Hawala was born centuries before Western financial systems. Merchant traders wishing to send funds to their homelands would deposit them with a hawala broker or hawaladar who normally owned a trading business. For a small fee, the banker would arrange for the funds to be available for withdrawal from another banker, normally also a trader, in another country.
The two bankers would settle accounts through the normal process of trade. Today, the technique works much the same, with businesspersons in various parts of the world using their corporate accounts to move money internationally for third parties. Deposits and withdrawals are made through hawaladars, rather than traditional financial institutions. The practice is vulnerable to terrorist financing and money laundering—funds do not actually cross borders, and transactions tend to be confidential, as records are not stringently kept.
In Pakistan, the system is called hundi. See
Alternative Remittance System.

Question 35

WILLFUL BLINDNESS

Describe willful blindness.

Answer 35

A legal principle that operates in money laundering cases in the U.S. and is defined by courts as the “deliberate avoidance of knowledge of the facts” or “purposeful indifference.” Courts have held that willful blindness is the equivalent of actual knowledge of the illegal source of funds or of the intentions of a customer in a money laundering transaction.

Question 36

BASEL COMMITTEE
According to the Basel Committee on Banking Supervision’s paper entitled “Compliance and the compliance function in banks,” what are the responsibilities of the board of directors for compliance?

Answer 36

According to the Basel Committee on Banking Supervision’s paper entitled “Compliance and the compliance function in banks,” the bank’s board of directors is responsible for overseeing the management of the bank’s compliance risk. The board should approve the bank’s compliance policy, including a formal document establishing a permanent and effective compliance function. At least once a year, the board or a committee of the board should assess the extent to which the bank is managing its compliance risk effectively.

Question 37

BASEL COMMITTEE
According to the Basel Committee on Banking Supervision’s paper entitled “Customer Due Diligence for Banks,” how are sound KYC procedures relevant to the safety and soundness of banks?

Answer 37

• They help to protect banks’ reputation and the integrity of banking systems by reducing the likelihood of banks becoming a vehicle for or a victim of financial crime and suffering consequential reputational damage, and
• They constitute an essential part of sound risk management (e.g. by providing the basis for identifying, limiting and controlling risk exposures in assets and liabilities, including assets under management).