AIBA Compliance Seminar

1. AIBACompliance Seminar Terrorist Financing June 13, 2013 Dennis M. Lormel President & CEO DML Associates, LLC

2. Introduction Current Events Facilitation Tools Countermeasures Case study: Lebanese Canadian Bank Conclusion Terrorist Financing

3. Introduction

4. Lessons Learned From Boston Bombing • We, as a society, continue to be vulnerable • Simplicity of bombings likely to inspire similar attacks • Jihadism continues to attract new adherents • Critical importance of public / private relationships • Vulnerabilities of terrorists • Finance • Communications • Social media • Videos • Chaos vs. communication and coordination • Media • Good and bad • The blame game • Easier to criticize than to distinguish • Assess before judging • Systemic v. one off problem • Lost statistic • 204 arrests of would be jihadist attackers since 9/11

5. Importance of Financial Information • As criminals and our financial system continue to become more sophisticated, financial transactional information becomes more relevant as a critically important investigative mechanism • Finance and communication are biggest vulnerabilities to bad guys • An investigator’s ability to collect and use financial information can be devastating to terrorists and criminals • Without money, terrorist and criminal organizations cannot adequately function • Financial investigations should be integral part of investigative strategies • Knowing what financial information is relevant, where to collect it from, and how to use it are facts all investigators can benefit from

6. Law Enforcement / Financial Institution FININT Comparison • Law enforcement • Conduct financially focused investigations to disrupt and / or prevent the flow of funds to terrorists • Conducted to support the broader counterterrorism mission • Collector and producer of actionable financial intelligence • Direct beneficiary of Bank Secrecy Act (BSA) data (SARs, CTRs, etc.) • Perspective  the “why” • Personnel (agents, intelligence analysts, forensic accountants) • Financial institution anti-money laundering (AML) compliance • Required by BSA to maintain robust AML program to safeguard system from money laundering and terrorist financing • Compliance (cost center) v. business (revenue center) mentality or culture • Repository of financial intelligence • Originator of BSA reports (SARs, CTRs, etc) • Perspective  the “how” • Personnel (compliance officers, analysts, investigators)

7. Disruption of Funding Flows • Back to origin / forward to strike teams • Funding to networks / organizations from point of origin • Ranging from hundreds to millions of dollars • Funding to operations • Ranging from thousands to hundreds of thousands of dollars • Funding to individuals, cells, or groups • Ranging from hundreds to thousands of dollars KSM Mohamed Atta

8. The Players…Looking Back • Individuals or groups engaged in fraud • Gangs • Drug dealers, organizations or cartels • Ethnic organized crime groups • Terrorists or terrorist groups

9. The Players…Going Forward Who are we dealing with? Individuals or groups engaged in fraud Domestic criminal organizations Transnational criminal organizations Terrorists or terrorist groups State sponsors Commonalities Use of facilitation tools Convergence Diversification Must have ready access to money

10. Threat Finance • Threat finance is an umbrella term used to encompass various types of financing that support activities harmful to U.S. National Security • Driven by Department of Defense • No singular accepted definition • Prosecution v. regulatory concern • Encompasses: • Terrorist financing • Transnational criminal organizations • Drug cartels • Proliferation and weapons of mass destruction

11. Criminal organizations and terrorist groups have increasingly found common ground of mutual benefit Each have learned how to benefit from conflict Each have benefited from convergence and diversification Convergence: the intersection where criminals and terrorists work together to support each other with the goal to maximize the benefit to their individual causes Mutual and individual benefit Diversification: as organizations mature in operations and sophistication, they diversify into different activities and thereby grow and strengthen their operations Rely on legitimate and illegitimate fronts Intersection of Crime & Conflict

12. Current Terrorism Threat in the United States

13. Current Developments • Growing recognition of importance of financial intelligence • (Financial) intelligence drives operations • Challenges of international terrorism more complex and diversified • Ongoing Arab spring • Changing balance of power • Terrorist groups taking advantage of unrest • Evolving international terrorist landscape • Al-Qaeda core greatly diminished (drone missile attacks) • Continued emergence of al-Qaeda affiliate groups • Potential volatility of Hizballah if Iran attacked • Growing nexus between transnational criminal and terrorist organizations • Convergence • Diversification • Growing emphasis on “threat finance” driven by DoD

14. Current Terrorist Threat in the U.S. • Homegrown violent extremists • …homegrown extremists are increasingly more savvy, harder to detect, and able to connect with other extremists overseas • Current threat • Al-Qaeda • Groups affiliated with al-Qaeda • Al-Qaeda in the Arabian Peninsula • al Shabaab • Lashkar-e-Taiba (LeT) (Mumbai style attack) • Iran and Iranian proxies • Hizballah • Hamas • The internet has expanded as a platform for spreading extremist propaganda, a tool for online recruiting, and a medium for social networking with like-minded violent extremists, all of which may be contributing to the pronounced state of radicalization inside the U.S. • Adaptability/flexibility/anonymity/vulnerability

15. Jihadist Movement • Jihadist movement divided into three basic elements • Al-Qaeda core organization • Regional jihadist franchises • Grassroots operatives • Two distinct types of operatives • Professionals • Amateurs • Al-Qaeda and regional groups • For the most part, highly trained professional terrorists • Grassroots operatives • Amateurs • Continuum ranging from untrained lone wolves to one who received varying levels of training • Never joined al-Qaeda or other formal militant groups

16. Represent increasing threat to U.S. security and interests, both domestically and internationally Organizations that carry out criminal operations across international borders Their interest in “bottom line” makes them more dangerous Located in countries with weak rule of law Present greater threat to regional security Willingness to work and provide material support to terrorists Mexican drug cartels Violent street gangs International criminal organizations Transnational Criminal Organizations Los Zetas MS 13 D-Company (Pakistan)

17. Transnational Criminal Organization Activities • Drug trafficking, one of the most common criminal activities • Most profitable • Increases levels of corruption • Leads to regional violence and instability in many regions • Causes health and social issues • Arms trafficking • Human smuggling and trafficking • Product counterfeiting • Trafficking in contraband • Sea Piracy • Money laundering • Hawala • Trade based • Black Market Peso Exchange (BMPE)

18. Threats Posed by Illicit Networks • Violence and intimidation • Threat to national security • Criminal activity • Threat to economy • Corruption • Acts as an enabler (like a disease) • Cyber security • Increasingly significant threat

19. Facilitation Tools

20. Facilitation Tools • Wire transfer • Electronic funds transfer (fast channel for moving money between countries and accounts) • Correspondent banking • Financial institution that provides services on behalf of another (relies on correspondent to conduct due diligence) • Illegal money remitters • Not licensed and / or registered (most significant vulnerability) • Shell companies • Operates without active business operations or significant assets • Electronic mechanisms • Finance and communications • What is the common thread or vulnerability between the above facilitation tools?

21. Beneficial Ownership • The term “beneficial ownership” when used to refer to beneficial ownership of an account in AML context is conventionally understood as equating to ultimate control over funds in such account, whether through ownership or other means. “Control” in this sense is to be distinguished from mere signature authority or legal title. • The ability to conceal beneficial ownership is extremely attractive to bad guys • The ability to conceal beneficial ownership is a detriment to law enforcement

22. Bulk Cash Smuggling • Evading of currency reporting requirements • Concealing more than $10,000 in currency or monetary instruments • Into or out of the United States • Criminal organizations smuggle bulk cash to keep their proceeds and related activities away from the scrutiny of financial regulators and law enforcement • Bulk cash smuggling is extremely harmful • Removes billions of dollars from commerce • Diminishes integrity of financial system • Fuels criminal enterprises

23. Trade Based Money Laundering • The use of international trade to move money, undetected, from one country to another is one of the oldest techniques used to circumvent government scrutiny • The international trade system is clearly subject to a wide range of risks and vulnerabilities exploited by criminal organizations and terrorists • Trade based money laundering represents an important channel of criminal activity • Growth of world trade enhances vulnerability • As standards applied to other money laundering techniques become increasingly effective, the use of trade based money laundering will increase

24. Free Trade Zones (FTZs) • Two fold benefits of FTZs • Legitimate • Boosts economic opportunity • Illegitimate • Can result in reduction in finance and trade controls and enforcement • Creates opportunity for money laundering and the financing of terror • Created within jurisdictions to promote trade, support new business formation and encourage foreign direct investment • Have proliferated in recent years • Approx. 3,000 FTZs in 135 countries • Incentives offered to support development of exports, foreign direct investment and local employment • Exemptions from duty & taxes • Simplified administrative procedures • Duty free importation of raw materials, machinery, parts and equipment

25. Countermeasures

26. Understanding Geographic Risk • Geographic • Global • Regional • Country specific • Local • Cultural vulnerabilities • Bribery/corruption • Accepted business practice • Regulatory and law enforcement capacity and will • Free trade zones • Level of criminal and/or terrorist threat • Business activity • Reasonableness • Red flags

27. Address customer risk Recognition Mitigation Adaptability factor Living process Assess reasonableness of business activity Consider enhanced due diligence KYC: Due Diligence • Know your customer program • Sound process • Verification • Documentation • Identify beneficial ownership • FATF recommendations • FinCEN guidance • Both stress importance of identification and consequence of risk

28. Deconstructing Ownership & Risk Customer Due Diligence Process Identify Beneficial Ownership Adequate Conduct Ongoing Due Diligence Vigilance Assess Customer Risk Consider Enhanced Due Diligence Assess Reasonableness of Business Activity Consider Enhanced Due Diligence Documentation Verification Accurate Timely

29. Lebanese Canadian Bank Case Study: Anatomy of a Global Narco-Terrorist Organization

30. Anatomy of a Global Narco-Terrorist Operation • Case study demonstrating how criminal, drug trafficking and terrorist organizations collaborated in a multi-billion dollar worldwide narco-terrorist drug trafficking and money laundering enterprise • Mutually beneficial operation involving: • Joumma drug trafficking/criminal organization • Hizballah • Los Zetas Mexican drug cartel • Colombian and Venezuelan drug suppliers • Exploitation of financial institutions • Exploitation of facilitation tools and financial mechanisms • Exploitation of systemic vulnerabilities • Exploitation of Lebanon’s financial system

31. Factors Facilitating DTO Operations • Lebanese Canadian Bank • Management complicity and support for Hizballah • Ineffective due diligence • Ineffective internal controls • Money exchange houses / hawalas • Bulk cash shipment / smuggling • Cross border wire transfers • Correspondent banking • Payable through accounts • Shell companies / front companies • Corruption • Structuring • Money laundering • Trade based money laundering • Black market peso exchange

32. Drug & Laundering Flow Involving U.S. Europe United States Lebanon Middle East West Africa Colombia

33. Drug & Laundering Flow Involving Asia Asia Europe United States Lebanon Middle East West Africa Colombia

34. Joumaa – Los Zetas Trafficking Flow United States Joumaa collects 8% to 14% Los Zetas Mexico City Venezuela Colombia

35. Conclusion Case Study • This case demonstrates how criminals and terrorists can benefit financially by collaborating together • Drug trafficking remains the most prolific funding mechanism for criminals and terrorists • Money laundering essential to successful operations • The exploitation of systemic vulnerabilities facilitated operations

36. Conclusion

37. Conclusion • Growing nexus between criminal organizations and terrorist groups • Convergence • Diversification • Organizational vulnerabilities of bad guys • Communications • Finance • Partnerships and perspectives • Law enforcement  “why” • Financial institutions  “how” • Importance of financial intelligence • Be proactive and unpredictable • Exploit vulnerabilities of bad guys

38. Dennis M. Lormel President & CEO DML Associates, LLC 19309 Winmeade Drive Lansdowne, VA 20176 571-333-0300 dlormel@dmlassociatesllc.com www.dmlassociatesllc.com