Anti-Money Laundering

1. Anti-Money Laundering Presentation for theCentral Bank of LibyaRoyce Walker Financial Services Volunteer CorpsVolunteerMarch 23 - 25, 2009

2. Anti-Money Laundering • Introduction • Topics of Discussion: • Definition of Money Laundering • How Money Laundering is Accomplished • Legal Considerations and Reporting Requirements • Red Flags • Information Resources

3. Anti-Money Laundering What is Money Laundering? Money laundering is the criminal practice of processing ill-gotten gains, or “dirty” money, through a series of transactions; in this way the funds are “cleaned” so that they appear to be proceeds from legal activities. Money laundering generally does not involve currency at every stage of the laundering process. [Quoted From: FFIEC BSA/AML Examination Manual, 2007, page 7]

4. Anti-Money Laundering How is Money Laundering Accomplished? A complex process involving three independent steps that can occur simultaneously: • Placement. • Layering. • Integration.

5. Anti-Money Laundering Placement Placement is: • First, most vulnerable stage of the process. • Goal to introduce unlawful proceeds into financial system without attracting attention of financial institutions or law enforcement. • Techniques include structuring currency deposits in amounts to evade reporting requirements; commingling currency deposits of legal and illegal enterprises.

6. Anti-Money Laundering Examples of Placement Perpetrator: • Divides large amounts of currency into less-conspicuous smaller sums and deposits them directly into a bank account. • Deposits refund check from a canceled vacation package or insurance policy. • Buys monetary instruments (e.g., cashier’s checks or money orders); instruments are collected and deposited into accounts at another bank.

7. Anti-Money Laundering Layering Layering is: • Second stage of the process. • Involves moving funds around the financial system in a manner that creates a confusing and complicated paper trail.

8. Anti-Money Laundering Examples of Layering Perpetrator: • Exchanges monetary instruments for larger or smaller amounts. • Wires or transfers funds to and through numerous accounts in one or more financial institutions.

9. Anti-Money Laundering Integration Integration is: • Ultimate goal of the process. • After funds are in the financial system and insulated through the layering stage, integration creates appearance of legality through additional transactions. • Additional transactions further shield the perpetrator by providing a plausible explanation for the source of the funds.

10. Anti-Money Laundering Examples of Integration Perpetrator buys and resells: • Real estate. • Investment securities. • Foreign trusts. • Other assets (automobiles, jewelry, etc.).

11. Anti-Money Laundering

12. Anti-Money Laundering First Money Laundering Case Study The Way the Scheme Was Conducted A perpetrator made many airline trips from his country of residence to a foreign country. On every trip the perpetrator traveled with currency strapped to his body, and even more currency stuffed in his luggage.

13. Anti-Money Laundering First Money Laundering Case Study (continued) Placement On arriving at his hotel in the foreign country, the perpetrator divided the currency into small stacks that would fit inside a briefcase. Then, one briefcase at a time the perpetrator deposited the currency in a bank account in a bank in the foreign country (Bank A).

14. Anti-Money Laundering First Money Laundering Case Study (continued) Layering After depositing all of the currency brought on the trip into the bank account in Bank A, the funds in the account were wire transferred to a bank account in a bank (Bank B) in a different foreign country. From the account in Bank B, the perpetrator transferred the funds to a bank account in a bank (Bank C) in yet another foreign country.

15. Anti-Money Laundering First Money Laundering Case Study (continued) Integration Eventually, the perpetrator gradually transferred the funds from Bank C into his company’s bank account in a bank (Bank D) in his country of residence. In Bank D, the funds were mixed with deposits from legitimate sales.

16. Anti-Money Laundering First Money Laundering Case Study (continued) What was the Outcome? When the funds transferred into Bank D were mixed with deposits from legitimate sales, the result was a boost in the company’s stock price creating more than $40 million in equity, which the perpetrator cashed out and left his country of residence. The perpetrator was eventually caught, tried, convicted, and served 8 years in prison.

17. Anti-Money Laundering Practical Advice Follow the money!!! Transactions involved in the money laundering process most often leave a trail that can be followed through forensic analysis of records. Following the money trail will not be easy work!!!

18. Anti-Money Laundering Legal Considerations Enact laws to prohibit money laundering. Empower law enforcement and regulatory agencies with the ability to enforce the laws. Implement criminal and civil penalties for the perpetrators of money laundering schemes.

19. Anti-Money Laundering United States Laws 1970 – Currency and Foreign Transactions Reporting Act (Bank Secrecy Act) (BSA) • Helped identify source, volume, and movement of currency and other monetary instruments in or out of the U.S. or deposited in financial institutions. • Established recordkeeping and reporting requirements for persons, banks, and other financial institutions; identified persons conducting transactions to maintain paper trail.

20. Anti-Money Laundering United States Laws (continued) 1986 – Money Laundering Control Act: • Augmented BSA’s effectiveness, applying equally to banks of all charters. • Imposed criminal liability on person or financial institution that knowingly assists in laundering of money, or structures transactions to avoid reporting them. • Directed banks to implement procedures reasonably designed to ensure and monitor compliance with BSA reporting and recordkeeping requirements.

21. Anti-Money Laundering United States Laws (continued) 1992 – Annunzio–Wylie Anti-Money Laundering Act: • Strengthened sanctions for BSA violations and role of U.S. Treasury in combating money laundering. 1994 – Money Laundering Suppression Act: • Further addressed U.S. Treasury’s role in combating money laundering.

22. Anti-Money Laundering United States Laws (continued) 1996 – A Suspicious Activity Report (SAR): • Developed for use by all banking organizations in U.S. • Required banking organization to file a SAR when it detects a known or suspected criminal violation of federal law, a suspicious transaction possibly related to money laundering activity, or a violation of BSA.

23. Anti-Money Laundering United States Laws (continued) 2001 – Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act: • Criminalized financing of terrorism; augmented BSA framework to strengthen customer identification procedures. • Prohibited financial institutions from engaging in business with foreign shell banks (bank/financial institutions with no presence in any country).

24. Anti-Money Laundering United States Laws (continued) 2001 – Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (continued): • Required financial institutions to have due diligence procedures. • Improved information sharing between financial institutions and the U.S. government. • Expanded Anti-Money Laundering (AML) requirements to all financial institutions.

25. Anti-Money Laundering United States Laws (continued) 2001 – Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (continued): • Increased civil and criminal penalties. • Gave Treasury authority to impose “special measures.” • Facilitated records access; required quick response to requests for information. • Required banking agencies to consider a bank’s AML record when reviewing mergers, acquisitions, etc.

26. Anti-Money Laundering United States Government Agencies Involved in Anti-Money Laundering United States Treasury Financial Crimes Enforcement Network – A bureau of the U.S. Treasury Federal Banking Agencies – Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, National Credit Union Administration, Office of the Comptroller of the Currency, and Office of Thrift Supervision Office of Foreign Assets Control – A bureau of the U.S. Treasury

27. Anti-Money Laundering International Agencies Involved in Anti-Money Laundering Bank of International Settlements - Basel Committee on Banking Supervision Financial Action Task Force on Money Laundering (FATF) International Monetary Fund (IMF) The World Bank

28. Anti-Money Laundering Criminal and Civil Penalties Criminal and civil penalties for money laundering should be severe, should apply to individuals and financial institutions, and include: • Prison time. • Monetary fines. • Forfeiture of property involved in activity. • Loss of bank (financial institution) charter. • Bank employees barred from future bank employment.

29. Anti-Money Laundering Compliance Requirements Banks and financial institutions must: • Obtain sufficient authentication information from customers (know your customer). • File certain reports or currency transactions or suspicious activities.

30. Anti-Money Laundering Compliance Requirements (continued) Customer Identification Program (CIP): • Required for prevention of money laundering. • Requires customers to prove who they are. • Banks must keep records of identifying information, verify customer names against government maintained lists.

31. Anti-Money Laundering Compliance Requirements (continued) Currency Transaction Reports (CTR) – Reports filed by financial institutions for each deposit, withdrawal, exchange of currency, or other payment or transfer, by, through, or to the financial institution which involves a transaction in currency of more than $10,000.

32. Anti-Money Laundering Compliance Requirements (continued) Currency Transaction Reporting exemptions – Financial institutions may exempt from CTR reporting requirements: • large reportable currency transactions made by other financial institutions, governmental departments, agencies, those acting with governmental authority, or public companies and their subsidiaries that are listed on one of three major exchanges referenced in FinCEN's regulations.

33. Anti-Money Laundering Compliance Requirements (continued) CTR exemptions: (continued) • reportable transactions in currency by eligible non-listed businesses or payroll customers.

34. Anti-Money Laundering Compliance Requirements (continued) Suspicious Activity Reports (SAR) – These reports are filed when known or suspected that: • Funds come from illegal activity or disguise funds from illegal activity. • Transaction structured to evade BSA requirements or appears to serve no known business or apparent lawful purpose. • Business entity being used to facilitate criminal activity.

35. Anti-Money Laundering Compliance Requirements (continued) Other Information: • Large currency aggregation reports. • Monetary instrument records. • Funds transfer records. • Nonsufficient funds (NSF) reports. • Large balance fluctuation reports. • Account relationship reports.

36. Anti-Money Laundering Compliance Requirements (continued) The complexity of data analysis, recordkeeping and reporting requires the use of information technology resources (computer hardware, software) and adequately trained personnel. There are companies that offer products designed to assist banks and financial institutions with compliance requirements (ACL, Bankers Online, EACompliance, FINRA, SAS).

37. Anti-Money Laundering Second Money Laundering Case Study How it Began An individual involved in an illegal business activity acquired large amounts of cash in small denominations. Uncomfortable with so much cash on hand, the perpetrator deposited the excess cash in a bank account he had opened in his own name at Bank A. He used this account to pay for personal expenses for him and his family.

38. Anti-Money Laundering Second Money Laundering Case Study (continued) How it Grew As he acquired more money, he opened another bank account at Bank B using a different first name and someone else’s Personal Identity Number. He provided an address at a vacant lot in his community. He used this account to pay for the expenses of a family member.

39. Anti-Money Laundering Second Money Laundering Case Study (continued) How it Continued As the illegal business activity continued, the perpetrator wanted to improve communication with some of his business associates. He purchased communication devices by writing a check from his account at Bank A. At this time he also opened an account at Bank C using another name, Personal Identity Number, and address. He used this account to deposit cash received from his business and used it to pay for supplies for the business.

40. Anti-Money Laundering Second Money Laundering Case Study (continued) Lifestyle Change The perpetrator eventually bought himself an expensive automobile with the proceeds of his illegal business activity to allow him greater access to his business associates. He also began wearing more expensive clothing and jewelry items. He paid for the clothing from his account at Bank A, the vehicle from his account at Bank B, and the jewelry from his account at Bank C.

41. Anti-Money Laundering Second Money Laundering Case Study (continued) Moving the Money During the time the perpetrator operated the illegal business he moved funds in and out of his accounts at Banks A, B, and C by making a cash deposit at one bank, and then moving some or all of the deposit to one of the other banks. The perpetrator was eventually caught and arrested. He was also charged with money laundering!!!

42. Anti-Money Laundering Second Money Laundering Case (continued) What should have been done to detect this sooner? • Banks B and C should have confirmed customer name, Personal Identity Number, address for new accounts. • Banks A, B, and C should have reported large currency deposit transactions if they exceeded a certain amount, or if there were many deposits just under that amount. • Banks A, B, and C should have analyzed their data and reported suspicious activity, such as deposits made and then funds quickly transferred from account of deposit.

43. Anti-Money Laundering Suspicious Activity “Red Flags” “Red Flags” are things that may indicate suspicious activity. The presence of a “red flag” is not by itself evidence of criminal activity. Closer scrutiny should help to determine whether the activity is suspicious or one for which there does not appear to be a reasonable business or legal purpose. There are many potential “Red Flags,” some of which are included in the following slides.

44. Anti-Money Laundering Examples of “Red Flags” Customers Who Provide Insufficient or Suspicious Information • A customer uses unusual or suspicious identification documents that cannot be readily verified. Efforts to Avoid Reporting or Recordkeeping Requirement • A customer is reluctant to furnish identification when purchasing negotiable instruments in recordable amounts.

45. Anti-Money Laundering Examples of “Red Flags” (continued) Funds Transfers • Funds transfer activity is unexplained, repetitive, or shows unusual patterns. Automated Clearing House (ACH) Transactions • Multiple layers of Third Party Service Providers appear to be unnecessarily involved in transactions.

46. Anti-Money Laundering Examples of “Red Flags” (continued) Activity Inconsistent with the Customer’s Business • Large volume of cashier’s checks, money orders, or funds transfers deposited into, or purchased through, an account when nature of the accountholder’s business would not appear to justify such activity. Lending Activity • Loans secured by pledged assets held by third parties unrelated to the borrower.

47. Anti-Money Laundering Examples of “Red Flags” (continued) Changes in Bank-to-Bank Transactions • The size and frequency of currency deposits increase rapidly with no corresponding increase in non-currency deposits. Cross-Border Financial Institution Transactions242 • In-country bank increases sales or exchanges of large denomination bank notes to out-of-country bank(s)/financial institution(s).

48. Anti-Money Laundering Examples of “Red Flags” (continued) Trade Finance • Items shipped that are inconsistent with the nature of the customer’s business (e.g., a steel company that starts dealing in paper products, or an information technology company that starts dealing in bulk pharmaceuticals). Privately Owned Automated Teller Machines (ATMs) • ATM activity levels are high in comparison with other privately owned or bank-owned ATMs in comparable geographic and demographic locations.

49. Anti-Money Laundering Examples of “Red Flags” (continued) Insurance • A customer purchases a product that appears outside the customer’s normal range of financial wealth or estate planning needs. Shell Company Activity • Payments to or from the company have no stated purpose, do not reference goods or services, or identify only a contract or invoice number.

50. Anti-Money Laundering Examples of “Red Flags” (continued) Embassy and Foreign Consulate Accounts • Official embassy business is conducted through personal accounts. Employees • Employee exhibits a lavish lifestyle that cannot be supported by his or her salary.