#15 Money Laundering
Customer Due Diligence
Effective customer due diligence (CDD) sets forth policies and procedures that may be used to evaluate the risk of certain customer relationships.
Money Laundering Schemes
Knowledge of common schemes identified by financial institutions during their SAR investigations helps other institutions identify potential suspicious activity and money laundering schemes. Findings in FinCEN's 2008 report "Suspected Money Laundering in the Residential Real Estate Industry" showed that a sampling of 151 SAR narratives fell into six categories:
U.S. Treasury
The BSA grants authority to the U.S. Treasury to require covered financial institutions (e.g., banks, savings associations and credit unions) and nonbank financial institutions (e.g., money services businesses, mortgage lenders, brokers/dealers in securities and insurance companies) to establish anti-money laundering programs, file reports and retain records.
Bank Secrecy Act
The Bank Secrecy Act (the BSA), formally referred to as the Currency and Foreign Transactions Reporting Act of 1970, was designed to prevent financial institutions in the United States from being used to launder money.
OFAC
The Office of Foreign Assets and Control (OFAC) is an office under the U.S. Treasury Department responsible for administering and enforcing economic sanctions.
The Federal Banking Agencies
The federal banking agencies are responsible for helping to ensure compliance with the BSA by banks and other institutions, which the agencies monitor and regulate through supervision and audits.
Section 351 - Amendments Relating to Reporting of Suspicious Activities:
This section expands: -immunity from liability for reporting suspicious activities; and -the prohibition against notifying an individual who is the subject of an SAR of its filing.
A SAR must be filed with FinCEN no later than 30 days after the date of initial detection,
and a copy, as well as any supporting documentation, must be maintained for at least five years.
Suspicious Activity Report Under the BSA, a financial institution must file a Suspicious Activity Report (SAR) upon the detection of:
criminal violations that: involve insider abuse in any amount; total $5,000 or more when a suspect can be identified; or total $25,000 or more regardless of a potential suspect.
Other reported or suspected illicit activities
it was noted that another of the deposited large checks bore a memo line notation apparently referencing real estate in a city in a Middle Eastern country under Office of Foreign Assets Control sanctions. The customer also sent a wire transfer from the account to an individual located in another country in the same region.
Penalties Covered financial institutions: A financial institution may:
lose its institution charter; be fined up to $1 million; and/or be the subject of a cease-and-desist order covering all of its operations.
Information Sharing The BSA and the USA PATRIOT Act require that covered financial institutions share information with federal law enforcement agencies as well as
other financial institutions. This is coordinated through FinCEN.
Integration
the process of combining criminal proceeds with legal funds to provide legitimate ownership.
Placement
the process of introducing unlawful proceeds into the financial system (e.g., loan balances quickly reduced by multiple cash payments under reporting thresholds).
Layering
the process of separating the criminal proceeds from their criminal origins using financial transactions in one or more accounts (e.g., negotiable instruments used to purchase other negotiable instruments; the deposit of cash followed by a transfer of funds in almost the same amount to other accounts).
Customer Identification Program
under the BSA, all covered financial institutions must implement a Customer Identification Program (CIP) to help prevent and detect suspicious activity.
BSA Requirements,
under the BSA, financial institutions are required to establish and maintain procedures designed to ensure their compliance with the law. Federal regulations outline such requirements. Each institution must develop a written anti-money laundering compliance program, which must be approved by the institution's board of directors.
Structuring
(e.g., making cash deposits or withdrawals at dollar values of $10,000 or less, making them at multiple teller windows on a single banking day, or making them at multiple branch locations or by multiple individuals into a single account on a single day)
Transactions conducted or attempted that total $5,000 or more, when the bank knows, suspects or has reason to suspect that the transaction:
- may involve money laundering or other criminal activity; is designed to evade the provisions of the BSA; has no business purpose or apparent lawful purpose; or is not typical for the customer.
BSA requires that covered financial institutions have in place the following CDD policies and procedures:
-Adequate high-risk procedures based on the institution's risk profile -CDD expectations and responsibilities -Adequate CIP and suspicious activity monitoring systems -Procedures for evaluating insufficient information -Accuracy and maintenance procedures
Red Flags may include: 1
-a customer who provides insufficient or suspicious information. -efforts to avoid reporting or recordkeeping requirements. -funds transfers: -in large or odd amounts; or -to or from a financial secrecy haven or a high-risk geographic location. 1
Section 319(b)- Bank Records Related to Anti-Money Laundering Programs:
-authorizes the Attorney General or the Secretary of the Treasury to issue a summons or subpoena to any foreign bank that maintains a correspondent account in the United States for records related to such accounts; and -requires the maintenance of records identifying a legal agent for correspondent accounts.
Among those businesses not eligible for a Phase II exemption from the filing requirements are:
-automobile or equipment dealerships; -lawyers, accountants and doctors; -investment services; -real estate brokers; and -title insurance and real estate closing agencies.
The purpose of the USA PATRIOT Act, as it relates to covered financial institutions, is to: 1a
-better prevent, detect and prosecute money -laundering and terrorist financing. enhance: -law enforcement investigatory tools; and -the requirements for, and impose special scrutiny on, high-risk customers, products and geographic locations that may be susceptible to criminal abuse. 1a
Phase II exemptions, such as:
-certain nonlisted businesses; and -payroll customers (i.e., customers that have maintained transaction accounts at the exempting institution for at least two months and that frequently withdraw more than $10,000 cash to pay their employees).
For an entity:
-certified Articles of Incorporation; -a government-issued business license; -a partnership agreement; or -a trust instrument.
Provisions of the BSA also require a financial institution to (continued):
-cooperate with money laundering or suspicious activity investigations and any FinCEN requests for information related to such investigations. -implement a customer identification program (CIP)
Other CIP Requirements In addition to identity verification, a financial institution must have procedures in place to:
-cross-check customer identities with government lists for known or suspected terrorists or terrorist organizations. -notify customers of information requests to verify their identities. -obtain financial institution references
Nondocumentary Verification When acceptable documents are NOT AVAILABLE, the CIP must instruct institution employees on how to verify customer identities through:
-customer contact. -third-party reporting agencies or public databases. -financial institution references. -financial statements.
Phase I exemptions, such as:
-domestic banks; -federal, state or local government agencies; -United States governmental authorities; and entities, other than banks, whose common stocks are listed on the New York Stock Exchange or American -Stock Exchange or have been designated as NASDAQ National Market Securities listed on the NASDAQ Stock Market.
Red flags for an employee who:
-exhibits a lavish lifestyle not supported by his salary; -fails to follow established policies and procedures; or -is reluctant to take a vacation.
Covered financial institution employees: An individual employee in violation of the BSA (including those who willfully "look the other way") may:
-face employment termination; -be barred from the financial services industry; and/or -be subject to up to 10 years in prison and/or fines in an amount up to $500,000.
Additional information cont
-financial institution references. -the proximity of the customer's street address, employer or business location to the institution. -the frequency of international transactions. -forecasted activity volume. -explanations for account activity changes.
A nonlisted business is a commercial enterprise with domestic operations that:
-has maintained a transaction account at the exempting institution for at least two months; -frequently engages in currency transactions with the exempting institution in excess of $10,000; and -is incorporated or organized under the laws of the United States or a state.
Money laundering may be done by:
-hiding the origin and ownership of the criminal funds; -maintaining control of the criminal proceeds during the laundering process; -disguising and/or altering the form of the criminal funds (e.g., converting cash to loan disbursements); and -"cleaning" the criminal funds so that they can be used for legitimate purposes or used in other criminal activities.
Purpose of the PATRIOT ACT cont. 2b
-impose requirements on all members of the financial services industry to report suspected money laundering. -strengthen measures to prevent the use of the U.S. financial system for personal gain by corrupt foreign officials and facilitate repatriation of stolen assets to the citizens of countries to whom such assets belong. 2b
Minimum requirements for the BSA program include:
-internal controls and metrics to ensure compliance. -independent auditing of compliance. -the designation of individuals responsible for managing compliance. -staff training for compliance.
With such a program, a covered financial institution:
-must verify customer identities and maintain verification records. (All verification documentation and information must be maintained for five years after the record was made.) -must cross-check customer identities with government lists for known or suspected terrorists or terrorist organizations. -must distribute CIP notices to customers. -may rely on verifications made by third-party financial institutions that meet CIP requirements.
Purpose and Applicability - The goals of the BSA include:
-preventing and detecting money laundering and the financing of criminal activity. -documenting large currency transactions. -improving reporting and aiding in the investigation of financial crimes.
These policies and procedures increase the ability of a financial institution to:
-protect itself against high-risk transactions; and -prevent and detect money laundering and terrorist financing.
A correspondent account, as defined by the USA PATRIOT Act, is an account established to:
-receive deposits from, or make payments on behalf of, a foreign financial institution; or -handle other financial transactions related to such an institution. A payable-through account is a checking account, generally marketed to foreign banks, that allows such banks to offer their customers access to the U.S. banking system.
Red Flags cont 2
-repetitive, unexplained or unusual transfer activities. -activity inconsistent with the customer's business. -unusual or unexplained lending activity, such as: a loan secured by pledged assets held by a third party unrelated to the borrower; a loan made for, or paid on behalf of, a third party with no reasonable explanation; or use of a certificate of deposit, purchased using an unknown source of funds, to secure a loan. 2
Required reports include:
-the Currency Transaction Report (CTR, IRS form 4789). -the Report of International Transportation of Currency or Monetary Instruments (MIR, IRS form 4790). -the Report of Foreign Bank and Financial Accounts (FBAR, IRS form TD F 90-22.1).
To ensure that suspicious activity is identified, an effective monitoring and reporting system must be in place. Components of such a system include:
-the identification of unusual activity. -the ability of employees to be aware of and to identify unusual or suspicious activity. -the use of law enforcement requests to alert the financial institution to suspicious activity (e.g., subpoenas; National Security Letters, which are written investigative demands). -transaction monitoring through the review of transaction reports, patterns and suspicious activity. -automated account monitoring software. -the reporting of suspicious activity, even if it is not identified with an underlying crime.
Covered financial institutions not only must continually monitor and evaluate all customers, but also must obtain additional information for customers designated as high risk. Additional information that may be required may relate to:
-the purpose of the account. -the source of the customer's wealth. -the account's beneficiaries. -the customer's occupation and/or type of business. -financial statements.
unusual or suspicious transactions such as:
-transactions involving foreign currency exchanges followed by funds transfers to higher-risk locations; -transactions involving the movement of funds to or from higher-risk locations where there appears to be no logical business reason for the person to be dealing with those locations; or -banks from higher-risk locations opening accounts.
(CIP) program includes procedures for:
-verifying customer identities; -maintaining verification records; -cross-checking customer identities with government lists for known or suspected terrorists or terrorist organizations; -distributing CIP notices to customers; and -working with third-party financial institutions to meet CIP requirements.
FinCEN
A bureau within the U.S. Treasury Department, FinCEN is the delegated administrator of the BSA. As such, it is charged with: -issuing guidance and regulations; -enforcing the BSA; and -coordinating communication and investigations with law enforcement agencies and financial institutions.
The BSA applies to financial institutions.
A financial institution is each agent, agency, branch or office within the United States of any person doing business, whether or not on a regular basis or as an organized business concern
Tax evasion
For Example A bank reported a series of transactions occurring within a one-month period in which the same property was bought and sold among related individuals. As a result of this flipping of the property, the bank granted a loan refinance of more than $600,000 to an individual who did not hold title to the property at the time the loan closed. The bank indicated in the SAR narrative that it was not able to definitively determine the motive for these transactions but surmised that they may have been conducted to promote money laundering or tax evasion.
Money laundering
For Example A bank reported that during a three-month period, a customer received nearly $800,000 in large wire transfers to his account from an escrow company. The customer then purchased three large cashier's checks payable to the same escrow company. It has been FinCEN's experience that such activity may be part of a layering scheme.
Fraud
For Example A mortgage lender reported that one of its customers was named in media reports. The customer had pled guilty to wire fraud and money laundering. He admitted that he obtained $6.4 million in mortgage loans using false appraisals.
5. Identity theft
For Example A mortgage lender reported that it received a change of address on a home equity line of credit account and later determined that the actual account holder's identity had been assumed by another individual. Nearly $260,000 was paid out against the home equity line before the fraud was discovered. The funds were paid by check to several individuals.
Red Flags
Red flags are suspicious activities that indicate possible illegal or unscrupulous activity.
Relevant Sections of the USA PATRIOT Act Section 311 - Special Measures for Jurisdictions, Financial Institutions or International Transactions of Primary Money Laundering Concern:
Section 311 enhances requirements for correspondent accounts. This includes requiring verification and information collection similar to that for domestic customers, as well as establishing guidelines for the opening or maintenance of U.S. correspondent or payable-through accounts (also known as "pass-through" or "pass-by" accounts) for foreign banking institutions.
Section 312 - Special Due Diligence for Correspondent Accounts and Private Banking Accounts:
Section 312 amends the BSA by requiring enhanced due diligence by U.S. financial institutions that maintain correspondent accounts for foreign financial institutions or private banking accounts of non-U.S. persons.
Section 314 - Cooperative Efforts to Deter Money Laundering:
Section 314 requires information sharing from financial institutions and regulators to law enforcement when formally requested through FinCEN and establishes requirements for institutions that participate in voluntary sharing.
Section 325- Concentration Accounts at Financial Institutions:
Section 325- Concentration Accounts at Financial Institutions: Section 325 permits the Secretary of the Treasury to issue regulations regarding concentration accounts. This includes ensuring that such accounts are not used to disguise the identity of the customer who is the owner of the funds moved through the account.
Section 326 - Verification of Identification:
Section 326 establishes requirements for verifying customer identities at the time an account is opened.
Section 352- Anti-Money Laundering Programs:
Section 352 requires financial institutions to establish anti-money laundering programs.
Enforcement of Anti-Money Laundering Laws Government Agencies
Several U.S. government agencies work together to prevent and detect money laundering and enforce anti-money laundering laws and regulations.
Section 313 - Prohibition on U.S. Correspondent Accounts with Foreign Shell Banks:
To prevent foreign shell banks from having access to the U.S. financial system, Section 313: -prohibits banks and broker-dealers from maintaining correspondent accounts for any foreign bank that does not have a physical presence in any country; and -requires financial institutions to ensure their correspondent accounts are not indirectly used to provide correspondent services to such banks.
Required Reporting Currency Transaction Report
Under the BSA, a financial institution must report to FinCEN single or structured currency transactions that exceed $10,000 using a Currency Transaction Report (CTR). Currency transactions include "any deposit, withdrawal, exchange or other payment or transfer" that involves currency.
The USA PATRIOT Act of 2001
Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism
Penalties Violations of the BSA may result in penalties for individuals, financial institutions and employees of financial institutions.
Violations include the following: Individuals: An individual may be sentenced to as much as 20 years in prison and ordered to pay up to $500,000 in fines. Personal property, loan collateral, bank accounts or any other assets or involved property may be seized.
A CTR must be filed within 15 days following the day on which the reportable transaction occurred (25 days if filed electronically),
a copy must be retained by the institution for at least five years. Certain types of customers may be exempted from currency transaction reporting
Within 14 days after receiving an information request,
a covered institution must conduct a one-time search of its records to identify any current or past accounts or transactions for the specified individual or entity.
Red flags for identifying possible terrorist financing activity include:
activity inconsistent with a customer's business funds transfer activities such as: -transfers that are ordered in amounts designed to avoid triggering identification or reporting requirements; -transfers that do not identify the originator or person on whose behalf the transaction is occurring; or -the use of personal, business or nonprofit accounts to funnel money to a small number of foreign beneficiaries.
Additional consequences may be imposed by other government organizations as a result of noncompliance,
as these types of crimes typically involve violations of numerous laws, including the BSA.
Documentary Verification
for an individual customer, unexpired government-issued identification that establishes the nationality or residence of the individual (e.g., a driver's license or passport).
Terrorist financing
is a crime in which the threat of violence is used to intimidate a particular population to do, or to abstain from doing, a specific act. Financial infrastructure is essential to terrorist operations. Because terrorist groups must be able to access their funds easily and keep those funds fluid to obtain necessary materials and manage logistics, money laundering is critical to their operations.
A concentration account (also known as a "special-use," "suspense" or "collection" account)
is an internal account established to facilitate the processing and settlement of multiple or individual customer transactions within the bank, usually on the same day.
Money Laundering
is the process by which a criminal seeks to conceal the illegal origin of certain funds so that he may enjoy his ill-gotten gains. In effect, he is filtering the illegal gains, or "dirty" money, through a series of financial transactions in an effort to "clean" the funds so that they appear to be proceeds from legal activities.
The BSA was amended by the passage of the USA PATRIOT Act of 2001,
it is enforced by the Financial Crimes Enforcement Network (FinCEN), a section of the U.S. Treasury Department.
Record large wire transfers that exceed $3,000, regardless of whether it is the initiating, intermediary or receiving institution. When requested, institutions must provide these records to FinCEN.
monitor foreign account activities. Financial institutions are prohibited from establishing, maintaining, administering or managing a correspondent account in the United States for, or on behalf of, a foreign shell bank (i.e., a foreign bank without a physical presence in any country). Covered institutions must also ensure that the accounts they maintain for foreign banks are not being used by that foreign bank to indirectly serve any foreign shell bank.
Covered financial institutions may voluntarily share information with other institutions to aid in identifying and reporting suspected terrorist or money laundering activities,
participating institutions must notify FinCEN of their voluntary sharing.
To disguise illegal activities and gains, money launderers may use techniques such as:
placement, layering, integration
In requiring such institutions to work with government agencies to prevent and detect money laundering,
provisions of the BSA require recordkeeping and the reporting of specific transactions that have a higher risk of being used to launder money, evade taxes and aid in other criminal activities.
Provisions of the BSA also require a financial institution to:
report to FinCEN on a CTR any large currency transaction that exceeds $10,000. Such a transaction may be a single transaction or a structured currency transaction (i.e., multiple transactions made by or on behalf of the same person designed to evade reporting requirements).
When a federal law enforcement agency seeks specific information from a particular financial institution, the request is submitted through FinCEN, which then
submits the request to the named financial institution. The request details the information needed.
Record specific, large negotiable instrument purchases. Financial institutions must record single or structured cash purchases of negotiable instruments between $3,000 and $10,000. (Purchases that exceed $10,000 would require a CTR.),
these records must be provided to FinCEN upon request, report suspicious activity and transactions to FinCEN using a Suspicious Activity Report (SAR).
The BSA and other privacy laws require that SARs be kept confidential and shared only with other law enforcement agencies. Also, federal law provides civil liability protection to persons filing SARs, regardless of whether such reports are filed pursuant to SAR instructions or are filed voluntarily,
this means that financial institutions and their employees involved in SAR reporting are protected from civil lawsuits.