chapter 2

indicators of money laundering using electronic transfers of funds

- funds transfer in secrecy havens, - large incoming funds received on behalf of a foreign client received on behalf of a foreign client, - many small incoming transfer of funds that are received and almost immediately wired to another account, - funds activity that is unexplained or repetitive, - payments or receipts that are received that have no apparent link to legitimate contracts, goods, or services - funds transfers that are sent or received from the same person to or from different accounts

three stages of money laundering

1) placement 2) layering 3) integration

why is private banking so vulnerable to money laundering?

1. commission based 2. intense commission 3. confidentiality associated 4. close relationship between clients and relationship managers 5. culture of discretion 6. relationship managers advocating for their clients

4 reasons to establish or control a shell company for money laundering

1. convert cash proceeds of crime to alternative assets 2. makes illegal money seem like it comes from a legal source 3. can be customized; flexible and can be tailored to the launderers needs 4. effective in concealing criminal ownerships; can use nominees to be the owners

two reasons correspondent banking is vulnerable to money laundering

1. correspondent banking relationships create a situation in which a financial institution carries out financial transactions on behalf of customers of another institution, meaning that the correspondent bank provides services for individuals or entities for which it has neither verified the identities nor obtained any first-hand knowledge. 2. the amount of money that flows through correspondent accounts can pose a significant threat to financial institutions as they process large volumes of transactions for their customers' customer, making it more difficult to identify the suspect transactions as the financial institution generally does not have the info on the actual parties conducting the transaction to know whether they are unusual.

what can be constituted as suspicious activity for dealers in precious metals

1. if a person delivers a precious metal for refining and has the authority to sell it but want payment to be made to a third party. 2. precious metal pool accounts

why are internet casinos vulnerable to money laundering

1. virtual casinos can be profitable for governments, which sells license for the sites and may share in the operators' profits, incentivizing them to insert inadequate controls. 2. transactions are not cash based but credit card based and the offshore location of many internet gambling sites makes locating and proescuting relevent parties difficult if not impossible.

when was the FATF formed?

1989

what recommendation is used for charities (guidelines on best practices for charities and combatting the abuse of non profit organizations)

8

money remitters and money exchange houses in money laundering

??? pg 75/48

independent introducing broker

An introducing broker (IB) is a futures broker who has a direct relationship with a client, but delegates the work of the floor operation and trade execution to another futures merchant. The merchant firm is usually a close partner of the IB.

electronic transfer of funds

Any transfer of funds that is initiated by electronic means, such as an automated clearinghouse (ACH) computer, automated teller machine (ATM), electronic terminal, mobile phone, telephone or magnetic tape.

What are the risks to privatization efforts as a result of money laundering?

Criminal organizations can outbid legitimate purchasers for formerly state-owned enterprises. In the past, criminals have used purchases of marinas, resorts, casinos, and other businesses to hide their illicit proceeds and to further their criminal activities.

is money laundering only exercised through cash transactions?

FATF has shown that money laundering can be achieved through virtually every medium, financial institution, or business

FATF

Financial Action Task Force; a Paris-based multinational or inter-governmental body formed in 1989 by the Group of 7 industrialized nations to foster international action against money laundering

what is the reputational risk to the country because of money laundering?

It diminishes legitimate global opportunities because foreign financial institutions may decide to limit their transactions with institutions located in money laundering havens because the necessary extra scrutiny will make them more expensive. Legitimate business in these areas may suffer as a result.

what economic effect does money laundering/terrorism financing have on financial institutions?

It undermines the legitimate private sector: - Money launderers often hide behind businesses that appear legitimate and partake in legitimate business, meaning they can get company products and services at incredibly competitive prices, making it hard for legitimate businesses to compete. - The companies provide a vehicle for tax evasion, depriving the country of revenue. - Finally, front companies and other investments in legitimate companies, money laundering proceeds can be used to control whole industries or sectors of the economy of certain countries, allowing for the misallocation of resources from artificial distortions in asset and commodity prices.

how does money laundering and terrorist finance affect financial institutions?

It weakens financial institutions, negatively affecting the stability of individual banks or other financial institutions, such as securities firms and insurance companies. Financial institutions that rely on the proceeds of crime have additional challenges in adequately managing their assets, liabilities, and operations.

describe the second step of money laundering. give examples.

LAYERING: the separation of illicit proceeds from their source by layers of financial transactions intended to conceal the origin of the proceeds. - sending wire transfers of funds from one account to another, sometimes to or from other institutions or jurisdictions. - converting deposited cash into monetary instruments like traveler's checks - reselling high value goods and prepaid access/stored valued products - investing in real estate and legitimate businesses - placing money in investments such as stocks, bonds or life insurance - shell companies or other institutions meant to obscure ownership

What are the social costs to a county associated with money laundering?

Money laundering is integral to maintaining the profitability of crime. It enables drug traffickers, smugglers, and other criminals to expand their operations.

describe the first step of money laundering. give examples.

PLACEMENT: the physical disposal of cash or other assets derived from criminal activity. During this phase, illegal money is introduced into the financial system. - breaking up large amounts of cash into smaller sums and depositing them directly into a bank account. - transporting cash across borders to deposit in foreign financial institutions. -buying high value gods that can then be resold for payment by check or bank transfer.

The United Nations 2000 Convention Against Transnational Organized Crime is also known as the _______

Palermo Conference

where is the FATF based?

Paris

USA Patriot Act

The United and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism

shell bank

a bank that has no physical presence in any country and is not a regulated affiliate of any legitimate banks with regulatory oversight

shell company

a company that at the time of incorporation has no signficant assets or operations

shelf company

a corporation that has had no activity. it has been created and put on the "shelf" and later sold to someone who would prefer to have a pre-registered company than a new one

loan back scheme

a criminal provides an associate with a specific amount o fillegitimate money. the associate then provides a loan or mortgage back to the trafficker for the same amount with all the necessary loan and/or mortgage documentation. this creates an illusion that the trafficker's funds are legitiamte. the scheme is reinforced through legitmately scheduled payments made on the loan by the traffickers

cuckoo smurfing

a form of money laundering linked to alternative remittance systems, in which criminal funds are transferred through the accounts of unwitting persons who are expecting genuine funds or payments from overseas. those who hold the bank accounts are not aware of the fact that illicit money is being deposited into their accounts. It also requires an insider within a financial institution and is a four step process. 1. have a customer who needs to transfer money from one place to another, generally in a different country 2. the insider who provides the details to their associate in the other country who has the illegal money 3. the associate takes that amount and deposits his cash into the system and then the alternate remitter then transfers to legitimate money to the associate rather than the intended payee

whole or permanent life

a life insurance that has an investment feature which can increase the death benefit as well as the cash value

reverse flip

a money laundering might find a cooperative property seller who agrees to a reported purchase price well below the actual value of the property and then accepts the difference under the table. this way, the launder can purchase a 2 million dollar property for 1 million, secretly passing the balance to the cooperative seller. after holding the property for a time, the launderer sells it for its true value of 2 million.

black market peso exchange

a process by which money in the us (or other countries) derived from illegal activity is purchased by Columbian or other country peso brokers and deposited in US bank accounts that the brokers have established.

omnibus accounts

accounts held by one future commissions merchants for another. transactions of multiple account holders are combined and their identities are unknown to the holding fcm.

precious metal pool accounts

accounts maintained by a small number of large precious metal companies and have worldwide scope. they have gold and they give it to the precious metal company who then gives them gold credits in this account. they can use that account to get money back, request the gold they gave back, or send those to another person

guaranteed introducing broker

an introducing broker dealer with an exclusive written agreement with a futures commisssion merchant that obligates the fcm to assume responsibility for the introducing broker's performance

closed system cards: identity

anonymous

semi closed system cards: identity

anonymous

non captive agent

are those who offer the insurance companies products but are not employed by the company

bearer shares

bearer stock certificates

bmpe

black market peso exchange

commodity pools

combines funds from various members and uses them to trade in futures and options contracts

why is gambling so good for money laundering

continue to be associated with money laundering because they provide a ready made excuse for recently acquired wealth with no apparent legitimate source

options and options contracts

contracts that create the right but not the obligation to buy or sell a set amount of something such as a share or commodity at a set price after a set expiration date

futures and futures contracts

contracts to buy or sell a quantity of a commodity at a future date at a set price

willful blindness

courts define it as the deliberate avoidance of knowledge of the facts or purposeful indifference

structuring

designing transaction to evade triggering or reporting record keeping transaction

where does money laundering and terrorism finance have particularly significant economic and social consequences?

developing countries are particularly vulnerable. they tend to have less stable financial systems and a lack of banking regulations and effective law enforcement

credit unions in money laundering

don't pose a huge threat. the ones that offer more financial services pose a slightly bigger threat but it's most suspicious characteristic is that it deals with large cash transactions

e-purses

electronic purses

captive agents

employees of insurance companies who are subject to the full control of the insurance company

commodity trading advisers

engage in the business of advising others either directly or indirectly as to the value or advisability of trading future contracts or commodity options or issue analysis or reports concerning trading futures or commodity options

private banking

extremely lucrative industry. imp in money laundering. provides highly personalized and confidential products and services to clients at fees that are often based on a percentage; typically operate semi autonomously from the other part of the bank; caters to wealthy customer

the difference between money laundering and terrorist financing

funds destined for money laundering are derived from criminal activities but terrorist financing may also include funds from perfectly legitimate sources. concealment of funds for their purpose is more necessary rather than their source.

fcm

futures commission merchants

trusts

generally defined as a legal relationship that is set up by a person (the settlor) where assets have been placed under the control of another person (the trustee) for the benefit of one or more peresons (the beneficiaries) or for a specified purpose

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

semi-closed system cards: description

gift card that can be used by a selected group of merchants or service provider

closed system cards: description

gift cards

commodities

goods such as foods, grains, and metals that are usually traded in large amounts in commodities exchanges. usually through futures contracts

why is gold valuable to money launderers?

has high intrinsic value in a relatively compact form which is easy to transport; more readily accepted than precious forms; holds its volume regardless of shape; bought and sold easily and often anonymously

open system cards: monetary value stored on card?

held on card. all online.

concentration accounts

internal accounts established to facilitate the process and settlement of multiple or individual customer transactions within the bank usually on the same day. Special Use, Omnibus, Settlement Suspense, Sweep, Collection accounts.

IB-Cs

introducing broker-dealers in commodities. A firm or person that solicits and accepts commodity futures orders from customers but does not accept funds.

annuity

is an investment that provides a defined series of payments in the future in exchange for an upfront sum of money

what did the Palermo conference decide?

it defined money laundering as - the conversion or transfer of property, knowing it was derived from a criminal offense, for the purpose of concealing or disguising its illicit origin; -the concealment or disguising of the true nature, source, location, disposition, movement, right with respect to, or ownership of property knowing that it is derived from a criminal offense; -the acquisition, possession or sue of property, knowing at the time of its receipt that it was derived from a criminal offense or from participation in a crime

how can the securities sector be used to launder money?

it depends whether its from outside or inside the sector. if it's outside then the creation of legal entities may be used to conceal or obscure the source of these funds (layering). within the sector itself: embezzlement, insider trading, securities fraud, market manipulation

difficulty in dealing with laundering in the securities field

little currency is involved; its use in the money laundering process is generally after launderers have disposed of their cash through other methods

how does money laundering affect crime and corruption?

money laundering increases the profitability of criminal activity and attracts more criminals. Typically, these havens have: - limited number of predicate crimes for money laundering, - limited types of institutions and persons covered by money laundering laws and regulations, - and little to no enforcement of the laws, weak penalties, or provisions that make it difficult to confiscate or freeze assets related to money laundering. Criminals may try to bribe government officials, lawyers, and employees of financial or non financial institutions

how does money laundering cause economic distortion and instability for a country?

money launders are more concerned in protecting their proceeds and hiding their illicit origins rather then generating profit from it. thus they "invest" their money in activities that are not necessarily economically beneficial to the country where the funds are located. Sometimes, low-quality investments are better than sound investments for hiding source of money. In some countries, entire industries, such as construction and hotels, have been financed not because of actual demand, but because of the short-term interests of money launderers.

IOSCO

montreal-based global association of governmental bodies that regulate the securities and futures market; International Organization of Securities Commissions

semi-open cards: identity?

not anonymous

credit cards in money laundering

not used in placement. mostly used in the layering and integration phases of money laundering.

double invoicing

offshore corp orders goods from its subsidiary in another country and then the payment is sent in full to the bank account of the subsidiary. both companies are owned by the criminal enterprise and the "payment" for goods is actually a repatriation of illicit money previously spirited out of the country.

commodity pool operator

operator or solicitor of funds of a commodity pool which combines for members of trade futures or options contracts

false invoicing scheme

over billing or under billing for the reputed ggoods or services is a common money laundering technique

what stage of money laundering generally occurs in casinos

placement

PEPs

politically exposed persons

PICs

private investment companies; corps established by individual bank customers and other offshore jurisdictions to hold assets; essentially shell companies for tax and trust reasons

loan technique for money laundering with criminally controlled companies

proceeds of crime can be laundered by lending money between criminally controlled companies. in one case, drug guy had 500k in bank account in the name of a shell company. these funds were "lent" to restaurants in which the drug trafficker had invested. this seemingly legitimate use of funds assisted in making it appear that the funds were being properly integrated into the economy. the 500k was repaid with interest to avoid suspicion.

gatekeepers

professionals who have the ability to either block or facilitate the entry of illegitimate money into the financial system such as notaries, accountants, auditors, lawyers, etc.

Section 313

prohibits US fin institutions from opening accounts with foreign shell banks; requires them to take reasonable steps to ensure that a correspondent account of a foreign bank is not indirectly using a shell bank

section 319

requires US fin institutions to maintain records and names and contact info of owners of foreign banks for which they maintain correspondent accounts; must keep name and address of agent in the US designated to accept legal process of the US government

Section 312

risk based due diligence for foreign institutions to mitigate money laundering risks; must take reasonable steps to identify the owners of the bank

semi-open cards: description

same thing as open system but can't be used at ATMS

forms of ownership of shell companies

shares to natural or legal person or in registered or bearer form; created for a single purpose or to hold a single asset; others can be established as multipurpose

closed system cards: reloadable?

some are, some arent

semi-open cards monetary value storage?

stored on the card; not online. they have a cash value.

microstructuring

structuring in smaller amounts

how does the concept of "knowledge" factor into the definition of money laundering?

the intent and knowledge required to prove the offense of money laundering includes the concept that such a mental state may be inferred from "objective factual circumstances"

pricing of exports vs imports in money laundering

the most popular fraudulent pricing scheme is to under value exports instead of over pricing imports. the gov watches imports closeley bcause of the renues generated by import duties but doesnt really care about exports

legal risk

the potential for lawsuits, adverse judgments, unenforceable contracts, fines and penalties generating losses, increased expenses for an organization, or even the closure of the organization. EX: legitimate clients can lose money or assets and sue the organization for reimbursement.

operational risk

the potential for loss resulting from inadequate internal processes, personnel or systems or from external events. Such losses occur when institutions incur reduced or terminated inter-bank or correspondent banking services or an increased cost for these services.

concentration risk

the potential for loss resulting from too much credit or loan exposure to one borrower or group of borrowers.

reputational risk

the potential that adverse publicity regarding an organization's business practices and associations, whether accurate or not, will cause a loss of public confidence in the integrity of the organization. EX: - Depositors may be more willing to incur large penalties rather than leaving their funds in a questionable bank, resulting in unanticipated withdrawals. - Depositors/investors may feel insecure over their money because of a banking scandal. - The loss of high quality borrowers reduces profitable loans and increases the risk of the overall loan portfolio.

money laundering

the process of taking criminal proceeds and disguising their illegal source in anticipation of ultimately using the criminal proceeds to perform legal and illegal activities

correspondent banking

the provision of banking services by one bank to another bank

payable through accounts

the respondent bank's own customers are permitted to conduct their own transaction through the respondent bank's correspondent account without needing to clear the transaction through the respondent bank. they have a virtually unlimited number of sub account holders. Sometimes the sub account holders are not identified to the correspondent bank. The foreign banks customers have the ability to to directly control funds at the correspondent bank.

open system cards: reloadable?

they are typically reloadable.

down-trading

trading in expensive vehicles for cheaper models and then being paid the difference in checks

wash trading

transactions involve the entry of matching buys and sells in particular securities which create the illusion of trading

TCSP

trust and company service providers; participate in the creation or administration or management of corporate vehicles

open system cards: description

typically branded by american express or visa etc and connected to ATM networks, allowing the cards to be used for multiple purposes and at multiple points of sale with participating merchants

open system cards: identity?

typically not anonymous

semi closed system cards: reloadable?

typically not but some are

bearer checks

unconditional orders (negotiable instruments) that, when presented to a financial institution, must be paid out to the holder of the instrument rather than to a apyee specified on the order itself

closed system cards: monetary value storage?

value is kept in the card, not online

ownership of bearer shares

when bearer securities are transferred, because there is no registry of owners, the transfer takes place by physically handing over the bonds or share certificates

semi-open cards: reloadable?

yes reloadable

semi closed system cards: monetary value storage?

yes stored on the card, not online