CAMS Concepts & Vocabulary

Suspicious Transaction Report (STR)

A government form that includes a financial institution's account of a questionable transaction.

Enhanced Due Diligence Requirement (USA PATRIOT Act)

Additional identity standards and monitoring that must be applied to foreign private banking ($1MM+ in deposits) and correspondent accounts operating under: - An offshore banking license - A license issued by a foreign country designated as non-cooperative by an international organization - A license issued by a foreign country that has been designated by the U.S. as warranting special measures

Tax Information Exchange Agreements

Bilateral agreements among national governments that can yield evidence for money laundering and tax evasion prosecutions.

Beneficial Owner

The natural person who ultimately owns or controls an account through which a transaction is being conducted.

Extradition

The surrender by one country to another of an accused or convicted person under a bilateral agreement that specifies the terms of such exchanges, such as the persons subject to being exchanged and the crimes for which exchanges will be permitted.

Clearing Account

• An "omnibus" or "concentration account" • Held by a financial institution in its name • Used primarily for internal administrative or bank-to-bank transactions in which funds are transmitted and commingled without personally identifying the originators. • USA Patriot Act prohibits the use of such accounts for customer transactions.

Know Your Customer (KYC) Program

• Customer identification • Customer acceptance policy • Monitoring • Risk management

Risk Assessment

• Levels of Risk: Low to Prohibited • Types of Risk: Geographical, Customer, Products/Services

Money Laundering Reporting Officer (MLRO)

• Person responsible for overseeing a firm's anti-money laundering activities and program and for filing reports of suspicious transactions with the national FIU. • Key person in the implementation of anti-money laundering strategies and policies.

International Cooperation Methods

1. International ML Information Network 2. Mutual Legal Assistance Treaties 3. Financial Intelligence Units (MOUs) 4. Supervisory Channel

Financial Intelligence Unit

A central, national agency responsible for receiving (and, as permitted, requesting), analyzing and disseminating to the competent authorities, disclosures of financial information: • Concerning suspected proceeds of crime and potential financing of terrorism. • Required by national legislation or regulation, in order to combat money laundering and terrorism financing.

Financial Institution

According to the FATF's 40 Recommendations, a financial institution is any person or entity that conducts as a business one or more of the following activities or operations on behalf of customers: • Acceptance of deposits and other repayable funds from the public. • Lending. • Financial leasing. • The transfer of money or value. • Issuing and managing means of payment (e.g., credit and debit cards, checks, traveler's checks, money orders and bankers' drafts, electronic money). • Financial guarantees and commitments. • Trading in: - money market instruments (checks, bills, CDs, derivatives etc.); - foreign exchange; - exchange, interest rate and index instruments; - transferable securities, and - commodity futures trading. • Participation in securities issues and the provision of financial services related to such issues. • Individual and collective portfolio management. • Safekeeping and administration of cash or liquid securities on behalf of other persons. • Otherwise investing, administering or managing funds or money on behalf of other persons. • Underwriting and placement of life insurance and other investment-related insurance. • Money and currency changing.

Subpoena

Compulsory legal process issued by a court to compel the appearance of a witness at a judicial proceeding, sometimes requiring the witness to bring specified documents.

Cuckoo Smurfing

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.

Know Your Employee (KYE)

Policies and procedures for acquiring a better knowledge and understanding of the employees of an institution for the purpose of detecting conflicts of interests, money laundering, past criminal activity and suspicious activity: - Exaggerated qualifications - Frequent unresolved exceptions - Inconsistent lifestyle & salary - Avoids taking vacations - Frequently overrides controls - Improper use of company resources

Customer Due Diligence

Requires: • Full Identification (including beneficial owners) • Development of transaction and activity profiles • Risk assessment • Acceptance • Monitoring • Investigations • Documentation of findings When to require (FATF): • Establishing business relations • Carrying out occasional transactions • On suspicion of money laundering or terrorist financing • On doubts of previously obtained customer identification PEPs (FATF): • Obtain senior management approval for relationships • Reasonable measures to establish source of funds • Conduct enhanced ongoing monitoring

International Money Laundering Abatement and Anti-Terrorist Financing Act

The Act represents Title III of the USA Patriot Act of 2001, which contains most, but not all, of the provisions of that landmark law that deal directly with anti-money laundering matters.

Over The Counter (OTC)

Two distinct meanings in the money laundering context: 1. Bank Secrecy Act - deposits of cash made physically at a branch. 2. Securities industry - market for trading equities that are not listed on an organized stock exchange, or for trading securities such as corporate bonds, mortgage-backed or asset-backed securities, currency swaps, etc.

Predicate Crimes

• "Specified unlawful activities" whose proceeds, if involved in the subject transaction, can give rise to prosecution for money laundering. • Most anti-money laundering laws contain a wide definition or listing of such underlying crimes.

Search Warrant

• A grant of permission from a court for a law enforcement agency to search certain designated premises and to seize specific categories of items or documents. • The warrant is authorized based on information contained in an affidavit submitted by a law enforcement officer. • What to do: - Call counsel. - Understand scope. - Obtain a copy of the warrant. - Ask for a copy of the affidavit supporting the warrant. - Remain present while inventory of items is taken. - Keep track of the records taken by the agents. - Ask for a copy of law enforcement's inventory. - ACP: suggest court keeps for safety

Report on the Observance of Standards and Codes (ROSC)

• A report used by the IMF and the World Bank that summarizes the extent to which countries observe internationally recognized standards and codes for fiscal and monetary stability. • Examines monetary and financial policy transparency, fiscal transparency, banking supervision, securities, insurance, payments systems, corporate governance, accounting, auditing and insolvency and creditor rights. • ROSCs summarizing countries' observance of these standards are prepared and published at the request of the member country. • The results are used in consideration of IMF and World Bank loans and for the private sector (including rating agencies) for risk assessment.

Bust-Out

• A scheme in which the use or extension of credit is obtained and is increased fraudulently while the perpetrators avoid having to pay back the illegally obtained credit or goods. • Typically will operate a shell or front business that accepts credit purchases on stolen or fraudulently obtained credit cards for illegal or no goods. • Popular in creating large bankruptcy frauds in which business entities secure loans in excess of the actual value of the company or property and then disappear with the money, leaving the lender to take a substantial loss.

Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime

• Adopted by the Committee of Ministers of the Council of Europe in September 1990, which addressed all types of criminal offenses and thereby has greater impact than the Vienna Convention. • The offense of money laundering was extended to include money laundering associated with all serious offenses, not just drug trafficking. • In May 2005, a revised convention was adopted.

Wolfsberg Group

• Association of global financial institutions that aim to develop standards for KYC, AML, and CTF policies • Key Principles: - AML guidelines for international private banks (compliance program, due diligence, beneficial ownership, high risk individuals and countries, and independence) - Suppression of Terrorism Financing (global list & guideline coordination) - Guidelines on correspondent banking (Risk-based due diligence, no shell banks, and periodic review of client information) - Monitoring, Screening & Searching

Core Principles

• Basel Committee - Core Principles for Effective Banking Supervision • International Organization of Securities Commissions - Objectives and Principles for Securities Regulation • International Association of Insurance Supervisors - Insurance Supervisory Principles

Private Banking Risks

• Client Advocacy • Powerful Clients • Culture of Secrecy and Discretion • Secrecy Jurisdictions • Culture of lax AML controls • Corrupt Politically Exposed Persons (PEPs)

Black Market Peso Exchange (BMPE)

• Complex method of trade-based money laundering. • Originally driven by Colombia's restrictive policies on currency exchange. • Dealing with peso brokers that dealt in the black market or parallel financial market 1. Colombian drug traffickers receive Colombian pesos in Colombia in exchange for U.S. drug dollars in the U.S 2. Black market goods ready for export are paid for by the peso broker, using the purchased narcotics dollars, on behalf of the Colombian importer 3. Dollars are placed into the U.S. financial system by the peso broker, then "sold" by the brokers to businessmen in Colombia who need dollars to buy United States goods for export. • Found in Venezuela, Argentina, Brazil, and Paraguay. • Comparable systems in Dubai, China and Europe

Vienna Convention

• Convention in 1988 against the Illicit Trade in Narcotic Drugs and Psychotropic Substances. • Countries that become parties to the Vienna Convention commit to criminalizing drug trafficking and associated money laundering, and enacting measures for the confiscation of the proceeds of drug trafficking.

Risk Matrix

• Document or chart that allows financial institutions to assess the money laundering risk of a business or customer relationship. • A risk matrix sets out critical elements or parameters of risk, so that institutions can calculate whether a potential client presents a low, medium or high level of money laundering risk. • Later, the matrix allows the institution to make informed decisions on the frequency of transaction monitoring of particular accounts or customers.

Basel Committee on Banking Supervision (Basel Committee)

• Established by the G-10's central bank of governors in 1974 to promote sound supervisory standards worldwide. • Secretariat is appointed by the Bank for International Settlements in Basel, Switzerland. • Issued papers on: 1. customer due diligence for banks, 2. consolidated KYC risk management, 3. transparency in payment messages, 4. due diligence regarding cover payment messages related to cross-border wire transfers, and 5. sharing of financial records among jurisdictions in connection with the fight against terrorist financing.

Compliance Culture

• Establishing a strong compliance plan that is approved by the board of directors and is fully implemented • Insisting that it be kept informed of compliance efforts, audit reports and any compliance failures, with corrective measures instituted • Communicating compliance expectations to the institution personnel • Conditioning employment on regulatory compliance

FATF and FATF-Style Regional Bodies (FSRBs)

• FATF - 34 Member countries, EC, and GCC • Associate Members: FATF-Style Regional Bodies (access to policymaking) • Observers: Basel Committee, UN, etc. • Interdependent partners in global AML and CFT • No organizational hierarchy between the FATF and FSRBs • Common goal: collaborative approach to their activities, in particular the peer review process. • May issue regional recommendations, regional typologies

Investigation by Law Enforcement

• Follow the money • Identify the unlawful activity (predicate offense) • Document the underlying activity and transactions • Review databases (FIU databases, commercial databases) • Review public records (court records, corporate filings) • Review licensing and registration files • Analyze the financial transactions and activity of target. • Review STRs • In cross-border cases, seek international assistance

Basel CDD Paper

• Guidance on Customer Due Diligence (CDD) for banks issued by the Basel Committee in October 2001. • Includes sound KYC policies and procedures that are critical to: 1. protecting the safety and soundness of banks and 2. the integrity of banking systems. • In February 2003, the Basel Committee on Banking Supervision issued "General Guide to Account Opening and Customer Identification."

Suspicious Activity Reporting Process

• Identification & Evaluation • Documentation • Notification • Training

Customer Identification Program

• Identifying information • Recordkeeping requirements • Checking new accounts against government lists • Providing adequate notice about CI requirements • Policies for reliance on other financial institutions • When suspicious transaction reports should be filed • Conducting a risk analysis of customers • Opening new accounts for existing customers • Obtaining BOD approval • Conducting audit and training programs of CIP

UN Security Council Resolution 1267

• Imposed sanctions on Taliban-controlled Afghanistan for its support of Osama Bin Laden and the Al-Qaeda organization. • No longer exclusively targets Afghanistan - extends to any individual, group, undertaking or entity participating in planning or financing activities for Al-Qaeda or Taliban. • Member countries are obliged to adopt sanction implementation programs so that financial institutions can block the transactions, and freeze the assets of any person or entity on the list of UN designated terrorist entities.

Anti-Money Laundering Program

• In many jurisdictions, government regulations require financial institutions, including banks, securities dealers and money services businesses, to establish such programs. • At a minimum, the anti-money laundering program should include: 1. Written internal policies, procedures and controls; 2. A designated AML compliance officer; 3. On-going employee training; and 4. Independent review to test the program.

USA Patriot Act

• Included more than 50 amendments to the Bank Secrecy Act. • Title III of the Act, the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001, contains most, but not all, of its anti-money laundering-related provisions. - Section 311: Special Measures for money laundering risk - Section 312: CD/EDD for correspondent/private banking - Section 313: Shell bank prohibition - Section 319: Forfeiture & records of correspondent accounts

Consequences of Money Laundering

• Increased crime and corruption • Undermines legitimate sector • Weakening of financial institutions • Risks to Privatization Efforts • Economic distortion and instability • Loss of Tax Revenue • Reputation Risk for the Country

Egmont Group

• Informal network of FIUs for international money laundering and terrorist financing co-operation. • Secretariat established in 2007 in Toronto, Canada • Meets regularly to find ways to promote the development of FIUs and to share information and expertise • Principles include: - free information exchange on reciprocity - specific purpose only - information subject to strict controls & safeguards

Benami Account

• Nominee account. • Held by one person or entity on behalf of another • Associated with the hawala underground banking system of the Indian subcontinent.

Vital Service Providers (VSPs)

• People who help move the billions of dollars drug traffickers earn around the world. • Includes accountants, attorneys, broker-dealers, other financial institutions, communications and transportation providers, and people who build concealment traps—sophisticated hiding places for drugs and money in vehicles, boats, or houses.

Know Your Correspondent Bank (KYCB)

• Procedures employed in determining the beneficial owners of a respondent bank and the type of activity that is "normal and expected" for the bank. • The USA Patriot Act included statutory provisions that bear directly on the procedures U.S. financial institutions must follow in connection with foreign correspondent banks.

Gatekeepers

• Professionals such as lawyers, notaries, accountants, investment advisors, and trust and company service providers who assist in transactions involving the movement of money, and are deemed to have a particular role in identifying, preventing and reporting money laundering. • Some countries, such as the U.K. and the Cayman Islands, impose due diligence requirements on gatekeepers that are similar to those of financial institutions. • Two critical milestones in international gatekeeper regulation have been the European Union's revised anti-money laundering directive of 2001 and the FATF 40 Recommendations of 2012, both containing anti-money laundering provisions for these professionals.

Bank Secrecy Act (BSA) Compliance Program

• Program that U.S.-based financial institutions are required to establish • The program's components include at a minimum: 1. the development of internal policies, procedures and controls; 2. the designation of a compliance officer; 3. ongoing employee training; and 4. an independent audit function to test the program.

OFAC

• Prohibit transactions and require the blocking of assets of persons and organizations on OFAC list • All U.S. persons must comply with OFAC regulations

Correspondent Banking

• Provision of banking services by one bank (the "correspondent bank") to another bank (the "respondent bank"). • Large international banks typically act as correspondents for thousands of other banks around the world. • Respondent banks may be provided with a wide range of services, including cash management (e.g., interest-bearing accounts in a variety of currencies), international wire transfers of funds, check clearing services, payable-through accounts and foreign exchange services. • Initial Due Diligence Procedures (FATF): - Gather information on bank - Assess AML/CTF Program - Obtain Senior Management Approval

Certification

• Pursuant to USA Patriot Act • Written statement by a respondent bank signed by its duly authorized representative certifying that the bank does not do business with shell banks (Section 313) • Written representation provided by a U.S. federal agent stating that the matter for which he or she is seeking information is linked to money laundering or terrorist financing. (Section 314(a))

European Union Directive on Prevention of the Use of the Financial System for the Purpose of Money Laundering and Terrorist Financing

• Requires EU member states to amend national laws to prevent money laundering. • Confined to drug trafficking as defined in the Vienna Convention and credit and financial institutions, but member states were encouraged to cover other sectors. • Expanded in 2001 to include corporate service providers, casinos, lawyers and accountants. • In 2005, the previous two directives were replaced with Third EU Directive: 1. Defining "money laundering" and "terrorist financing" as separate crimes. 2. Extending CI and STR obligations to trusts and company service providers, life insurance intermediaries and dealers selling goods for cash payments above a certain amount. 3. Detailing a risk-based approach to customer due diligence. 4. Protecting employees who report suspicions of money laundering or terrorist financing. 5. Requiring comprehensive statistics regarding the use of and results obtained from suspicious transaction reports. 6. Requiring "beneficial owner" identification and verification on all accounts held by legal entities or persons.

UN Security Council Resolution 1373 (2001)

• Requires member nations to take a series of actions to combat terrorism. • Requires member nations to "afford one another the greatest measure of assistance for criminal investigations or criminal proceedings relating to the financing or support of terrorist acts.

Investigation Responses

• Respond quickly and completely. • Attempt to narrow any overly broad requests. • Cooperate with investigators and prosecutors. • Obtain counsel. • Have a centralized control in place. • Conduct internal investigation.

Closing an Account

• Should make an independent determination as to whether to close the account. Consider: - legal basis - stated policies and procedures - severity of underlying conduct • Request to keep the account open should be in writing.

Terrorist Financing

• The process by which terrorists fund their operations in order to perform terrorist acts. • Two primary sources of financing for terrorist activities: 1. financial support from countries, organizations or individuals. 2. a wide variety of revenue-generating activities, some illicit, including smuggling and credit card fraud.

Money Laundering

• The process of concealing or disguising the existence, source, movement, destination or illegal application of illicitly-derived property or funds to make them appear legitimate. • Three part system: 1. Placement of funds into a financial system, 2. Layering of transactions to disguise the source, ownership and location of the funds, and 3. Integration of the funds into society in the form of holdings that appear legitimate.

Collective Knowledge

• The sum of the knowledge held separately by a financial institution's directors, officers and employees regarding a certain issue, customer or account. • Can be used to suggest corporate responsibility for compliance and liability for non-compliance.

Payable Through Account

• Transaction account opened at a depository institution (correspondent) by a foreign financial institution (respondent) through which the foreign institution's customers engage, either directly or through sub-accounts, in banking activities (at correspondent) and transactions in the country where the account was opened. • Such accounts pose risks to the depository institutions that hold them because it can be difficult to conduct due diligence on foreign institution customers who are ultimately using the PTA accounts.

Alternative Remittance System (ARS)

• Underground banking or informal value transfer systems. • Often associated with ethnic groups from the Middle East, Africa or Asia. • Usually no physical movement of currency and a lack of formality with regard to verification and recordkeeping. • Money transfer takes place by coded information that is passed through chits, couriers, letters or faxes, followed by telephone confirmations. • Hawala (an Arabic word meaning "change" or "transform"), Hundi (a Hindi word meaning "collect"), Chiti banking (referring to the way the system operates), Chop Shop banking (China), and Poey Kuan (Thailand).

World Bank

• Vital source of financial and technical assistance to developing countries. • Made up of two unique development institutions owned by 184 member countries—the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). • Both organizations provide low-interest loans, interest-free credit, and grants to developing countries.

Account Opening, Customer Identification and Verification

• should have reliable customer identification and account opening procedures. • procedures should determine the true identity of customers. • identification standards should be tailored to the risk posed by particular customers and required under applicable law. • when appropriate, obtain information about the source of wealth, source of funds, and the customer's line of business.