MONEY LAUNDERING _ BSA & AML: ESSENTIALS, BSA/AML Complying with BSA, GLOSSARY BSA_AML_Money Laundering RED FLAGS, BSA/AML Complying with BSA
What is a legal entity customer?
1. Corporation 2. Limited Liability Co 3. Other entity created by the filling of a public document with a Secretary of State or similar office 4. General partnership or any similar entity formed under the laws of a foreign jurisdiction 5. Limited partnership 6. Business trust created by a filing with a state office or an other entity created in this manner
Exempt Customer
A business or entity that has been granted an automatic exemption by the financial institution from filing CTRs because he or she has legitimate business reasons for making frequent large cash deposits.
Shell Company Activity
A financial institution is unable to obtain sufficient information or information is unavailable to positively identify originators or beneficiaries of accounts or other banking activity (using the Internet, commercial database searches, or direct inquiries to a respondent institution). • Payments to or from the company have no stated purpose, do not reference goods or services, or identify only a contract or invoice number. • Goods or services, if identified, do not match the profile of the company provided by respondent financial institution or character of the financial activity; a company references remarkably dissimilar goods and services in related funds transfers; explanation given by foreign respondent institution is inconsistent with observed funds transfer activity. • Transacting businesses share the same address, provide only a registered agent's address, or have other address inconsistencies. • Unusually large number and variety of beneficiaries are receiving funds transfers from one company. • Frequent involvement of multiple jurisdictions or beneficiaries located in high-risk offshore financial centers. • A foreign correspondent institution exceeds the expected volume in its client profile for funds transfers, or an individual company exhibits a high volume of and pattern of funds transfers that is inconsistent with its normal business activity. • Multiple high-value payments or transfers between shell companies with no apparent legitimate business purpose. • Purpose of the shell company is unknown or unclear.
What is a straw man?
A person set up to serve as a cover for a questionable transaction.
Third-Party Service Provider (TPSP)
A professional organization engaged by a company to provide services for and in the name of the organization to their clients.
CIP Notice
A sign, document, or other form of communication that informs customers that a financial institution will request information verify customer identity.
Payroll Customer
An individual on behalf of a business entity that can make CTR-exempt withdrawals from an eligible account for payroll purposes only, provided he or she meets certain conditions
Controlling Individual
An individual who exercises control (ownership or signing authority) over an account.
Other Unusual or Suspicious Customer Activity
Customer rents multiple safe deposit boxes to store large amounts of currency, monetary instruments, or high-value assets awaiting conversion to currency, for placement into the banking system. Similarly, a customer establishes multiple safe custody accounts to park large amounts of securities awaiting sale and conversion into currency, monetary instruments, outgoing funds transfers, or a combination thereof, for placement into the banking system. • Unusual use of trust funds in business transactions or other financial activity • Customer uses a personal account for business purposes. • Customer has established multiple accounts in various corporate or individual names that lack sufficient business purpose for the account complexities or appear to be an effort to conceal the beneficial ownership from the bank. • Customer makes multiple and frequent currency deposits to various accounts that purportedly unrelated. • Customer conducts large deposits and withdrawals during a short time period after opening and then subsequently closes the account or the account becomes dormant. Conversely, an account with little activity may suddenly experience large deposit and withdrawal activity. • Customer makes high-value transactions not commensurate with the customer's known incomes.
Non-Listed Business
Describes any entity that is not automatically exempted from CTR filings, but may be granted an exemption by the financial institution as long as the entity meets certain criteria. Office of the Comptroller of the Currency (OCC) - It is the agency responsible for chartering, regulating, and policing all national banks.
Account
Designates any formal banking relationhip, including any customer product or service relationship as deposit accounts, safe deposit boxes,credit accts or extensions
Account
Designates any formal banking relationship, including any customer product or service relationship, such as deposit accounts, safe deposit boxes, credit accounts, or extensions of credit.
The "BSA Exam Manual" provided uniform BSA examination guidelines to be shared by all federal banking regulators. The manual states there are four original pillars of a bank's BSA program. What are these four pillars?
Designation of a BSA Compliance Officer Development of Internal Policies, Procedures, and Controls Ongoing, Relevant Training of Employees Independent Testing and Review
Unusual Employee Behavior or Activities
Employee exhibits a lavish lifestyle that cannot be supported by his or her salary. • Employee fails to conform to recognized policies, procedures, and processes, particularly in private banking. • Employee is reluctant to take a vacation.
Consequences of Noncompliance
Even when criminal liability is not an issue, a bank's BSA compliance deficiency can have important consequences including restrictions on mergers, acquisitions, and branching. Civil money penalties (CMPs) can be assessed against the bank by its federal regulator and the Treasury's FinCEN office. As the importance of BSA compliance has taken on greater visibility, these CMPs have grown amounting to millions of dollars in recent cases for chronic failure to file CTRs or SARs. Even errors in something as straightforward as filing CTRs may require the bank to go back over old transactions and reconstruct how they should have been reported. This is called "back filing" and it is a time and resource consuming obligation.
Legal entity customer responsibility
FinCEN intends that the legal entity customer identify its ultimate beneficial owner(s) and not "nominees" or straw men. Banks have questioned the level of reliance the bank can place upon the beneficial ownership information provided by the legal entity customer. FinCEN is clear that it is the responsibility of the legal entity customer—not the bank—to identify the customer's ultimate beneficial owners. The bank may rely upon the information provided by its customer unless the bank has reason to question the information's accuracy. This information should be collected from the individual seeking to open a new account on behalf of the legal entity customer. This individual could be, but is not necessarily, a beneficial owner.
Depending on your job function, what are examples of responsibilities you may be assigned to comply with the BSA?
Form a reasonable belief as to the identity of customers and beneficial owners at account opening Monitor transactions daily to identify any attempts to avoid currency transaction reporting requirements File Currency Transaction Reports (CTRs) for incoming or outgoing cash transactions that exceed $10,000 File Suspicious Activity Reports (SARs) for transactions or other banking behaviors that appear to be suspicious Keep information on all monetary instruments purchased with cash amounts of $3,000 to $10,000 Keep all BSA records for a period of at least five years Keep certain information concerning wire transfers
What consist the Section 314(a) of the USA PATRIOT Act
Implementing regulations established by FinCEN for information sharing between financial institutions, FinCEN, and law enforcement to deter money laundering and terrorist activity.
What is the Edge Act Corporation?
Implementing regulations established by FinCEN for information sharing between financial institutions, FinCEN, and law enforcement to deter money laundering and terrorist activity.
Maintaining Confidentiality
In order to maintain your institution's safe harbor protection, it is essential that suspicions and Suspicious Activity Reports be kept confidential. Discuss these matters with no one but the designated supervisor or department.
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). • Customers conducting business in high-risk jurisdictions. • Customers shipping items through high-risk jurisdictions, including transit through non-cooperative countries. • Customers involved in potentially high-risk activities, including activities that may be subject to export/import restrictions (e.g., equipment for military or police organizations of foreign governments, weapons, ammunition, chemical mixtures, classified defense articles, sensitive technical date, nuclear materials, precious gems, or certain natural resources such as metals, ore or crude oil). • Obvious over- or under-pricing of goods and/or services • Obvious misrepresentation of quantity or type of goods imported or exported • Transaction structure appears unnecessarily complex and designed to obscure the true nature of the transaction. • Customer requests payment of proceeds to an unrelated third party. • Shipment locations or descriptions of goods not consistent with letter of credit • Documentation showing higher or lower value or cost of merchandise than that which was declared to customs or paid by the importer. • Significantly amended letters of credit without reasonable justification or changes to the beneficiary or location of payment. Any changes in the names of parties should prompt additional OFAC review.
What is Money Laundering?
Money laundering is the process of using the financial system to exchange "dirty" money (funds generated through illegal activity) for "clean" money (funds that appear to be the proceeds of legitimate activities).
Embassy and Foreign Consulate Accounts
Official embassy business is conducted through personal accounts. • Account activity is not consistent with the purpose of the account, such as pouch activity or payable upon proper identification transactions. • Accounts are funded through substantial currency transactions. • Accounts directly fund personal expenses of foreign nationals with appropriate controls, including, but not limited to, expenses for college students.
National Bank E.g. Penalty assessed DOJ issued a four-count felony indictment and a $1.256 billion forfeiture order against the bank.
Reasons the criminal penalty was assessed This bank was charged with willfully failing to maintain an effective anti-money laundering (AML) program and willfully failing to conduct due diligence on its foreign correspondent affiliates. The bank was held accountable for stunning failures of oversight—and worse—that led the bank to permit narcotics traffickers and others to launder hundreds of millions of dollars through the bank's subsidiaries, and to facilitate hundreds of millions more in transactions with sanctioned countries.
Providing Detailed Information
Regarding any suspicions you may have, be able to provide as much detailed information as possible. Ideally, you should be able to answer the questions who? what? where? when? why? and how?
Customer Due Diligence (CDD)
Require to collect info on beneficial owners when an account is opened. The bank can rely on the information provided by the customer, use Customer Identification Program procedures to verify the identity of beneficial owners, although when documentation is used, the bank can rely on copies.
How banks can avoid fines and penalties.
Strong compliance culture; Commit sufficient resources; Info Tech (IT) monitoring; Monitor and manage risk; Employees accountable
What is BSA?
The Bank Secrecy Act (BSA) was designed to detect and prevent money laundering connected with white collar crime by creating a data trail to document large cash transactions. Since the events of 9/11 and the passage of the USA PATRIOT Act, the Bank Secrecy Act has become a powerful tool in tracking and stopping drug trafficking, illegal gambling, organized crime, tax evasion, and terrorist activities.
(FinCEN) Financial Crimes Enforcement Network
The Financial Crimes Enforcement Network (FinCEN) is a bureau of the United States Department of the Treasury that collects and analyzes information about financial transactions in order to combat domestic and international money laundering, terrorist financing, and other financial crimes.
Wire Transfer
The electronic transfer of funds from one financial institution to another.
Explain your role in meeting the BSA requirements
The quality of a bank's compliance program depends on the actions of its employees when they are assisting customers in conducting transactions. If employees do not follow the bank's policies and procedures, the results can be disastrous. As a bank employee, you play an important part in monitoring transactions that may help lead investigators to discover an organized money laundering effort or enable them to uncover a major fraud scheme. What you must do to comply with the BSA and protect the assets of your financial institution will be dictated by where you work in the bank and your job responsibilities.
The bank must use Customer Identification Program procedures to verify the identity of beneficial owners, although when documentation is used, the bank can rely on copies.
The rule also includes a number of exceptions from coverage. Although the actual rule was effective July 11, 2016, compliance is not mandatory until May 11, 2018. ABA will release a separate course to train on these new CDD requirements.
Financial Crimes Enforcement Network (FinCEN) released the text of its long-awaited final customer due diligence (CDD) rule. What is that rule?
The rule will require banks to collect information on beneficial owners when an account is opened, using the model form included with the rule or taking other steps to collect the same information, and the bank can rely on the information provided by the customer.
Willful Non-Compliance
This occurs when a bank employee fails to collect or verify any CIP information, neglects to complete a CTR when necessary, neglects to complete an SAR, or completes a wire transfer or sale of negotiable instruments when either transaction involves $3,000 without collecting and verifying the customer and transaction information.
CIP
USA PATRIOT ACT > Bank Secrecy Act> Customer Identification Program
Describe the "five pillars" of the BSA Program
Understanding the nature and purpose of customer relationships for the purpose of developing a customer risk profile Conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information
One Size Does Not Fit All
While the final rule contains certain minimum requirements, it does not presume that "one size fits all" for the establishment of a Customer Identification Program (CIP). Each institution is required to develop its own program, tailored to its particular product offerings, customer base and geographic location. It must, however, include risk-based procedures to assure that with implementation of its CIP, the institution is able to form a reasonable belief that it knows the true identity of each new customer. CIP rules state your institution must document the procedures which will be followed when opening an account. The procedures must specify the identifying information that will be obtained from each customer.
National Bank Penalty assessed Civil money penalty of $2.5 billion. Reasons the criminal penalty was assessed
Willfully violated the suspicious activity reporting requirements of the BSA and its implementing regulations leading to one of the most massive securities fraud in U.S. history—the one perpetrated by Bernie Madoff.
Customer Identification Program (CIP)
requirement of the Bank Secrecy Act (BSA) that requires banks and other financial institutions to adopt written procedures to ensure proper identification of customers when opening accounts, unless the customer has an existing account with the institution.
Other Unusual or Suspicious Customer Activity
• Customer frequently exchanges small-dollar denominations for large-dollar denominations • Customer frequently deposits currency wrapped in currency straps or currency wrapped in rubber bands that is disorganized and does not balance when counted • Customer purchases a number of cashier's checks, money orders, or traveler's checks for large amounts under a specified threshold • Customer purchases a number of open-end stored value cards for large amounts. Purchases of stored value cards are not commensurate with normal business activities • Customer receives large and frequent deposits from online payments systems, yet has no apparent online or auction business • Monetary instruments deposited by mail are numbered sequentially or have unusual symbols or stamps on them • Suspicious movements of funds occur from one bank to another, and then funds are moved back to the first bank • Deposits are structured through multiple branches of the same bank or by groups of people who enter a single branch at the same time • Currency is deposited or withdrawn in amounts just below identification or reporting thresholds • Customer visits a safe deposit box or uses a safe custody account on an unusually frequent basis • Safe deposit boxes or safe custody accounts opened by individuals who do not reside or work in the institution's service area, despite the availability of such services at an institution closer to them • Customer repeatedly uses a bank or branch location that is geographically distant from the customer's home or office without sufficient business purpose • Customer exhibits unusual traffic patterns in the safe deposit box area or unusual use of safe custody accounts. For example, several individuals arrive together, enter frequently, or carry bags or other containers that could contain large amounts of currency, monetary instruments, or small valuable items.
BSA/AML: Complying with the BSA Glossary Civil money penalties (CMPs)
A punitive fine imposed by a regulatory agency on a bank or its employee for a significant violation of law.
For what two reasons did FinCEN issue the CDD Rule?
A) To clarify and strengthen customer due diligence requirements for certain financial institutions D) To ensure that banks can identify the ultimate beneficial owner or owners of legal entity customers
1. Which statement best completes the following sentence: What you must do to comply with the BSA and protect the assets of your financial institution will be dictated by ______________________.
A. The length of time you have been employed by the bank and where you work in the bank B. The level of experience of your senior management team and your job responsibilities C. Where you work in the bank and your job responsibilities D. Your job responsibilities and the length of time you have been employed by the bank
Privately-Owned Automated Teller Machines
Automated Teller Machine (ATM) activity levels are high in comparison with other privately-owned or bank-owned ATMs in comparable geographic or demographic locations • Sources of currency for the ATM cannot be identified or confirmed through withdrawals from account, armored car contracts, lending arrangements, or other appropriate documentation
Customer Identification and Verification
Banks must collect the name, date of birth, address and Social Security number or other government identification number (passport number or other similar information in the case of foreign persons) for any individual who meets the characteristics of either the ownership prong or the control prong.
Explain your role in meeting the BSA requirements
Form a reasonable belief as to the identity of customers and beneficial owners at acct opening Monitor transactions daily to identify any attempt to avoid currency transaction reporting requirem File Currency Transaction Reports (CTRs) for incoming or outgoing cash transactions that exceed $10,000 File Suspicious Activity Reports (SARs) for transactions or other banking behaviors that appear to be suspicious Keep information on all monetary instruments purchased with cash amounts of $3K to $10K Keep all BSA record for period of at least 5 years Keep certain information concerning wire xfers
Minimum Requirements for Personal Accts
Four items: Legal Name; Date of birth; Street Address; Identification number
Violation Penalties
If you knowingly fail to comply with of the BSA's requirements or procedures (CIP, CTR, wire transfers, sales of monetary instruments, SAR) both you and your institution could be prosecuted for willful non-compliance. Penalties for BSA violation have been known to include: • Job loss • Removal from employment in the financial services industry • Prison time • Significant monetary fines
The Birth of CIP
In October 2001, following the events of September 11, 2001, President Bush signed into law the USA PATRIOT Act. The Act added a new subsection to the Bank Secrecy Act requiring minimum standards be followed when identifying customers who open new accounts.
A beneficial owner
It is an individual who owns 25 percent or more of the equity interests in a company or is the single individual who exercises control.
International Bank with U.S. branches E.g.1 Penalty assessed Department of Justice (DOJ) assessed a forfeiture of $500 million to the United States.
Reasons the criminal penalty was assessed The BSA requires banks to have anti-money laundering programs sufficient to identify and report suspicious financial activity. This bank was cited for willfully failing to establish an adequate AML program. As per the court documents, the bank did not have adequate staffing, training and oversight, which permitted multiple high-risk shell companies and foreign financial institutions to use the bank to launder money through the United States. According to court documents, more than $3.2 billion dollars involving shell companies and high-risk transactions with foreign financial institutions flowed through the bank. The bank also admitted it failed to maintain proper documentation regarding its customers or maintain readily available documentation about its high-risk clients.
National Bank (Community Bank) Penalty assessed Civil money penalty of $4.1 million. Reasons the civil penalty was assessed
Serious failures in compliance with the BSA, namely (1) lacking an effective anti-money laundering program reasonably designed to manage risks of money laundering and other illicit activity, (2) failing to conduct adequate due diligence on foreign correspondent accounts, and (3) failing to detect and adequately report suspicious activities. The bank has since ceased operations.
Customer Due Diligence (CDD)
The final rule will require banks to collect information on beneficial owners when an account is opened, using the model form included with the rule or taking other steps to collect the same information, and the bank can rely on the information provided by the customer.
USA PATRIOT Act
The official title of the USA PATRIOT Act is "Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001." The purpose of the USA PATRIOT Act is to deter and punish terrorist acts in the United States and around the world, to enhance law enforcement investigatory tools, and other purposes, some of which include: To strengthen U.S. measures to prevent, detect and prosecute international money laundering and financing of terrorism; To require all appropriate elements of the financial services industry to report potential money laundering.
Business Day
The period within a day when a financial institution is open for business. In general, hours are typically when most businesses are in operation (usually 9 a.m. to 5 p.m.). This may also be a day when a financial institution posts business to its books and accounts. Ordinarily, most calendar days other than Saturdays, Sunday and legal public holidays are considered business days
Activity Inconsistent with the Customer's Business
The currency transaction patterns of a business show a sudden change inconsistent with normal activities. • A large volume of cashier's checks, money orders, or funds transfers is deposited into or purchased through an account when the nature of the accountholder's business would not appear to justify such activity. • A retail business has dramatically different patterns of currency deposits from similar business in the same general location. • Unusual transfers of funds occur among related accounts or among accounts that involve the same or related principals. • The owner of both a retail business and a check-cashing service does not ask for currency when depositing checks, possibly indicating the availability of another source of currency. • Goods or services purchased by the business do not match the customer's stated line of business. • Payments for goods or services are made by checks, money orders, or bank drafts not drawn from the account of the entity that made the purchase.
Describe the consequences banks may face for noncompliance
There are significant civil and criminal penalties for not complying with the requirements of the Bank Secrecy Act. Financial institutions that violate BSA criminal statutes are subject to sanctions that may be so severe that they revoke a bank's federal charter or terminate the institution's deposit insurance. When a bank's failure to execute its BSA program enables serious criminal infractions to go unreported, it can be exposed to prosecution by the United States Justice Department and be liable for the amount of criminal proceeds that flowed through the bank. The banking industry has seen a number of high profile supervisory and enforcement actions involving BSA compliance issues. These enforcement actions have been accompanied by increasingly stern warnings by regulators, both publicly and during examinations, indicating that BSA is once again at the forefront and that financial institutions of all sizes should be prepared for stepped up scrutiny of their existing BSA compliance programs.
Cross-Border Financial Institution Transactions*
U.S. bank increases sales or exchanges of large denomination U.S. bank notes to Mexican financial institution(s). Large volumes of small denomination U.S. banknotes being sent from Mexican casas de cambio (exchange houses) to their U.S. accounts via armored transport or sold directly to U.S. banks. These sales or exchanges may involve jurisdictions outside of Mexico. • Casas de cambio direct the remittance of funds via multiple funds transfers to jurisdictions outside of Mexico that appear to have no apparent business relationship with the casas de cambio. Funds transfer recipients may include individuals, businesses or other entities in trade-free zones. • Casas de cambio deposit numerous third-party items, including sequentially-numbered monetary instruments, to their accounts at U.S. banks. • Casas de cambio direct the remittance of funds transfers from their accounts at Mexican financial institutions to accounts at U.S. banks. These funds transfers follow the deposit of currency and third-party items by the casas de cambio into their Mexican financial institution. * FinCEN Advisory FIN-2006-A003, Guidance to Financial Institutions on the Repatriation of Currency Smuggled into Mexico from the United States, April 28, 2006
$3,000 Rule
Whenever $3,000 to $10,000 in cash in involved in negotiable instrument purchases (bank check, cashier's check, traveler's check, money order) or when a wire transfer or other third-party transfer is for $3,000 or more, an institution must record certain identifying information before completing the transaction.
Suspicious Activity Report (SAR)
A report filed with FinCEN to identify potential and actual illegal activity such as money laundering, terrorist financing, and other financial fraud and abuse. The report helps government efforts to detect and prevent the flow of illicit funds, and identifies emerging threats through analysis of patterns and trends.
BSA/AML programs must now include, at a minimum, the following five pillars:
A system of internal controls Independent testing Designation of a compliance officer or individual(s) responsible for day-to-day compliance Training for appropriate personnel Appropriate risk-based procedures for conducting ongoing CDD to understand the nature and purpose of customer relationships, ongoing monitoring to identify and report suspicious transactions, and, on a risk basis, to maintain and update customer information
Suspicious Activity Report (SAR)
An electronic filing with FinCEN by the financial institution that reports known or suspected violations of the law or observed suspicious activity.
Money Laundering Red Flags
Customers Who Provide Insufficient or Suspicious Information Efforts to Avoid Reporting or Recordkeeping Requirements Funds Transfers Automated Clearing House Transactions Activity Inconsistent with the Customer's Business Lending Activity Changes in Bank-to-Bank Transactions Cross-Border Financial Institution Transactions* Trade Finance Privately-Owned Automated Teller Machines Insurance Shell Company Activity Embassy and Foreign Consulate Accounts Unusual Employee Behavior or Activities Other Unusual or Suspicious Customer Activity
Structuring
Occurs if a person, acting alone, in conjunction with, or on behalf of other persons, conducts or attempts to conduct one or more transactions in currency in any amount, at one or more financial institutions, on one or more days, in any manner, for the purpose of evading necessary reporting requirements
Exempt
Point of Sale (POS) credit products Accounts to finance the purchase of postage Insurance premium financing Accounts to finance the purchase or leasing of equipment
Changes in Bank-to-Bank Transactions
The size and frequency of currency deposits increases rapidly with no corresponding increase in non-currency deposits. • A bank is unable to track the true accountholder of correspondent or concentration account transactions. • The turnover in large-denomination bills is significant and appears uncharacteristic, given the bank's location. • Changes in currency-shipment patterns between correspondent banks are significant
Financial institutions regularly have BSA examinations. What are two common areas of concern cited on those examinations?
1) Failure by institutions to commit adequate resources to BSA compliance programs 2) Failure of employees to abide by the controls in place or to stay current with program changes
Which two statements characterize the use of enforcement penalties by government agencies to combat noncompliance with the BSA?
1) Penalties are substantial and can cause a bank to cease operations 2) Penalties can involve some or all aspects of the required components of a bank's BSA program
Defining Beneficial Owners: The rule utilizes a two-pronged approach to defining a beneficial owner: an ownership prong and a control prong.
1. Ownership prong Under this prong, a beneficial owner is defined as each individual, if any, who, directly or indirectly, owns 25 percent or more of the equity interests of a legal entity customer. However, the rule recognizes that there may be instances when no single individual owns 25 percent or more of the equity interest of the legal entity; in such instances, the bank is still required to collect the required information for one individual who controls, manages, or directs the legal entity customer.
What is not a legal entity?
1. Sole proprietorship 2. Unincorporated associations or natural person opening accounts on their own behalf 3. Regulated financial institutions, including bank/financial holding companies 4. Those customers exempts under both CTR and CIP 5. Any entity other than a bank whose common stock or analogous equity interests are listed on the NY, American, or NASDAQ stock exchange 5. Most trusts
Which two options reflect the fifth pillar expectations of the CDD Rule?
1. Understanding the nature of the customer's business 2. Conducting ongoing monitoring
Key Elements of the BSA
1.Designation of a BSA Compliance Officer 2.Development of internal policies, procedures, and controls 3.Ongoing, relevant training of employees 4.Independent testing & review
Efforts to Avoid Reporting or Recordkeeping Requirements
A customer or group tries to persuade a financial institution employee not to file required reports or maintain required records. • A customer is reluctant to provide information needed to file a mandatory report, to have the report filed, or to proceed with a transaction after being informed that a report must be filed. • A customer is reluctant to provide identification when purchasing negotiable instruments in recordable amounts. • A business or customer asks to be exempted from reporting or recordkeeping requirements. • A person customarily uses the Automated Teller Machine (ATM) to make several deposits below a specified threshold. A customer deposits funds into several accounts, usually in amounts of less than $3,000, which are subsequently consolidated into a master account and transferred outside the country, particularly to or through a location of specific concern (e.g., countries designated by national authorities and the Financial Action Task Force on Money Laundering (FATF) as non-cooperative countries and territories). • A customer accesses a safe deposit box after completing a transaction involving a large withdrawal of currency or accesses a safe deposit box before making currency deposits structured at or just below $10,000 to evade Currency Transaction Report (CTR) filing requirements.
Insurance
A customer purchases products with termination features without concern for the product's investment performance. • A customer purchases insurance products using a single, large-premium payment, particularly when payment is made through unusual methods such as currency or currency equivalents. • A customer purchases a product that appears outside the customer's normal range of financial wealth or estate planning needs. • A customer borrows against the cash surrender value of permanent life insurance policies, particularly when payments are made to apparently unrelated third parties. • Policies are purchased that allow for the transfer of beneficial ownership interests without the knowledge and consent of the insurance issuer. This would include secondhand endowment and bearer insurance policies. • A customer is known to purchase several insurance products and uses the proceeds from an early policy surrender to purchase other financial assets.
Customers Who Provide Insufficient or Suspicious Information
A customer uses unusual or suspicious identification documents that cannot be readily verified. • A customer provides an individual Tax Identification Number (TIN) after having previously used a Social Security Number. • A customer uses different tax identification numbers with variations of his or her name. • When establishing a new account, a business is reluctant to provide complete information about the nature and purpose of his or her business, anticipated account activity, prior banking relationships, the names of its officers, directors, or information on its business location. • A customer's home or business telephone is disconnected. • A customer's background differs from that which would be expected on the basis of his or her business activities. • A customer makes frequent large transactions and has no record of past or present employment experience. • A customer is a trust, shell company, or private investment company that is reluctant to provide information on controlling parties or underlying beneficiaries.
Financial Crimes Enforcement Network (FinCEN)
A division of the U.S. Treasury. FinCEN makes information from SARs (Suspicious Activity Reports) available to law enforcement and regulatory agencies to support their investigations and examinations. Money Laundering - The legitimization ("washing") of illegally obtained money to hide its true nature and source (typically drug trade or terrorist activities). Money laundering occurs when an individual passes illegally-obtained ("dirty") funds surreptitiously through legitimate business channels, or by means of bank deposits, investments, or transfers from one place (or person) to another.
Your legal entity customer, Melon Cauli Fresh Foods, recently had a publicly-traded company, Lettuce Eat, take a 35% ownership interest, with the remaining 65% ownership held by the original three founders of the company. Which two options indicate for whom you must collect beneficial ownership information? A) Lettuce Eat, the publicly-traded company owning 35% of Melon Cauli B) Any one of the three original founders that owns 25% or more interest in Melon Cauli C) One individual with significant ownership over Melon Cauli Fresh Foods D) No one, because the company is owned by another company
A is incorrect because, as a publicly-traded company, Lettuce Eat is exempt from the CDD Rule's reporting requirements. D is incorrect because beneficial ownership must be established for a legal entity customer. If any one of the three original founders owns 25% or more interest in the entity, that founder would need to be identified as a beneficial owner, plus one individual under the control prong.
OFAC List/Specially Designated Nationals and Blocked Persons List
A list of individuals and companies owned by or acting on behalf of targeted countries that is published by OFAC (Office of Foreign Assets Control). The list also names individuals, groups, and entities, such as terrorists or narcotics traffickers designated under programs that are not country-specific. These individuals are called "Specially Designated Nationals" or "SDNs." Their assets are blocked, and U.S. persons are generally prohibited from dealing with them. The SDN list is frequently updated; however, there is no predetermined timetable for updating. Names are added and removed as appropriate.
Office of Foreign Assets Control (OFAC) List/Specially Designated Nationals (SDN) List
A list of individuals and companies owned and controlled by, or acting on behalf of, targeted countries, which is published by OFAC. The lists also names individuals, groups, and entities, such as terrorists or narcotics traffickers designated under programs that are not country-specific. These individuals are called Specially Designated Nationals or SDNs. Their assets are blocked and U.S. persons are generally prohibited from dealing with them. The SDN list is frequently updated; however, there is no predetermined timetable for updating. Names are added and removed as necessary and appropriate. The BSA requires the institution to check all incoming and outgoing wire transfer originators and beneficiaries against the OFAC list. Checking the OFAC or SDN List is also a key part of a bank's Customer Identification Program (CIP). If a party appears on the list, the institution must follow the OFAC directions regarding how to handle the transaction. In some instances, the institution may be required to accept the funds and place them in a blocked account; in others, OFAC may require completely rejecting the transaction.
BSA/AML: Complying with the BSA Glossary Currency Transaction Report (CTR)
A report filed with FinCEN required by the BSA for cash transactions involving more than $10,000, unless exempted under one of the provisions of the Act.
Currency Transaction Report (CTR)
An electronic filing that creates a data trail which documents the sources and destinations of large cash transactions over $10,000 conducted by or on behalf of an individual or entity in one business day. The Internal Revenue Service (IRS) reports that banks and thrift institutions are required by the Bank Secrecy Act (BSA) to complete the CTR detailing currency transactions of $10,000 or more.
Money Service Businesses (MSB)
Any person doing business, whether or not on a regular basis or as an organized business concern, in one or more of the following capacities: currency dealer or exchanger, check casher, issuer of traveler's checks, money orders or stored value, seller or redeemer of traveler's checks, money orders or stored value, money transmitter, or U.S. Postal Service. Negotiable Instrument - A written order or promise to transfer money from one party to another by delivery or by endorsement and delivery, and without formal assignment in the form of a check, draft, bill of exchange, promissory note, or acceptance.
Currency Transaction Reports (CTRs)
Any transaction or group of transactions occurring in one business day, involving more than $10,000 in cash, must be recorded in a Currency Transaction Report (CTR) and filed with the U.S. Department of the Treasury. Since there are numerous businesses and other entities that have legitimate reasons to make frequent, large, cash transactions, the government grants exemptions for banks and certain government entities. Additionally, financial institutions are allowed to grant exemptions to businesses that meet certain minimum requirements.
Defining Beneficial Owners: The rule utilizes a two-pronged approach to defining a beneficial owner: an ownership prong and a control prong.
Control prong Under the control prong, a beneficial owner is defined as a single individual with significant responsibility to control, manage, or direct the legal entity customer, including an executive officer or senior manager (e.g., a chief executive officer, chief financial officer, chief operating officer, managing member, general partner, president, vice president, or treasurer) or any other individual who regularly performs similar functions.
What is the primary requirement for covered financial institutions regarding the collection of beneficial ownership information?
Covered financial institutions are now required to obtain, verify, and record the identities of the beneficial owners of legal entity customers. Beneficial owners are defined as any individual who, directly or indirectly, owns 25% or more of the equity interests of a legal entity customer (i.e., the ownership prong); and a single individual with significant responsibility to control, manage, or direct a legal entity customer, including an executive officer or senior manager (e.g., a chief executive officer, chief financial officer, chief operating officer, managing member, general partner, president, vice president, or treasurer ); or any other individual who regularly performs similar functions (i.e., the control prong).
Suspicious Activity Reporting
Each employee at a financial institution should be alert for various types of suspicious activity. If you get a feeling that something is "just not right" about a customer's behavior, a transaction, or a pattern of transactions, tell the designated supervisor or department immediately and complete a Suspicious Activity Report (SAR).
The following common areas of concern are cited on the BSA examinations:
Failure by institutions to commit adequate resources to BSA compliance programs, due to either cost-cutting measures or a failure to keep pace with an institution's growth Failure to address the risks posed by high-risk international financial activities, such as foreign correspondent banking, cross-border funds transfers, bulk cash repatriation, remote deposit capture, and embassy accounts Failure by institutions to manage and supervise third-party service providers and payment processors Failure to adequately address the risks posed by new technologies, such as mobile banking, prepaid cards, and virtual currency Failure of employees to abide by the controls in place or to stay current with program changes
Failure by institutions to commit adequate resources
Failure by institutions to commit adequate resources to BSA compliance programs, due to either cost-cutting measures or a failure to keep pace with an institution's growth Failure to address the risks posed by high-risk international financial activities, such as foreign correspondent banking, cross-border funds transfers, bulk cash repatriation, remote deposit capture, and embassy accounts Failure by institutions to manage and supervise third-party service providers and payment processors Failure to adequately address the risks posed by new technologies, such as mobile banking, prepaid cards, and virtual currency Failure of employees to abide by the controls in place or to stay current with program changes, In addition, although many of these issues may seem to impact larger global banks, smaller institutions have their own set of risks and challenges. For ex., smaller banks face risks from the use of third-party service providers and the rapid growth of technologies, such as mobile banking, but are subject to cost considerations that might limit their ability to allocate sufficient resources.
There are significant civil and criminal penalties for not complying with the requirements of the Bank Secrecy Act.
Financial institutions that violate BSA criminal statutes are subject to sanctions that may be so severe that they revoke a bank's federal charter or terminate the institution's deposit insurance. When a bank's failure to execute its BSA program enables serious criminal infractions to go unreported, it can be exposed to prosecution by the United States Justice Department and be liable for the amount of criminal proceeds that flowed through the bank. The banking industry has seen a number of high profile supervisory and enforcement actions involving BSA compliance issues. These enforcement actions have been accompanied by increasingly stern warnings by regulators, both publicly and during examinations, indicating that BSA is once again at the forefront and that financial institutions of all sizes should be prepared for stepped up scrutiny of their existing BSA compliance programs.
Civil Money Penalties: A punitive fine imposed by a regulatory agency on a bank or its employee for a significant violation of law.
It can be assessed against the bank by its federal regulator and the Treasury's FinCEN office. As the importance of BSA compliance has taken on greater visibility, these CMPs have grown amounting to millions of dollars in recent cases for chronic failure to file CTRs or SARs. Even errors in something as straightforward as filing CTRs may require the bank to go back over old transactions and reconstruct how they should have been reported. This is called "back filing" and it is a time and resource consuming obligation.
Automated Clearing House Transactions
Large-value, Automated Clearing House (ACH) transactions frequently initiated through Third- Party Service Providers (TPSP) by originators that are not financial institution customers and for which the institution has no or insufficient due diligence. • TPSPs have a history of violating ACH network rules or generating illegal transactions or processing manipulated or fraudulent transactions on behalf of its customers. • Multiple layers of TPSPs that appear to be unnecessarily involved in transactions. • Unusually high level or transactions initiated over the Internet or by telephone. • National Automated Clearing House Association (NACHA) information requests indicate potential concerns with the bank's usage of the ACH system.
Lending Activity
Loans secured by pledged assets held by third parties unrelated to the borrower. • Loan secured by deposits or other readily marketable assets, such as securities, particularly when owned by unrelated third parties. • Borrower defaults on a cash-secured loan or any loan that is secured by assets which are readily convertible into currency. • Loans are made for or on behalf of a third-party with no reasonable explanation. • To secure a loan, the customer purchases a Certificate of Deposit (CD) using an unknown source of funds, particularly when funds are provided via currency or multiple monetary instruments. • Loans that lack a legitimate business purpose, provide the bank with significant fees for assuming little or no risk, or tend to obscure the movement of funds (e.g. loans made to a borrower and immediately sold to an entity related to the borrower).
Funds Transfers
Multiple funds transfers are sent in large, round dollar, hundred dollar, or thousand dollar amounts. • Funds transfer activity occurs to or from a financial secrecy haven or to or from a high-risk geographic location without an apparent business reason or when activity is inconsistent with the customer's business or history. • Many small, incoming transfers of funds are received or deposits are wired to another city or country in a manner inconsistent with the customer's business or history. • Large, incoming funds transfers are received on behalf of a foreign client, with little or no explicit reason. • Funds transfer activity is unexplained, repetitive, or shows unusual patterns. • Payments or receipts with no apparent links to legitimate contracts, goods, or services are received. • Funds transfers are sent or received from the same person to or from different accounts. • Funds transfers contain limited content and lack related party information.
The $3,000 Rule for Negotiable Instruments and Wire Transfers
Negotiable instrument purchases (cashier's check, money order, etc.) involving cash between the amounts of $3,000 and $10,000 trigger recordkeeping requirements. A financial institution must: • Record and verify the purchaser's identity • Collect information on the instrument(s) being purchased The amount of information collected is based upon whether the purchaser is a customer or a non-customer. Wire transfers involving $3,000 or more (regardless of the method of payment) trigger reporting requirements as well. A financial institution must: • Record and verify purchaser information • Record any available payment instructions • Check all new originators and beneficiaries against the OFAC list
Must a covered financial institution's procedures for identifying and verifying the identity of beneficial owners of legal entity customers be identical to its customer identification program?
No. However, the rule requires that the procedures, at a minimum, contain the same elements as required for verifying the identity of customers that are individuals under the applicable CIP rule. Financial institutions may verify identification through the use of photocopies or other reproductions of identification documents.
In general, the dollar amount of enforcement penalties assessed by the bank regulators and FinCEN is doing what?
Penalties are growing
What is an account?
Pursuant to the CIP rule, an "account" is a formal banking relationship to provide or engage in services, dealings, or other financial transactions, and includes a deposit account, a transaction or asset account, a credit account, or other extension of credit. It is a relationship established to provide a safe deposit box or other safekeeping services or to provide cash management, custodian, or trust services. The CDD Rule applies only to new accounts. Under the rule, a "new account" is defined as any account opened at a covered financial institution by a legal entity customer on or after May 11, 2018. The rule applies to every account opened after this date, not just the first account opened.
State Chartered Bank E. g. 3 Penalty assessed Forfeiture of $800,000. (Note that although this penalty was not large, this case illustrates the fact that even the bank's principal stockholder was held liable for part of the fine.)
Reasons the criminal penalty was assessed The bank conspired with its former top executive and others to violate federal bank regulations by knowingly and willfully failing to file currency transaction reports (CTRs) on various cash transactions involving deposits totaling more than $800,000. The bank was charged with a single count of conspiracy. The bank opened multiple accounts in the names of nominees or other businesses so that the cash deposits exceeding $10,000 on any day could be deposited into various accounts to conceal the relationship between the depositors and the transactions and to avoid the filing of any reports. The bank allegedly accepted and caused to be accepted cash deposits exceeding $10,000 on any day that were made to appear as though the funds were proceeds of legitimate business when, in fact, significant portions of the deposited funds were proceeds of illegal activity. The conspiracy count against the bank carried a maximum penalty of five years' probation and a $500,000 fine or a fine totaling twice the gross gain from the offense. In agreeing to the forfeiture of $800,000, the bank also paid $250,000 at the time it entered a formal guilty plea, with a long-standing shareholder paying an additional $125,000 at the same time. This same shareholder paid another $125,000 at the time of sentencing, and the bank, or any successor, had to pay the remaining $300,000 before the end of the two years' probation.
Customer Identification Program (CIP)
The Bank Secrecy Act (BSA) requires a financial institution to establish Customer Identification Program (CIP) that meets minimum requirements. To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens an account. The institution's staff will ask for the customer's name, address, and date of birth. The institution will ask to see a valid photo I.D., such as a driver's license. Additionally, before any new account is opened, the customer's name must be checked against the OFAC list.
State Bank Penalty assessed Civil money penalty of $15 million. Reasons the criminal penalty was assessed The civil money penalty is the result of the bank's history of noncompliance with laws and regulations and its numerous violations of the BSA.
The bank was cited for (1) failure to implement an effective BSA/AML Compliance Program with internal controls reasonably designed to detect and report evidence of money laundering and other suspicious activity and (2) failure to adequately oversee third-party payment processor relationships and related products and services in a manner commensurate with associated risks. The Bank subsequently ceased operations and was purchased by another bank.
