ACAMS Risk And Methods

What is money laundering?
Taking criminal proceeds and disguising their illegal source in anticipation if ultimately using the criminal proceeds to perform legal and illegal activities

Making dirty money look clean
The United Nations 2000 convention against transnational crime is also know as the?
Palermo convention
Willful blindness?
Deliberate avoidance of knowledge of the facts
Three stages of money laundering
Step one
Placement - the physical disposal of cash or other assets derived from criminal activity. Introduction of illegal funds into the financial system.
Ex.
Refining large amounts of cash into smaller sums
Buying high value good that can be resold
Steps of money laundering
Step 2
Layering - separation of illicit proceeds from their source by layers of financial transactions intended to conceal the true origin of the proceeds. Designed to disguise the audit trail
Ex
Wire transfers to and from related accounts and from different banks
Cash converting to MI's
Reselling high valued goods
Real estate or business investing
Steps of ml process
Step 3
Integration - supplying apparent legitimacy to illicit wealth through the re-entry of funds into the economy in what appears to be normal business or personal transactions
Economic consequences

Worse in developing countries, emerging markets, and countries with fragile financial systems.
Increased crime and corruption - enhance profitability of criminal activity
Ex
Havens of ML attracts people who commit crime, increased corruption, bribing gov officials, etc
Economic consequences
Undermine the legitimate private sector - front companies used to make business appear legitimate - engage in commingling of legitimate and illicit profits
- competitive advantage over legitimate firms (two sources of income)
- can be used to control whole industries/ sectors
Artificial distortion in assets and commodity prices
Economic consequences
Financial institutions
Affect the stability of banks, associated with a number of banks failing
Reputation risk, costs, fines
Asset seizures
Loss of profitable business - May lose client due to rep risk
Loan losses
Operation risk
Potential loss resulting from inadequate internal processes, personnel or systems or for external events

Loss of inter-bank or correspondent banking services or increased cost
Legal risk
Potential for law suits, adverse judgements, urn enforceable contracts, fine and penalties generating losses
Concentration risk
Potential for loss resulting from too much credit or loan exposure to one borrower or group of borrowers

No knowing who the true loan borrower is may result in losses, unenforceable contracts with fictitious persons
Economy - negative effects on governments
Illicit proceeds may dwarf gov. budgets - May lose control of economic policy

Adversely affect currencies and interest rates, exchange rates
Monetary instability- misallocation of resources from artificial distortion
Economic distortion
ml invest money in activities that are not economically beneficial to the country where the funds are located
- economic growth can suffer - hotels/ construction financed not based on demand but because of short term interests of ML - can result in collapse when ML abandon them
Loss of tax revenue
Tax evasion- diminishes tax revenue thus harms honest tax payers

Government revenue deficit my occur
Risk to privatization efforts
Threatens the efforts of many states due to the fact that criminal organization can outbid legitimate purchasers for formally state owned enterprises
Avenue to hide funds- marinas, casinos, resorts
Rep risk for country
Negative effects for development and economic growth

- Diminishes legitimate global opportunities bc institutions may limit their transactions with FI's located in havens
- legitimate businesses may have reduced access to the world markets
Social costs
Maintaining the profitability of crime
Allows criminal enterprise expansion
Increase security/ law enforcement budgets
Electronic fund transfers
Funds transferred by electronic mean, ACH, ATM, Mobile phone

Conduit for moving funds between accounts and across borders
- used in layering process of the ML cycle
- makes difficult to trace the true origin of the funds
Vary amounts sent, relatively small transactions, use reputable organizations
EFT ML indicators
-Transactions to or from a tax/ML haven or HRC w/ no business reason
-Large trans. Received on behalf of foreign client w/ unknown purpose
-Many small incoming trans. Including checks/ money orders that quickly moved out of the bank or country- inconsistent business/ hist
-fund activity is unexplained or unusual
The bank of ny scandal
Exposed money laundering through Russian correspondent accounts

By establishing correspondent banking relationships globally, banks can undertake international transactions for themselves and clients where they have no physical presence
Correspondent banking vulnerabilities
2 reasons
FI carries out financial transaction on behalf of customers of another FI
- indirect relationship, identity not verified

Amounts of money that flows through FCB makes it difficult to identify suspect transactions, lack of information on non- clients
USA patriot act
Section 312
ML control standards for correspondent account maintained in certain foreign countries

FI must set up a risk based due diligence to mitigate ML risks
Reasonable steps taken to identify the owner of a FCB
USA patriot act
Section 313
Prohibits opening accounts for foreign shell banks, reasonable steps taken to ensure foreign bank is not being used indirectly by a shell bank

Shell bank has no physical presence in any country, no regulatory oversight
USA patriot act
Section 319
Maintain records with the names and contact information of the owners of foreign banks with which that have correspondent accts
FCB basic question needing answers
Who the owners are

Nature of regulatory oversight
Payable through accounts
Foreign Customers are permitted to conduct their own transactions at the correspondent bank - directly control

FCB usually takes orders from their customers and pass them on to the correspondent bank
Payable through accounts money laundering risks
PTA with foreign institutions licensed in offshore financial section w/ weak/ absent supervision and licensing laws
- failure to apply customer due diligence policies to customers of respondent bank
- sub acct holders w/ currency dep/ withdraw privileges
Concentration accounts
Internal accts established to facilitate the processing/ settlement of multiple or individual customer transactions - usually on same day

Frequently used for transactions for private banking, trust and custody accounts, etc
Concentration acct money laundering risks

Customer identification information - separate from the transaction

- if separation occurs the audit trail is lost
- May be misused of administered improperly
Concentration account money laundering prevention practices
- Requiring duel signatures on general ledger tickets
- Prohibiting direct customers access to concentration accts
- capturing customer transactions in customer acct statements
- prohibit customer knowledge of concentration accts
- retain appropriate customer transaction and identifying info
- identify and monitoring recurring customer names
Private banking
Extremely lucrative, competitive and world wide industry
- Highly personalized and confidential products and services
- operates semi- autonomously from the rest of the bank

High net worth individuals are the clients - fierce competition causes risks
Private banking money laundering risks
Perceived high profitability
Intense competition

Powerful clientele
High level of confidentiality associated w/ private banking
Private banking money laundering risks (2)
Close relationship of trust between RM an their clients
- commission based compensation for RMs
- culture of secrecy and discretion

RMs advocates and protect clients
Private banking (3)
Non resident aliens as clients
- conducting majority of banking outside of US
Private investment companies (PICs)
- Established by individual bank customers and others in offshore jurisdictions to hold assets (Shell companies)

Secrecy laws/ confidentiality - offshore havens - tax/ trust reasons
- Established can conceal the true identity of beneficial owners
PICs (2)
Additional layer of security

- some nominal owners hold the title of companies for the benefit of individuals who remain undisclosed or subject to attorney client privilege

Source of concern - PEPs
Structuring
Evade triggering a reporting or record keeping requirement

Many go from bank to bank depositing cash and purchasing monetary instruments - under reporting threshold
Structuring examples
Breaking large transactions into two or more smaller ones

Large transaction broken into two or more smaller transactions conducted by two or more people
Money broker
Use identification documents of dead people supplied by money brokers
- Accts opened in low four figure amounts
- dep extra funds to cover living expenses
- signs blank checks, send checks to MB in country B
- accumulate few thousands b4 being virtually cleared out
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
Cuckoo smurfing vs. structuring
Cuckoo smurfing is that in the latter the third parties who holds the bank accounts being used are not aware of the fact illicit money is being deposited into their accounts

Requires work of an insider within a financial service provider
Cuckoo smurfing process
Customer provides funds to an alternative remitter for transfer to a beneficiary
- insider provides transaction details to an associate in foreign country
- associate deposits cash into the acct intended for the beneficiary, placed into financial systems
- associate in foreign country arranges to get the funds from the alternative remitter
Combat couckoo smurfing
Identify cash depositors into third party accts

Monitor for unusual cash deposits that are structured or placed in branches other than the customers
Microstructuring
Done in smaller amounts
- 18k in two deposits vs 20 $900 deposits
- sometimes linked to debit card where funds are taken out in a foreign country
Detecting Microstructuring
- Counter deposit slips instead of printed deposit slips
- Frequent activity conducted in newly opened acct
- Frequents visits to make cash deposits - inconsistent 4 bus/ personal acct
- cash deposits followed by ATM wd's in HRCs
- cash deposits into third party accts w/ no connection or purpose
Bank complicity
Insider can pose same risks as customers

Co-equal programs to know your customer and your employee
Credit unions or building societies
Lower risk of money laundering
- harder for criminals to launder illicit cash - smaller volume of transtns

More financial services offered the higher the potential risk
- contain high levels of cash transactions
Credit union - other high risk transaction
- Money transfers to third parties
- Third parties paying in cash for someone else
- Reluctance to provide identity information
- Activity within the accts of children - thinking it would draw less attention
NBFI - credit card
Likely to be used in layering and integration stages
- license member banks to issue bank cards
- acquiring banks which process transactions for merchants who accept cc's
- TPPPs contract with issuing/ acquiring banks for trans processing
Credit cards
- Illicit funds in offshore bank could access these funds through credit/ debit cards
Money remitters/ exchangers
Receive cash from their customer which is transferred to designated beneficiaries against payment of a commission

Popular for individuals who don't have access to formal banking svcs
- May have lower rates than banks for transferring funds abroad
Money exchangers (2)
Funds transfer companies possessing separate networks
- western union
Connected with informal or underground banking channels

International money orders
Money exchangers
Mitigating risks by:

ML technique
Due diligence - confirm client is properly licensed

Broker to make sure funds are made available to criminal organization at destination country in local currency
- illicit cash proceed can be transmitted through money exchangers
Insurance companies
Vulnerabilities
Highest risk products are life insurance and annuity products
- investment value can create a cash value if holder wants to cancel policy
Annuity - allows exchange of illicit funds for an immediate or deferred income stream
Insurance
ML indicators
Other vulnerabilities
Policy holder more interested in policy cancellation terms than benefits

- Lack of oversight controls over intermediaries
- Decentralized oversight - May fall between the cracks of multiple insurance companies, or find one with weakest AML oversight
- sales driven objectives - overlook signs of ML
Examples of ML in insurance
Overfund policy- move funds out of policy w/ no fees via check
Purchase and redemption of bonds - redeemed prior to term
Free look period- allows investor a time to back out of policy - via chk
Early redemption - cancellation term more important than benefits
Insurance
Important to consider from compliance perspective
Use of cash or cash equivalent to purchase insurance products

Insurance products paid w/ lump sum or single premium payment

Borrow money against insurance products value
Security broker-dealers
Industry run by computer transfers and paper

- use in ML process in generally after launderers have disposed of their cash through other methods