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115 Cards in this Set
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What are bearer negotiable instruments? |
Bearer negotiable instruments include monetary instruments in bearer form such as: negotiable instruments (including checks, promissory notes & MOs) that are either in bearer form, are endorsed w/o restriction, are made out to a fictitious payee, or are otherwise in such form that title thereto passes upon delivery. |
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What is an exempt account? |
In some countries, a distinction is granted to certain customers of a FI permitting the institution to waive its responsibility to report certain transactions that are otherwise required. Exempt accounts must be documented & the FIs that secure the exemptions must still monitor their transactions. |
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What is a front company? |
A business that commingles illicit funds w/ revenue generated from the sale of legitimate products or services. Criminals use front companies to launder illicit money by giving the funds the appearance of legitimate origin. Organized crime has used pizza parlors to mask proceeds from heroin trafficking. Front companies may have access to substantial illicit funds, allowing them to subsidize front company products & services at levels well below market rates or even below manufacturing costs. Front companies have a competitive advantage over legitimate firms that must borrow from financial markets making it difficult for legitimate businesses to compete w/ front companies. |
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Describe a Financial Intelligence Unit (FIU). |
A central governmental office that obtains information from financial reports, processes it & then discloses it to an appropriate government authority in support of a national AML effort. The activities performed by an FIU include receiving, analyzing & disseminating information &, sometimes, investigating violations & prosecuting individuals in the disclosures. |
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What is a commission rogatoire? |
Also known as letter rogatory, commission rogatoire is a written request for legal or judicial assistance sent by the central authority of one country to the central authority of another when seeking evidence from the foreign jurisdiction. The letter typically specifies the nature of the request, the relevant criminal charges in the requesting country, the legal provision under which the request is made, & the information sought. |
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What is a country’s extraterritorial reach? |
The extension of one country’s policies & laws to the citizens & institutions of another. U.S. ML laws contain several provisions that extend its prohibitions & sanctions into other countries. For example, the “extraterritorial jurisdiction” of the principal U.S. AML law can apply to a non-U.S. citizen if the “conduct” occurs “in part” in the U.S. |
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Describe a cross-border transfer. |
A cross-border transfer is any wire transfer in which the originator & beneficiary institutions are located in different jurisdictions. A cross-border transfer also refers to any chain of wire transfers that has at least one cross-border element. |
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What is a Mutual Legal Assistance Treaty (MLAT)? |
An agreement among countries allowing for mutual assistance in legal proceedings & access to documents & witnesses & other legal & judicial resources in the respective countries, in private & public sectors, for the use in official investigations & prosecutions. |
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What is an International Business Company (IBC)? |
A variety of offshore corporate structures, alternately called “exempt companies,” which are dedicated to business use outside the incorporating jurisdiction, rapid formation, secrecy, broad powers, low cost, low to zero taxation, & minimal filing & reporting requirements. |
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Describe an intermediary FI. |
An intermediary FI receives funds from a wire transfer transmitter’s FI & relays or transmits the order of payment to the recipient’s FI. In an international funds transmission, intermediary FIs are usually located in different countries. |
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What is a nominee company? |
A corporation that is formed for the express purpose of holding securities & other assets in its name on behalf of others, or providing nominee directors and/or officers on behalf of clients. |
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Describe a lockbox. |
A service offered by banks to companies in which the company receives payments by mail to a PO Box & the bank picks up the payments several times a day, deposits them into the company’s account, & notifies the company of the deposits. The service enables the company to put the money to work as soon as it is received, but the amounts must be large in order for the value obtained to exceed the cost of the service. In the insurance industry there is also widespread use of “lock boxes” for payment of life insurance & annuities products. |
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Describe Know Your Customer (KYC). |
KYC refers to AML policies & procedures used to determine the true identity of a customer & the type of activity that is “normal & expected,” & to detect activity that is “unusual” for a particular customer. Many experts believe that a sound KYC program is one of the best tools in an effective AML program. |
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Describe a Patriot Act certification. |
A certification is a formal assertion in writing which, under the USA Patriot Act, is used by U.S. regulators in different contexts, including a written statement by a respondent bank signed by its duly authorized representative certifying that the bank does not do business w/ shell banks (under Section 313 of the USA Patriot Act). It can also be a written representation provided by a U.S. federal agent stating that the matter for which he or she is seeking information from FIs under Sec. 314(a) of the USA Patriot Act regulations is linked to ML or TF. |
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Identify the three gateways that assist w/ the AML cooperation between companies. |
1. Mutual Legal Assistance Treaties, 2. Financial Intelligence Units, & 3. The Supervisory Channel. |
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Recommendations 36-40 from FATF’s 40 Recommendations pertain specifically to the international aspects of ML & TF investigations. What are Recommendations 36-40? |
Recommendations 36-40 deal w/ mutual legal assistance treaties, extradition, confiscation of assets & mechanisms to exchange information internationally. |
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What is a Memorandum of Understanding (MOU)? |
An agreement between two parties establishing a set of principles that govern their relationship on a particular matter. An MOU is often used by countries to govern their sharing of assets in international asset-forfeiture cases or to set out their respective duties in AML initiatives. FIUs, w/ the task of receiving & analyzing suspicious transaction reports on an ongoing basis & maintaining close links w/ police & customs authorities, share information among themselves informally in the context of investigations, usually on the basis of an MOU. The Egmont Group of FIUs has established a model for such MOUs. Unlike the Mutual Legal Assistance Treaty, this gateway is ordinarily used not for obtaining evidence, but for obtaining intelligence that might lead to evidence. |
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What are the steps commonly taken to obtain mutual legal assistance? |
1. The central authority of the requesting country sends a “commission rogatoire” (letter of request) to the central authority of the other country. The letter includes the information sought, the nature of the request, the criminal charges in the requesting country & the legal provision under which the request is made, 2. The central authority that receives the request sends it to a local financial investigator to find out if the information is available, 3. An investigator from the requesting country then visits the country where the information is sought, & accompanies the local investigator during visits or when statements are taken, 4. The investigator asks the central authority for permission to remove the evidence to the requesting country, 5. The central authority sends the evidence to the requesting central authority, thereby satisfying the request for mutual legal assistance, & 6. Local witnesses may need to attend court hearings in the requesting country. |
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According to the Egmont Group, what is the definition of a FIU? |
In 1996, based on the work of its Legal Working Group, Egmont approved a definition of an FIU. It was amended in 2004 to reflect the FIUs’ role in combating terrorism financing as follows: (a) A central, national agency responsible for receiving (&, as permitted, requesting), analyzing & disseminating to the competent authorities, disclosures of financial information, (b) Concerning suspected proceeds of crime & potential financing of terrorism, & (c) Required by national legislation or regulation, in order to combat ML & TF. |
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How does the scope of the European Union’s Third ML Directive differ from the Second ML Directive? |
> It specifically includes the category of trust & company service providers, > It covers all dealers trading in goods who trade in cash over 15,000 Euros, & > The definition of FI includes certain insurance intermediaries. |
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Describe the elements that should be addressed in a global approach to KYC identified in the Basel Committee’s October 2004 paper called “Consolidated KYC Risk Management.” |
The Basel Committee’s October 2004 paper called “Consolidated KYC Risk Management” addresses the need for banks to adopt a global approach & to apply the elements necessary for a sound KYC program to both the parent bank or head office & all of its branches & subsidiaries. These elements consist of: > Risk management, > Customer acceptance & identification policies, & > Ongoing monitoring of higher-risk accounts. |
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According to the Wolfsberg AML Principles for Private Banking (2000), what are situations for private banking that require further due diligence? |
> Public officials, including individuals holding, or having held, positions of public trust, as well as their families & close associates, > High-risk countries, including countries “identified by credible sources as having inadequate AML standards or representing high-risk for crime & corruption,” & > High-risk activities, involving clients & beneficial owners whose source of wealth “emanates from activities known to be susceptible to ML.” |
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How does the Caribbean Financial Action Task Force (CFATF) monitor member’s implementation of the AML recommendations? |
The CFATF monitors members’ implementation of the AML recommendations identified in the Kingston Declaration through the following activities: > Self-assessment of the implementation of the recommendations, > An ongoing program of mutual evaluation of members, > Coordination of, and participation in, training & technical assistance programs, > Biennial plenary meetings for technical representatives, & > Annual ministerial meetings. |
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How did the European Union’s Second Directive on Prevention on the Use of the Financial System for the Purpose of ML (2001) expand the scope of the First Directive? |
The European Union’s Second Directive on Preventation on the Use of the Financial System for the Purpose of ML (2001) extended the scope of the First Directive beyond drug-related crimes. The definition of “criminal activity” was expanded to cover not just drug trafficking, but all serious crimes, including corruption & fraud against the financial interests of the European Community. |
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According to the Section 312 of the USA Patriot Act, the due diligence program for correspondent & private banking accounts must address what three measures? |
The due diligence program for foreign correspondent & private banking accounts for non-U.S. persons must include “appropriate specific & risk-based,” &, whereby necessary, enhanced policies, procedures & controls reasonably designed to identify & report suspected ML in a correspondent account maintained in the U.S. This due diligence program must also be included in the institution’s AML program. The due diligence program must address three measures: > Determining whether enhanced due diligence is necessary, > Assessing the ML risk presented by the correspondent account, > Applying risk-based procedures & controls reasonably designed to detect & report suspected ML. |
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What banking functions or products are considered high-risk? |
> Private banking, > Offshore international activity, > Deposit-taking facilities, > Wire transfer & cash management functions, > Transactions in which the primary beneficiary is undisclosed, > Loan guarantee schemes, > Travelers checks, > Official bank checks, > Money orders, > Foreign exchange transactions, > Trade financing transactions w/ unusual pricing features, & > Payable through accounts (PTAs). |
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When categorizing risks, what are the four general levels of risk? |
> Prohibited - the company will not tolerate any dealings of any kind given the risk. Countries subject to economic sanctions or designated as state sponsors of terrorism, such as Sudan or Iran, are prime candidates for prohibited transactions. Prohibited customers would include shell banks, > High-Risk - the risks here are significant, but are not necessarily prohibited. To mitigate the heightened risk presented, the firm should apply more stringent controls to reduce the risk, such as conducting enhanced due diligence & more rigorous transaction monitoring. Countries that are noted for corruption or drug trafficking are generally deemed high risk. High-risk customers may include PEPs; high-risk products & services may include correspondent banking & private banking, > Medium-Risk - medium risks are more than a low- or standard-risk of ML, & merit additional scrutiny, but do not rise to the level of high-risk, & > Low- or Standard-Risk - This represents the baseline risk of ML; normal business rules apply. FATF member countries & domestic retail customers are frequently, but not always, considered to be standard- or low-risk. |
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Why is risk-based approach more preferable than a prescriptive approach in the area of AML & counter-terrorist financing? |
> Flexible - as ML & TF risks vary across jurisdictions, customers, products & delivery channels, & over time, > Effective - as companies are better equipped than legislators to effectively assess & mitigate the particular ML & TF risks they face, & > Proportionate - b/c a risk-based approach promotes a common sense & intelligent approach to fight ML & TF as opposed to a “check the box” approach. It also allows firms to minimize the adverse impact of AML procedures on their low-risk customers. |
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How is a private banking account defined under Section 312 of the USA Patriot Act? |
Under Section 312 of the USA Patriot Act, a private banking account is defined as an account w/ a minimum aggregate deposit of $1M for one or more non-U.S. persons & which is assigned to a bank employee acting as a liaison w/ the non-U.S. person. |
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What types of customers might be considered high-risk for ML? |
> Casinos, > Offshore corporations & banks located in tax/banking havens, > Leather goods stores, > Currency exchange houses, money remitters, check cashers, > Car, boat & plane dealerships, > Used-car & truck-dealers & machine parts manufacturers, > Travel agencies, > Brokers/dealers in securities, > Jewel, gem & precious metals dealers, > Import/export companies, & > Cash-intensive businesses (restaurants, retail stores, parking). |
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What are the basic elements of a FI’s AML program? |
> A system of internal policies, procedures & controls, > A designated compliance officer w/ day-to-day oversight over the AML program, > An ongoing employee training program, & > An independent audit function to test the AML program. |
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What steps should the independent audit take to evaluate the bank’s ability to identify unusual activity? |
> Reviewing policies, procedures & processes for suspicious activity monitoring, > Evaluating the system’s methodology for establishing & analyzing expected activity or filtering criteria, > Evaluating the system’s ability to generate monitoring reports, & > Determining whether the system’s filtering criteria are reasonable. |
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What are some characteristics of a successful AML compliance training program? |
Regulation & laws require FIs to have formal, written AML compliance programs that include “training for appropriate personnel.” A successful training program not only should meet the standards set out in the laws & regulations that apply to an institution, but should also satisfy internal policies & procedures & should mitigate the risk of getting caught up in a ML scandal. Training is one of the most important ways to stress the importance of AML efforts, as well as educating employees about what to do if they encounter potential ML. |
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Identify the responsibilities of the AML compliance officer. |
A person should be designated as the AML compliance officer. This individual should be responsible for designing & implementing the program, making necessary changes & disseminating information about the program’s successes & failures to key staff members, constructing AML-related content for staff training programs & staying current on legal & regulatory developments in the field. |
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Identify, in general, who should approve policies & procedures. |
Policies & procedures should be in writing, & must be approved by appropriate levels of management. In general, institution-level policies should be approved by the board, while business unit procedures can be approved by business unit management. |
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Identify the basic elements behind the development of an effective AML compliance training program. |
> Who to train, > What to train on, > How to train, > When to train, & > Where to train. |
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What are the seven elements of a sound customer due diligence (CDD) program? |
> Full identification of customer & business entities, including source of funds & wealth when appropriate, > Development of transaction & activity profiles of each customer’s anticipated activity, > Definition & acceptance of the customer in the context of specific products & services, > Assessment & grading of risks that the customer or the account present, > Account & transaction monitoring based on the risks presented, > Investigation & examination of unusual customer or account activity, & > Documentation of findings. |
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How can senior management show its commitment to compliance w/ AML laws & regulations? |
> Establishing a strong compliance plan that is approved by the board of directors & is fully implemented, > insisting that it be kept informed of compliance efforts, audit reports & any compliance failures, w/ corrective measures instituted, > Communicating compliance expectations to the institution personnel, > Including regulatory compliance w/in the job descriptions & job performance evaluations of institution personnel, > Implementing procedures, processes & controls to ensure compliance w/ the AML program, & > Conditioning employment on regulatory compliance. |
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Describe how the independent audit should review Suspicious Transaction Reporting (STR) systems. |
The independent audit should review STR systems, which should include an evaluation of the research & referral of unusual transactions. Testing should include a review of policies, procedures & processes for referring unusual or suspicious activity from all business lines (e.g., legal, private banking, foreign correspondent banking) to the personnel or department responsible for evaluating unusual activity. |
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Describe a sound Know Your Employee program. |
A KYE program means that the institution has a program in place that allows it to understand an employee’s background, conflicts of interest & susceptibility to ML complicity. Policies, procedures, internal controls, job description, code of conduct/ethics, levels of authority, compliance w/ personnel laws & regulations, accountability, monitoring, dual control, & other deterrents should be firmly in place. |
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Where does the ultimate responsibility for the AML compliance program rest with? |
The ultimate responsibility for the AML compliance program rests w/ the board of directors. Members must set the tone from the top by openly voicing their commitment to the program, ensuring that their commitment flows through all services areas, & holding responsible parties accountable for compliance. |
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Are the costs of non-compliance w/ AML laws & regulations limited to fines & penalties levied by regulators? |
The cost of the fines & penalties levied by regulators due to non-compliance w/ AML laws & regulations is only part of the overall expense. Significant additional costs include legal bills potential loss of business due to reputational damage, extensive compliance review charges, consulting fees, costs for system & other compliance program enhancements, as well as the opportunity costs as the compliance staff & others will be spending the bulk of their time addressing the consent order. |
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Identify the four ways that good technology can equip organizations w/ improved defenses in the fight against financial crime. |
> Transaction monitoring: scanning & analyzing data for potential ML activity, > Watch list filtering: screening new accounts, existing customers, beneficiaries & transaction counter parties against terrorists, criminal & other blocked-persons watch lists, > Automation of regulatory reporting: filing suspicious transaction reports (STRs), currency transaction reports (CTRs), or other regulatory reports w/ the government, & > A detailed audit trail: demonstrates compliance efforts to regulators. |
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According to the 1999 U.S. Customs “trade advisory” titled “The Black Market Peso Exchange,” what are the three red flags as indicators of BMPE? |
> Payment made in cash by a third party w/ no connection to the underlying transaction, > Payment made by wire transfers from third parties unconnected to the underlying transaction, & > Payment made w/ checks, bank drafts or MOs not drawn on the account of the purchaser. |
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Identify several types of internal reports FIs may use to discover ML & TF. |
> Daily cash activity in excess of the country’s reporting threshold, > Daily cash activity just below the country’s reporting threshold (to identify possible structuring), > Cash activity aggregated over a period of time (e.g., individual transactions over a certain amount, or totaling more than a certain amount over a 30-day period) to identify possible structuring, > Wire transfer reports/logs (w/ filters using amount & geographical factors), > Monetary instrument logs/reports, > Check kiting/drawing on uncollected funds (significant debit/credit flows), > Significant change reports, & > New account activity reports. |
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Define a search warrant & describe how it is issued. |
A search warrant is a grant of permission from a court for a LE agency to search certain designated premises & to seize specific categories of items or documents. Generally, the requesting agency is required to establish that probable cause exists to believe that evidence of a crime will be located. The warrant is authorized based on information contained in an affidavit submitted by a LE officer. |
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Identify the factors a prosecutor may consider when determining whether or not to bring a case against an institution involving ML-related charges. |
> The institution has a criminal history, > The institution has cooperated w/ the investigation, > The institution discovered & self-reported the ML-related issues, > The institution has had a comprehensive & effective AML program, > The institution has taken timely & effective remedial action, > There are civil remedies available that can serve as punishment, or > Deterring wrongdoing by others is needed & will be served by a prosecution. |
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Describe a typical suspicious or unusual transaction reporting process w/in a FI. |
While reporting procedures vary from country to country, a typical suspicious or unusual transaction reporting process w/in a FI includes: > Procedures to identify potential suspicious transactions or activity, > A formal evaluation of each instance, & continuation, of unusual transactions or activity, > Documentation of the suspicious transaction reporting decision, whether or not filed w/ the authorities, > Procedures to periodically notify senior management or the board of directors of suspicious transaction filings, & > Employee training on detecting suspicious transactions or activities. |
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What is the purpose of conducting an internal investigation? |
The purpose of the investigation will be to learn the nature & extent of any potential wrongdoing, to develop information sufficient to report - when necessary - to the authorities, to enable the institution to minimize its liability, & to stop any potential ML. |
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If a bank is under investigation by a government agency for possible ML, what steps should the Bank have for its employees follow? |
With regard to investigations conducted by the government, employees should be informed of the investigation & should be instructed not to produce corporate documents directly, but, rather, should inform senior management or counsel of all requests for documentation & should provide the documents to them for production. In that way, the institution will know what is being requested & what has been produced. In addition, the institution can determine what, if any, requests should be contested. The same procedure should be followed w/ regard to requests for employee interviews. |
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How should a FI monitor the receipt of a subpoena, summons, or other government request? |
When an institution receives a subpoena, summons or other government request, the institution should do more than just produce the records or information being sought. FIs should ensure that all grand jury subpoenas, as well as other information requests from government agencies, are reviewed by senior management, an investigations group or counsel to determine how best to respond to the inquiry & to determine if the inquiry or the underlying activity might pose a risk to the institution. In addition, the institution should maintain a centralized control over all requests & responses in order to ensure that the requests are responded to on a complete & timely basis & to establish a complete record of what is provided. This centralized record will also assist w/ regard to the institution’s own internal investigation. |
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ABC Bank was served/ a subpoena compelling the production of certain documents on a personal checking account. Describe the steps the bank should consider taking upon receipt of the subpoena. |
If an institution is served w/ a summons or subpoena compelling the production of certain documents, the institution should have its senior management and/or counsel review the summons or subpoena. If there are no grounds for contesting the summons or subpoena, the institution should take all appropriate measures to comply w/ the summons or subpoena on a timely & complete basis. Failure to do so can result in an adverse action & penalties for the institution. Also, the FI should not notify the customer who is being investigated. If the government asks the bank to keep certain accounts open, such a request should be obtained in writing under proper letterhead & authority from the government. |
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Identify several situations that may require a FI to initiate an internal investigation? |
> A report of examination from the regulators, > Information from third parties, such as customers, > Information derived from surveillance or monitoring systems, > Information from employees or a company hotline, > Receipt of a governmental subpoena or search warrant, > Learning that government investigators are asking questions of institution employees, business associates, customers or even competitors, & > The filing of a civil lawsuit against the institution or a customer of the institution. |
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ABC Bank was served w/ a search warrant. What next steps should the Bank consider? |
1. Call the FI’s in-house or outside counsel, 2. Review the warrant to understand its scope, 3. Ask for & obtain a copy of the warrant, 4. Ask for a copy of the affidavit that supports the search warrant (the agents are not obligated to provide a copy of the affidavit, but, if a FI is allowed to see the affidavit, the FI can learn more about the purpose of the investigation), 5. Remain present while the agents record an inventory of all items they seize & remove from the premises. Keep track of the records taken by the agents, 6. Ask for a copy of the LE’s inventory of what they have seized, & 7. Write down the names & agency affiliations of the agents who conduct the search. |
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Identify & describe the three sections of the USA Patriot Act concerning due diligence U.S. FIs need to perform for relationships w/ foreign correspondent banking customers. |
Section 312 requires institutions must set up risk based due diligence to mitigate the ML risks posed by foreign FIs. Section 313, which prohibits U.S. FIs from opening or maintaining correspondent accounts for foreign shell banks & requires them to take “reasonable steps” to ensure that a correspondent account of a foreign bank is not being used indirectly to provide banking services to a shell bank. Section 319, which requires U.S. FIs to maintain records w/ the names & address of the owners of foreign banks for which they maintain correspondent accounts. |
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What are the two main reasons correspondent banking is vulnerable to ML? |
> By their nature, correspondent banking relationships create a situation in which a FI carries out financial transactions on behalf of customers of another institution. This indirect relationship means that the correspondent bank provides services for individuals or entities for which it has neither verified the identities nor obtained any first-hand knowledge, & > The amount of money that flows through correspondent accounts can pose a significant threat to FIs, as they process large volumes of transactions for their customers’ customers. This makes it more difficult to identify the suspect transactions, as the FI generally does not have the information on the actual parties conducting the transaction to know whether they are unusual. |
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Describe four types of risk associated w/ ML faced by a FI. |
> Reputational risk is described as the potential that adverse publicity regarding an organization’s business practices & associations, whether accurate or not, will cause a loss of public confidence in the integrity of the organization. > Operational risk is described as the potential for loss resulting from inadequate internal processes, personnel or systems or from external events. > Legal risk is the potential for lawsuits, adverse judgments, unenforceable contracts, fines & penalties generating losses, increased expenses for an organization, or even the closure of the organization. > Concentration risk is the potential for loss resulting from too much credit or loan exposure to one borrower or group of borrowers. |
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What is a concentration account? |
Concentration accounts are internal accounts established to facilitate the processing & settlement of multiple or individual customer transactions w/in the bank, usually on the same day. These accounts are also known as special-use, omnibus, settlement, suspense, intraday, sweep or collection accounts. Concentration accounts are frequently used to facilitate transactions for private banking, trust & custody accounts, funds transfers & international affiliates. |
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What are the economic effects of ML? |
> Loss of control of, or mistakes in, decisions regarding economic policy, > Economic distortion & instability, > Loss of tax revenue, > Risks to privatization efforts, > Reputation risk for the country, & > Social costs |
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Describe the three phases of ML. |
> Placement is the physical disposal of cash or other assets derived from criminal activity. > Layering is the separation of illicit proceeds from their source by layers of financial transactions intended to conceal the origin of the proceeds. > Integration is supplying apparent legitimacy to illicit wealth through the re-entry of the funds into the economy in what appears to be normal business or personal transactions. |
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What is one of the most important aspects of due diligence for a bank when establishing a relationship w/ a money remitter? |
Ensuring the money remitter is properly licensed. |
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How can the free-look period be used to launder money? |
A free-look period is a feature that allows investors, for a short period of time after the policy is signed & the premium paid, to back out of a policy w/o penalty. This process allows the money launderer to get an insurance check, which represents cleaned funds. However, as more insurance companies are subject to AML program requirements, this type of ML is more readily detected & reported. |
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According to FATF, what three circumstances should be kept in mind when dealing w/ possible cuckoo smurfing activity? |
> The existence of these deposits is not necessarily grounds to reconsider the relationship w/ a customer. > It could be the indicator of laundering, therefore it should be examined carefully. > LE will need information on the depositor, so banks should seek to identify cash deposits made by third parties & should retain surveillance footage. |
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What favors may contribute to the vulnerabilities of private banking w/ regard to ML? |
> Perceived high profitability, > Intense competition, > Powerful clientele, > The high level of confidentiality associated w/ private banking, > The close relationship of trust developed between relationship managers & their clients, > Commission-based compensation for relationship managers, > A culture of secrecy & discretion developed by the relationship managers for their clients, & > The relationship managers becoming client advocates to protect their clients. |
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How can the early redemption method on insurance policies be used to launder money? |
One indicator of possible ML is when a potential policy holder is more interested in the cancellation terms of a policy than the benefits of the policy. The launderer buys a policy w/ illicit money & then tells the insurance company that he has changed his mind & does not need the policy. After paying a penalty, the launderer redeems the policy & receives a clean check from a respected insurer. |
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Describe microstructuring. |
Designing a transaction to evade triggering a reporting or record keeping requirement is called “structuring.” Microstructuring is essentially the same as structuring, except that it is done at a much smaller level. Instead of taking $18k & breaking it into two deposits, the microstructurer might break it into 20 deposits of approximately $900 each This even of structuring makes it extremely difficult to detect. |
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According to a 2001 report, “ML in Canada: An Analysis of RCMP Cases,” what are the four related reasons to establish or control a shell company for ML purposes? |
> Shell companies accomplish the objective of converting the cash proceeds of crime into alternative assets, > Through the use of shell companies, the launderer can create the perception that illicit funds have been generated from a legitimate source, > Once a shell company is established, a wide range of legitimate and/or bogus business transactions can be used to further the laundering process, & > Shell companies can also be effective in concealing criminal ownership. Nominees can be used as owners, directors, officers or shareholders. |
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Describe several ways commodity futures & options accounts may be susceptible to ML. |
There are several commodity & futures accounts are susceptible to ML, including: > Withdrawal of assets through transfers to unrelated accounts or to high-risk countries, > Frequent additions to or withdrawals from accounts, > Checks drawn on, or wire transfers from, accounts of third parties w/ no relation to the client, > Clients who request custodial arrangements that allow them to remain anonymous, > Transfers of funds to the adviser for management followed by transfers to accounts at other institutions in a layering scheme, > Investing illegal proceeds for a client, & > Movement of funds to disguise their origin. |
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Identify three ways ML can occur through vehicle sellers. |
The industry defined as “vehicle sellers” includes sellers & brokers of new vehicles, such as automobiles, trucks & motorcycles; new aircraft, including fixing wing airplanes & helicopters; new boats & ships, & used vehicles. Laundering risks & the ways laundering can occur through vehicle sellers include: > Structuring cash deposits below the reporting threshold, or purchasing vehicles w/ sequentially numbered checks or MOs, > Trading in vehicles & conducting successive transactions of buying & selling new & used vehicles to produce complex layers of transactions, > Accepting third-party payments, particularly from jurisdictions w/ ineffective ML controls. |
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What is the significance of a trust account, whether offshore or onshore, in the context of ML? |
The significance of a trust account - whether onshore or offshore - in the context of ML cannot be understated: it can be used as part of the first step in converting illicit cash into less suspicious assets; it can help hide criminal ownership of funds or other assets; & it is often an essential link between different ML vehicles & techniques, such as real estate, shell & active companies, nominees & the deposit & transfer of criminal proceeds. |
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Describe the type of services to third parties that any person or business provides on a professional basis to participate in the creation, administration or management of corporate vehicles. |
Trust & company service providers (TCSP) include those persons & entities that, on a professional basis, participate in the creation, administration or management of corporate vehicles. They refer to any person or business that provides any of the following services to third parties: > Acting as a formation agent of legal persons, > Acting as (or arranging for another person to act as) a director or secretary of a company, a partner of a partnership, or a similar position in relation to other legal persons, > Providing a registered office, business address or correspondence for a company, a partnership or any other legal person or arrangement, > Acting as (or arranging for another person to act as) a trustee of an express trust, & > Acting as (or arranging for another person to act as) a nominee shareholder for another person. |
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Why are hawalas attractive to terrorist financiers? |
Hawalas are attractive to terrorist financiers b/c they, unlike formal FIs, are not subject to formal government oversight & do not keep detailed records in a standard form. Although some hawaladars do keep ledgers, their records are often written in idiosyncratic shorthand & are maintained only briefly. |
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What is the difference in the money trail between TF & ML? |
The money trail for ML is circular w/ money eventually ending up w/ the person who generated it. On the other hand, the money trail for TF is linear w/ the money generated being used to propagate terrorist groups & activities. |
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Why are bearer bonds & bearer stock certificates prime vehicles for ML? |
Bearer bonds & bearer stock certificates, or “bearer shares,” are prime ML vehicles b/c they belong, on the surface, to the “bearer.” When bearer securities are transferred, b/c there is no registry of owners, the transfer takes place by physically handing over the bonds or share certificates. Bearer shares offer lots of opportunities to disguise their legitimate ownership. |
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How can art & antique dealers & auctioneers mitigate their ML risks? |
> Require all art vendors to provide names & addresses. Ask that they sign & date a form that states that the item was not stolen & that they are authorized to sell it. > Verify the identities & addresses of new vendors & customers. > If there is a reason to believe an item might be stolen, immediately contact the Art Loss Register, the world’s largest private database of stolen art. > Look critically when a customer asks to pay in cash. > Be aware of ML regulations. > Appoint a senior staff member to whom employees can report suspicious activities. |
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What general characteristics of TF can a FI look at to avoid becoming conduits for TF? |
FATF’s report entitled “Guidance for FIs in Detecting TF” published April 24, 2002 describes general characteristics of TF that a FI can look at to avoid becoming conduits for TF, including: (A) Use of an account as a front for a person w/ suspected terrorist links, (B) Appearance of an accountholder’s name on a list of suspected terrorists, (C) Frequent large cash deposits in accounts of non-profit organizations, (D) High volume of transactions in the account, and (E) Lack of a clear relationship between the banking activity & the nature of the accountholder’s business. |
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What is the most basic difference between TF & ML? |
The most basic difference between TF & ML involves the origin of funds. TF uses funds for an illegal political purpose, but the money is not necessarily derived from illicit proceeds. On the other hand, ML always involves the proceeds of illegal activity. The purpose of laundering is to enable the money to be used legally. |
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How does having a lawyer as a trustee on an account at a FI create vulnerabilities to ML at an institution? |
Lawyers often serve as trustees by holding money or assets “in trust” for clients. This enables lawyers to conduct transactions & to administer the affairs of a client. Sometimes, the illicit money is placed in a law firm’s general trust account in a file set up in the name of the client, a nominee, or a company controlled by the client. |
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Identify the three important tasks that FATF focuses on. |
> Spreading the AML message worldwide, > Monitoring implementation of the FATF Recommendations among FATF members, and > Reviewing ML trends & countermeasures. |
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Describe FATF’s Recommendation 15 (2012) on new technologies. |
Countries & FIs should assess the risks associated w/ developments of new products, business practices, delivery mechanisms & technology. FIs should assess these risks prior to launching new products; they should also take appropriate measures to mitigate the risks identified. |
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Identify the seven topics of international standards incorporated into the FATF 40 Recommendations (2012). |
> AML/CFT policies & procedures (Recommendations 1-2) > ML & confiscation (Recommendations 3-4) > TF & financing of proliferation (Recommendations 5-8) > Financial & non-financial institution preventative measures (Recommendations 9-23) > Transparency & beneficial ownership of legal persons & arrangements (Recommendations 24-25) > Powers & responsibilities of competent authorities & other institutional measures (Recommendations 26-35) > International cooperation (Recommendations 36-40) |
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What characteristics of charities or non-profit organizations make them particularly vulnerable to misuse for TF? |
> Enjoying the public trust, > Having access to considerable sources of funds, > Being cash-intensive, > Frequently having a global presence, often in or next to those areas that are exposed to terrorist activity, and > Often being subject to little or no regulation and/or having few obstacles to their creation. |
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According to the FATF 40 Recommendations, the complete set of countermeasures against ML & TF covers what 5 elements? |
> The identification of risks & development of appropriate policies, > The criminal justice system & LE, > The financial system & its regulation, > The transparency of legal persons & arrangements, & > International cooperation. |
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Describe FATF’s Recommendation 1 (2012) on the risk-based approach. |
Countries should start by identifying, assessing & understanding the ML & TF risks they face. Then they should take appropriate measures to mitigate the identified risks. The risk-based approach allows countries to target their limited resources in a targeted manner to their own particular circumstances, thereby increasing the efficiency of the preventative measures. FIs should also use the risk-based approach to identify & mitigate the risks they face. |
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What steps should the institution take to ensure a written report on the internal investigation retains the attorney-client privilege? |
If counsel for the institution prepares a written report of an investigation, the institution should take steps to not inadvertently waive the attorney-client privilege by distributing the report to persons who should not receive it. Every page of the report should contain a statement that it is confidential & is subject to the attorney-client privilege & work-product privilege. Copies of the report should be numbered, & a list of persons who are given copies to read should be maintained. After a set period of time, all copies should be returned. Persons obtaining the report should be instructed not to make notes on their copies. All copies should be maintained in a file separate from regular institution files in a further effort to maintain the highest level of protection. |
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According to statements by the U.S. Treasury & IRS, what are some patterns FIs can look for as they investigate possible ML? |
> Unusually high monthly balances in comparison to known sources of income, > Unusually large deposits, deposits in round numbers or deposits in repeated amounts that are not attributable to legitimate sources of income, > Multiple deposits made under reportable thresholds, > The timing of deposits. This is particularly important when dates of illegal payments are known, > Checks written for unusually large amounts (in relation to the suspect’s known practices), or > A lack of account activity. This might indicate transactions in currency or the existence of other unknown bank accounts. |
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What type of documents would a FI have that could assist a financial investigator in tracking money movements? |
A financial investigator’s main objective is to track the movement of money, whether through a bank, broker-dealer, MSB or casino. For example, banks maintain signature cards, which are collected at the opening of an account, account statements, deposit tickets, checks & withdrawal items & credit & debit memorandums. Banks also keep records on loans, cashier’s checks, certified checks, traveler’s checks & MOs. They exchange currency, cash third-party checks, & conduct wire transfers, as do most MSBs. Banks also keep safe deposit boxes & issue credit cards. |
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What are the four key elements of KYC as identified in the Basel Committee’s October 2001 paper called “Customer Due Diligence for Banks?” |
> Customer identification, > Risk management, > Customer acceptance, and > Monitoring |
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Identify the 7 specific customer identification issues as identified in the Basel Committee’s October 2001 paper called “Customer Due Diligence for Banks.” |
> Trust, nominee & fiduciary accounts, > Corporate vehicles, particularly companies w/ nominee shareholders or entities w/ shares in bearer form. > Introduced businesses, > Client accounts opened by professional intermediaries, such as “pooled” accounts managed by professional intermediaries on behalf of entities such as mutual funds, pension funds & money funds, > Politically exposed persons, > Non face-to-face customers, i.e., customers who do not present themselves for a personal interview, and > Correspondent banking. |
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Why is it important to interview knowledgeable employees as soon as practical? |
When performing an internal investigation, it is important to secure & review all relevant documentation & to interview all knowledgeable employees. It is important to interview these employees as soon as practicable so that their memories are the freshest & so that they can direct management or counsel to relevant documents & people on a timely basis. |
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Describe FATF’s Recommendation 20-21 (2012) on suspicious transaction reporting & liability. |
The Recommendations say that FIs must report to the FIU where they suspect or have reasonable grounds to suspect that funds are the proceeds of a criminal activity or are related to TF. The FIs & the employees reporting such suspicions should be protected from liability for reporting & should be prohibited from disclosing that they have reported such activity. |
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What are six principles set forth in the Basel Committee’s Statement of Principles called “Prevention of Criminal Use of the Banking System for the Purpose of ML”? |
In 1988, the Basel Committee issued a Statement of Principles called “Prevention of Criminal Use of the Banking System for the Purpose of ML” in recognition of the vulnerability of the financial sector to misuse by criminals. This was a step toward preventing the use of the banking sector for ML, & it set out principles w/ respect to: > Customer identification, > Compliance w/ laws, > Conformity w/ high ethical standards & local laws & regulations, > Full cooperation w/ national LE to the extent permitted w/o breaching customer confidentiality, > Staff training, and > Record keeping & audits. |
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In 2009, FATF began to publicly identify high risk jurisdictions. What made the named jurisdictions high risk? |
The named countries had strategic deficiencies in their AML/CFT regimes. |
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If an institution decides to file an STR, what should they do as soon as possible? |
Notify the investigators or prosecutors. |
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The checking account for XYZ Trading LTD, a company registered in the British Virgin Islands, was identified on a government subpoena issued to International Bank. The Bank has initiated an internal investigation on the account & its beneficial owners. What factors should the Bank consider on whether to close the account? |
Based on its internal investigation, the institution should make an independent determination as to whether to close the account in issue. Some of the factors that the institution should consider are as follows: > The legal basis for closing an account, > The institution’s stated policies & procedures for closing an account, > How serious is the underlying conduct. If the conduct is serious & rises to the level where the account would ordinarily be closed, then the institution should consider closing the account, or > As stated above, if LE requests the institution to keep the account open, the institution should request that the investigator or prosecutor make that request in writing on proper government agency letterhead w/ the appropriate authorized signature. |
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According to FATF’s Recommendations (2012), what are the designated thresholds for transactions under Recommendations 10, 22, & 23? |
FATF also designated specific thresholds that trigger AML scrutiny. For example, the threshold that FIs should monitor for occasional customers is 15,000 (Recommendation 10); for casinos, including internet casinos, it is 3,000 (Recommendation 22); & for dealers in precious metals, when engaged in any cash transaction, it is 15,000 (Recommendation 22-23). |
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Define a red flag. |
A warning signal that should bring attention to a potentially suspicious situation, transaction or activity. |
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Define physical cross-border transportation of currency. |
The physical cross-border transportation of currency is defined as any in-bound or out-bound transportation of currency or bearer negotiable instruments from one country to another. The term includes: (1) physical transportation by a natural person, or in that person’s accompanying luggage or vehicle; (2) shipment of currency through cargo containers; and (3) the mailing of currency or bearer negotiable instruments. |
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What are remittance services? |
Remittance services are also referred to as giro houses or casas de cambio. Remittance services are businesses that receive cash or other funds that they transfer through the banking system to another account. The account is held by an associated company in a foreign jurisdiction where the money is made available to the ultimate recipient. |
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Describe a nostro account. |
Nostro & vostro accounts are mirror correspondent accounts maintained by two banks in different jurisdictions to facilitate transactions in each other’s local currency - essentially, clearing accounts that balance foreign currency transactions between the two institutions. For example, Bank X from Brazil might open a U.S. -dollar account at Bank Y in the U.S., called a “nostro” (literally “our”) account; Bank Y in Brazil might open a mirror account in Brazilian reals w/ Bank X in Brazil - a “vostro” (“your”) account. Financial regulators have expressed concern over the transparency of nostro & vostro account relationships, especially when there are multiple layers of accounts w/in primary relationships. |
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What is the safe harbor for reporting suspicious activity? |
Safe harbor is defined as legal protection for FIs, their directors, officers & employees from criminal & civil liability for breach of any restriction on disclosing information imposed by contract or by any legislative, regulatory or administrative prohibition, if they report their suspicions in good faith to the Financial Investigation Unit (FIU), even if they did not know precisely what the underlying criminal activity was, & regardless of whether illegal activity actually occurred. |
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Describe a Ponzi scheme. |
A ML system named after Charles Ponzi, an Italian immigrant who spent 10 years in jail in the U.S. for a scheme that defrauded 40k people out of $15M. Ponzi’s name became synonymous w/ the use of new investors’ money to pay off prior investors. Ponzi schemes involve fake, non-existent investment schemes in which the investors are tricked into investing on the promise of unusually attractive returns. The operator of the scheme can keep the operation going by paying off early investors w/ the money from new investors until the scheme collapses under its own weight and/or the promoter vanishes w/ the remaining money. The scheme recently engaged in by Bernie Madoff is an example of a Ponzi scheme. The prime bank guaranty, roll program, bank debenture program & high yield promises are frequently used to entice investors into participating in Ponzi schemes. |
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What is the broad objective of the UNODC model legislation on ML & financing of terrorism? |
The broad objective of the Global Programme is to strengthen the ability of Member States to implement measures against ML & the financing of terrorism & to assist them in detecting, seizing & confiscating illicit proceeds, as required pursuant to United Nations instruments & other globally accepted standards, by providing relevant & appropriate technical assistance upon request. |
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According to the Basel Committee on Banking Supervision’s paper entitled “Compliance & the compliance function in banks,” what are the responsibilities of the board of directors for compliance? |
According to the Basel Committee on Banking Supervision’s paper entitled “Compliance & the compliance function in banks,” the bank’s board of directors is responsible for overseeing the management of the bank’s compliance risk. The board should approve the bank’s compliance policy, including a formal document establishing a permanent & effective compliance function. At least once a year, the board or a committee of the board should assess the extent to which the bank is managing its compliance risk effectively. |
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According to the Basel Committee on Banking Supervision’s paper entitled “Customer Due Diligence for Banks,” how are sound KYC procedures relevant to the safety & soundness of banks? |
> They help to protect banks’ reputation & the integrity of banking systems by reducing the likelihood of banks becoming a vehicle for or a victim of financial crime & suffering consequential reputational damage, and > They constitute an essential part of sound risk management (e.g., by providing the basis for identifying, limiting & controlling risk exposures in assets & liabilities, including assets under management). |
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According to FATF’s paper called “ML & TF Vulnerabilities of Commercial Websites & Internet Payment Systems,” what are the different classes/types of commercial websites? |
> Mediated customer-to-customer, sites that allow private individuals to sell to one another via an online marketplace, > Mediated business-to-customer, sites that allow multiple merchants to sell to consumers via an online marketplace, > Non-mediated customer-to-customer (i.e., bulletin board services & online classifieds), sites that only allow customers to advertise goods they want to sell, > Direct business-to-customer, merchants that sell goods to consumers via their own websites, and > Direct business-to-business websites, merchants selling to merchants. |
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What is tipping off? |
The improper or illegal act of notifying a suspect that he or she is the subject of a Suspicious Transaction Report or is otherwise being investigated or pursued by the authorities. |
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Describe a trustee. |
A trustee may be a paid professional or company or unpaid person that holds the assets in a trust fund separate from the trustee’s own assets. The trustee invests & disposes of the assets in accordance w/ the settlor’s trust deed, taking into consideration any letter of wishes. |
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According to the Wolfsberg Statement on AML Screening, Monitoring & Searching (2009), what are the most appropriate & effective overall monitoring frameworks? |
The Wolfsberg Group believes that a risk-based approach enhances the effectiveness of monitoring for unusual & potentially suspicious activity, to the extent that such activity is distinguishable from legitimate activity. It is for this reason that the Wolfsberg Group supports the introduction of risk-based monitoring models & frameworks that are sufficiently flexible to meet the needs & nature of individual financial institutions. The most appropriate & effective overall monitoring framework may contain one or more of the following elements: > A dedicated automated transaction monitoring system, > System-generated exception reports, > Manual “line of business” incident reports, > Scheduled periodic reviews/sampling, and > Event-driven reviews (e.g., following issuance of new typologies). |
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Define smurfing. |
A commonly used ML method, smurfing involves the use of multiple individuals and/or multiple transactions for making cash deposits, buying monetary instruments or bank drafts in amounts under the reporting threshold. |
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What is hawala? |
A funds exchange system in Indian & Chinese civilizations used to facilitate the secure & convenient cross-border movement of funds. Hawala was born centuries before Western financial systems. Merchant traders wishing to send funds to their homelands would deposit them w/ a hawala broker or hawaladar who normally owned a trading business. For a small fee, the banker would arrange for the funds to be available for withdrawal from another banker, normally also a trader, in another country. The two bankers would settle accounts through the normal process of trade. Today, the technique works much of the same, with business persons in various parts of the world using their corporate accounts to move money internationally for third parties. Deposits & withdrawals are made through hawaladars, rather than traditional FIs. The practice is vulnerable to TF & ML - funds do it actually cross borders, & transactions tend to be confidential, as records are not stringently kept. In Pakistan, the system is called hundi. See Alternative Remittance Systems. |
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Describe a tax haven. |
Countries that offer special tax incentives or tax avoidance to foreign investors & depositors. |
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According to the Egmont Group’s “Principles for Information Exchange Between Financial Intelligence Units for ML & TF cases,: what are the permitted uses of information? |
> Information exchanged between FIUs may be used only for the specific purpose for which the information was sought or provided. > The requesting FIU may not transfer information shared by a disclosing FIU to a third party, nor make use of the information in an administrative, investigative, prosecutorial or judicial purpose w/o the prior consent of the FIU that disclosed the information. |
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Describe willful blindness. |
A legal principle that operates in ML cases in the U.S. & is defined by courts as the “deliberate avoidance of knowledge of the facts” or “purposeful indifference.” Courts have held that willful blindness is the equivalent of actual knowledge of the illegal source of funds or of the intentions of a customer in a ML transaction. |
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According to FATF’s paper called “Risk-Based Approach Guidance for Casinos,” what are the potential transaction risks for land-based & internet casinos? |
According to FATF’s paper called “Risk-Based Approach Guidance for Casinos,” casinos should consider operational aspects (i.e., products, services, games & accounts/account activities) that can be used to facilitate ML & TF activities. In addition, land-based & internet casinos have the potential transaction risks: > Proceeds of crime, > Cash, > Transfers between customers, > Loan sharking, > Use of casino deposit accounts, and > Redemption of chips, tickets, or tokens for currency. |
