Acams Test

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What does FATF stand for and what is its purpose?

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The Financial Action Task Force (FATF) is a Paris-based
multinational or inter-governmental body formed in 1989 by the
Group of Seven industrialized nations to foster international
action against money laundering.

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The United Nations 2000 Convention Against Transnational
Organized Crime, also known as the “Palermo Convention,”
defines money laundering as:

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• The conversion or transfer of property, knowing it is derived
from a criminal offense, for the purpose of concealing or
disguising its illicit origin or of assisting any person who is
involved in the commission of the crime to evade the legal
consequences of his actions.
• The concealment or disguising of the true nature, source,
location, disposition, movement, rights with respect to, or
ownership of property knowing that it is derived from a criminal
offense.
• The acquisition, possession or use of property, knowing at the
time of its receipt that it was derived from a criminal offense or
from participation in a crime.

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FATF’s 40 Recommendations on Money Laundering, its 9 Special Recommendations on
Terrorist Financing and the 3rd European Union Directive on the Prevention of the Use of the Financial System for the Purpose of Money Laundering and Terrorist Financing state that the intent and knowledge required to prove the offense of money laundering includes the concept that such a mental state may be inferred from“objective factual circumstances.” In a number of jurisdictions, the term “willful blindness” is a legal principle that operates in money laundering cases. Courts define “willful blindness” 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 ofthe intentions of a customer in a money laundering transaction.

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In October 2001, FATF expanded its mandate to cover the
financing of terrorism.

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Concealment of funds used for terrorism is primarily designed to
hide the “purpose” for which these funds are used, rather than
their source.

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Both terrorists and money launderers use the same methods to
move their money in ways to avoid detection, such as structuring
payments to avoid reporting and underground banking, such as the
ancient system of hawala.

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Three Stages in the
Money Laundering Cycle

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Step One: Placement — The physical disposal of cash or
other assets derived from criminal activity.

Step Two: Layering — The separation of illicit proceeds from
their source by layers of financial transactions intended to
conceal the origin of the proceeds.

Step Three: Integration — 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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Increased Crime and Corruption: Successful money
laundering helps enhance the profitable aspects of criminal
activity. When a country is seen as a haven for money
laundering, it will attract people who commit crime. Typically,
havens for money laundering and terrorist financing have:

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• Limited number of predicate crimes for money laundering.
• Limited types of institutions and persons covered by money
laundering laws and regulations.
• Little to no enforcement of the laws, weak penalties, that make it difficult to confiscate or freeze assets related to money laundering.

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Undermining the Legitimate Private Sector:
One of the most serious microeconomic effects of money laundering is felt in
the private sector. Money launderers are known to use front companies, or businesses that appear legitimate and engage in legitimate business, but are in fact controlled by criminals
who commingle the proceeds of illicit activity with legitimate funds to hide the ill-gotten gains

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Weakening Financial Institutions:
Money laundering and terrorist financing can harm the soundness of a country’s
financial sector. They can negatively affect the stability of individual banks or other financial institutions, such as securities firms and insurance companies.

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Financial institutions that rely on the proceeds of crime have additional challenges in adequately managing their assets, liabilities and operations. The adverse consequences of money
laundering are generally described as reputational, operational, legal and concentration risks. They are interrelated, and each has financial consequences, such as:

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• Loss of profitable business
• Liquidity problems through withdrawal of funds
• Termination of correspondent banking facilities
• Investigation costs and fines
• Asset seizures
• Loan losses
• Reduced stock value of financial institutions

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Reputational risk is described as the potential that adverse publicity regarding an organization’s business practices and associations, whether accurate or not, will cause a loss of public confidence in the integrity of the organization.

Operational risk is described as the potential for loss resulting from inadequate internal processes, personnel or systems or from external events. Such losses occur when institutions incur reduced or terminated inter-bank or correspondent banking services or an increased cost for these services. Increased borrowing or funding costs are also a component of operational risk.

Legal risk is the potential for lawsuits, adverse judgments, unenforceable contracts, fines and penalties generating losses, increased expenses for an organization, or even the closure of the organization.

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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For these reasons, the Basel Committee on Banking Supervision has issued statements such as the 2001 Customer Due Diligence for Banks Paper on the prevention of the criminal use of their
members’ banking systems by money launderers.

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The economic effects of money laundering include:

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• Loss of control of, or mistakes in, decisions regarding
economic policy
•Economic Distortion and Instability
•Loss of Tax Revenue
•Risks to Privatization Efforts
•Reputation Risk for the Country
•Social Costs

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ELECTRONIC FUNDS TRANSFER

Electronic funds transfer systems offer money launderers a fast conduit for moving money between countries and accounts. Illicit fund transfers are easily hidden among the millions of legitimate transfers that occur each day and place the funds into an account established to receive the transfers. Money launderers also use electronic transfers of funds in the second phase of the laundering process, the layering cycle.

Some indicators of money laundering using electronic transfers offunds include:

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•Funds transfers that occur to or from a financial secrecy haven, or to or from a high-risk geographic location without an apparent business reason, or when the activity is inconsistent with the customer’s business or history.
•Large, incoming funds transfers that are received on behalf of a foreign client, with little or no explanation or apparent reason.
•Many small, incoming transfers of funds that are received, or deposits that are made using checks and money orders. Almost immediately, all or most of the transfers or deposits are wired to another account in a different city or country in a manner inconsistent with the customer’s business or history.
•Funds activity that is unexplained, repetitive or shows unusual patterns.
•Payments or receipts are received that have no apparent link to legitimate contracts, goods or services.
•Funds transfers that are sent or received from the same person to or from different accounts.

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CORRESPONDENT BANKING

A 305-page report, “Correspondent Banking: A Gateway to Money Laundering,”issued by the United States Senate Permanent Subcommittee on Investigations, found that some large U.S. and foreign banks facilitated, through carelessness and lax procedures, the movement of diverse criminal proceeds into the U.S.

Correspondent banking is the provision of banking services by one bank (the “correspondent bank”) to another bank (the “respondent bank’”). By establishing multiple correspondent relationships globally, banks can undertake international financial transactions for themselves and for their customers in jurisdictions where they have no physical presence. Respondent banks obtain a wide range of service through the correspondent relationship, including cash management (for example, interest bearing accounts in a variety of currencies), international wire transfers of funds, check clearing, payable-through accounts and foreign exchange services. The services offered by a correspondent b

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Correspondent banking is vulnerable to money laundering for two main reasons:

1. By their nature, correspondent banking relationships
create a situation in which a financial institution 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.
2. The amount of money that flows through correspondent
accounts can pose a significant threat to financial
institutions, as they process large volumes of
transactions for their customers’ customer. This makes
it more difficult to identify the suspect transactions,
as the financial institution generally does not have
the information on the actual parties conducting the
transaction to know whether they are unusual.

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After decades of relatively unexamined relationships, the USA Patriot (United and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism) Act of 2001 was passed which contains several provisions concerning due diligence U.S. financial institutions needed to perform for relationships with foreign correspondent banking customers. They include:

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Section 312, which underscores the importance of money laundering control standards for correspondent accounts maintained for certain foreign banks. Pursuant to this section, institutions must set up risk based due diligence to mitigate the money laundering risks posed by foreign financial institutions. In addition, for a correspondent account maintained for a foreign
bank operating under an offshore license or a license granted by a jurisdiction designated as being of concern for money laundering, a financial institution must take reasonable steps to identify the owners of the foreign bank, to conduct enhanced scrutiny of the correspondent account to guard against money laundering, and to ascertain whether the foreign bank provides correspondent accounts to other foreign banks and, if so, to conduct appropriate related due diligence.

Section 313, which prohibits U.S. financial institutions from opening or maintaining correspondent accounts for foreign shell banks and requires them to take “reasonable st

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PAYABLE THROUGH ACCOUNTS

In some correspondent relationships, the respondent bank’s own customers are permitted to conduct their own transactions— including sending wire transfers, making and withdrawing
deposits and maintaining checking accounts — through the respondent bank’s correspondent account without needing to clear the transactions through the respondent bank. Those arrangements are called payable-through accounts (PTAs). PTAs differ from normal correspondent accounts in that the foreign bank’s customers have the ability to directly control funds at the correspondent bank. This is different from the traditional correspondent relationship, where the respondent bank will take orders from their customers and pass them on to the correspondent bank.

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PTAs can have a virtually unlimited number of sub-account holders, including individuals, commercial businesses, finance companies, exchange houses or casas de cambio, and even other foreign banks. The services offered to the “subaccount holders” and the terms of the PTAs are specified in the agreement signed by the
correspondent and the respondent banks.

PTA accounts held in the names of respondent banks often involve checks encoded with that bank’s account number and a numeric code to identify the sub-account, which is the account of the respondent bank’s customer. Sometimes the sub-account holders are not identified to the correspondent bank.

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Elements of a PTA relationship that can threaten the correspondent bank’s money laundering defenses include:

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•PTAs with foreign institutions licensed in offshore financial services sectors with weak or absent bank supervision and weak licensing laws.
•PTA arrangements where the correspondent bank regards the respondent bank as its sole customer and fails to apply its Customer Due Diligence policies and procedures to the customers of the respondent bank.
•PTA arrangements in which sub-account holders have currency deposit and withdrawal privileges.
•PTAs used in conjunction with a subsidiary, representative or other office of the respondent bank, which may enable the respondent bank to offer the same services as a branch without being subject to supervision.

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CONCENTRATION ACCOUNTS

Concentration accounts are internal accounts established to facilitate the processing and settlement of multiple or individual customer transactions within 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 and custody accounts, funds transfers and international affiliates.

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Money laundering risks can arise in concentration accounts if
the customer-identifying information, such as name, transaction
amount and account number, is separated from the financial
transaction. If separation occurs, the audit trail is lost, and accounts
may be misused or administered improperly. Banks that use
concentration accounts should implement adequate policies,
procedures and processes covering operation and recordkeeping
for these accounts.

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What are some anti-money laundering pratices for Concentration Accounts?

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•Capturing customer transactions in the customer’s account statements.
•Prohibiting customers' knowledge of concentration accounts or their ability to direct employees to conduct transactions through the accounts.
•Retaining appropriate transaction and customer identifying information.
•Reconciling accounts frequently by an individual who is independent from the transactions.
•Establishing a timely discrepancy resolution process.
•Identifying and monitoring recurring customer names.

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PRIVATE BANKING

Private banking is an extremely lucrative, competitive and worldwide industry and is an important issue when discussing the money laundering field.

Private banking provides highly personalized and confidential products and services to well heeled clients at fees that are often based on “assets under management.” Private banking often operates semi-autonomously from other parts of a bank and caters to wealthy customers who seek confidentiality and personalized service.

Fierce competition among private bankers for the high net-worth individuals who are their main clientele has given rise to the need for tighter government controls worldwide.

Often, private banking customers are “non-resident aliens” meaning they are conducting their banking in a country outside the one in which they reside.

Private investment companies (PICs), which have been an
element of many high-profile laundering cases in recent years, are
excellent laundering vehicles. PICs are corporations established

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The following factors may contribute to the vulnerabilities of private banking with regard to money laundering:

•Perceived high profitability.
•Intense competition.
•Powerful clientele.
•The high level of confidentiality associated with private banking.
•The close relationship of trust developed between relationship managers and their clients.
•Commission-based compensation for relationship managers.
•A culture of secrecy and discretion developed by the relationship managers for their clients.
•The relationship managers becoming client advocates to protect their clients.

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STRUCTURING

Designing a transaction to evade triggering a reporting or recordkeeping requirement is called “structuring.” Structuring is possibly the most commonly known money laundering method.

Structuring can be done in many settings or industries, including banking, money services businessess and casinos.

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Here is how foreign “money brokers” conduct what is called
structuring:

•A structurer, who is acting for a foreign money broker, opens numerous checking accounts in Country A using real and fictitious names. Sometimes the structure uses identification documents of dead people supplied by the money brokers.
•With funds supplied by the money brokers, the structurer opens the accounts with inconspicuous amounts, usually in the low four-figures.
•To allay bank suspicions, the money brokers sometimes deposit extra funds to cover living expenses and to give the accounts an air of legitimacy.
•Once the accounts are opened, the structurer signs the newly-issued checks in blank, leaving the payee, date and amount lines blank.
•He sends the signed blank checks to the money broker in country B, usually by courier.

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In 2005, FATF added a new term to the vast money laundering lexicon – “cuckoo smurfing.”

The term, mentioned in the organization’s 2005 Typologies Report, refers to a form of money laundering linked to alternative remittance systems, in which criminal funds are transferred through the accounts of unwitting persons who are expecting genuine funds or payments from overseas. The term cuckoo smurfing first originated in investigations in the United Kingdom, where it is a significant money laundering technique.

The main difference between traditional structure and cuckoo smurfing is that in the latter the third parties who hold the bank accounts being used are not aware of the fact that illicit money is being deposited into their accounts.

Cuckoo smurfing requires the work of an insider within a financial institution and is generally a four step process:

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To combat cuckoo smurfing, FATF recommends that banks have controls in place to identify depositors who pay cash into third-party accounts. Also, banks should monitor for unusual cash deposits that are structured or placed in branches other than where the customer’s account is held.

According to FATF, the following should be kept in mind when dealing with possible cuckoo smurfing activity:

•The existence of these deposits is not necessarily grounds to reconsider the relationship with a customer.
•It could be the indicator of laundering, therefore it should be examined carefully.
•Law enforcement will need information on the depositor, so banks should seek to identify cash deposits made by third parties and should retain surveillance footage.

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Microstructuring is essentially the same as structuring, except that it is done at a much smaller level.

A few means of detecting microstructuring include:

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•Use of counter deposit slips as opposed to preprinted deposit slips.
•Frequent activity in an account immediately following the opening of the account with only preliminary and incomplete documentation.
•Frequent visits to make cash deposits of nominal amounts that are inconsistent with typical business or personal banking activity.
•Cash deposits followed by ATM withdrawals,particularly in higher risk countries.
•Cash deposits made into business accounts by third parties with no apparent connection to the company.

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BANK COMPLICITY

In an effort to identify and anticipate trouble before it costs time, money and reputation, companies are developing programs to look closely at the people working inside their own four walls. Knowing your employee is as crucial to a company’s security as knowingcustomers and other “outsiders.”

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CREDIT UNIONS OR BUILDING SOCIETIES

The United Kingdom’s Joint Money Laundering Steering Group (JMLSG) stated in a November 2006 guidance that, although credit unions pose a low money laundering risk, they are still vulnerable to money laundering and terrorist financing schemes.

In the 2007update, the JMLSG included credit unions and building societies in the scope of its recommendations to have AML programs in place. On the plus side, their relatively small size, compared to banks and other financial institutions, makes it harder for criminals to launder illicit cash because suspicious activity can be more easily discovered within a smaller volume of transactions, the JMLSG report found.

Overall, though, credit unions contain “high levels of cash transactions,” which increases the risk of money laundering and terrorist financing.

The group concluded that other high-risk transactions include: money transfers to third parties, third parties paying in cash for someone else and reluctance to provide

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CREDIT CARD INDUSTRY

Credit card accounts are not likely to be used in the initial placement stage of money laundering because the industry generally restricts cash payments. They are more likely to be used in the layering or integration stages

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MONEY REMITTERS AND EXCHANGE HOUSES

Money remitters transfer funds for their customers. They receive cash from their clients which is transferred to designated beneficiaries against payment of a commission. These businesses
provide a valid and legitimate financial service.

Like banks, remittance services have been widely used for money laundering. The risks of laundering are not confined to the informal funds transfer networks; they may also apply to official networks like those of the government postal service.

The biggest misconception about this industry is that there is minimal oversight. In fact, many are subject to a variety of national and/or local regulators and often have extremely tight compliance programs in place. The scrutiny to which money remitters are subject can vary greatly, in large part due to the ease with which some money transmitters can set up their business and not be subject to any regulation. This is why one of the most important aspects of due diligence for a bank when e

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INSURANCE COMPANIES

In its 2002-2003 typologies report, FATF experts submitted case examples that showed the vulnerabilities of the insurance sector to money laundering. The primary emphasis in the examples was on the investment aspect of life insurance policies. Most significant laundering and terrorist financing risks in the insurance industry are found in life insurance and annuities products.

Annuities are another type of insurance policy that has a cash value. An annuity is an investment that provides a defined series of payments in the future in exchange for an up-front sum of money.

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Vulnerabilities in the insurance sector include:

•Lack of oversight/controls over intermediaries: Insurance brokers have a great deal of control and freedom regarding policies.
•Decentralized oversight over aspects of the sales force: Insurance companies may have employees(captive agents) who are subject to the full control of the insurance company.
•Non-captive agents, those who offer an insurance company’s products, but are not employed by an insurance company (i.e., the noncaptive agent will often work with several insurance companies to find the best mix of products for their clients) may fall between the cracks of multiple insurance companies or may work to find the company with the weakest AML oversight if they are complicit with the money launderer.

•Sales-driven objectives: The focus of brokers is on selling the insurance products and, thus, they often overlook signs of money laundering, such as a lack of explanation for wealth or unusual methods for paying insurance premiums.

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Examples of how money can be laundered through the
insurance industry include:

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•The customer can over fund the policy and move funds into and out of the policy while paying early withdrawal penalties.
•The purchase and redemption of single premium insurance bonds are key laundering vehicles. The bonds can be purchased from insurance companies and then redeemed prior to their full term at a discount.
•Use of the free-look period: A free-look period is a feature that allows investors, for a short period of time after the policy is signed and the premium paid, to back out of a policy without penalty
•Early redemption: One indicator of possible money laundering is when a potential policyholder is more interested in the cancellation terms of a policy than the benefits of the policy.

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SECURITIES AND BROKER DEALERS

The difficulty in dealing with laundering in the securities field is that, usually, little currency is involved. It is an industry that runs by computer transfers and paper. Its use in the money laundering process is generally after launderers have disposed of their cash through other methods.

Aspects of the industry that increase its exposure to laundering are:

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•Its international nature.
•The speed of the transactions.
•The ease of conversion of holdings to cash without significant loss of principal.
•The routine use of wire transfers from, to or through multiple jurisdictions.
•The competitive, commission-driven environment, which, like private banking, provides ample incentive to disregard the source of client funds.
•The practice of brokerage firms of maintaining securities accounts as nominees or trustees, thus permitting concealment of the identities of the true beneficiaries.

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For illegal funds originating outside the sector, securities transactions for the creation of legal entities may be used to conceal or obscure the source of these funds (layering)In the case of illegal activities within the securities market itself — for example embezzlement, insider trading, securities fraud, market manipulation — the transactions or manipulations generate illegal funds that must then be laundered.

In both cases, the securities sector offers the launderer the potential for a double advantage:
allowing him to launder illegal funds and to acquire additional profit
from the related securities fraud.

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Money laundering can occur in the securities industry in customer accounts that are used only to hold funds and not for trading. That allows launderers to avoid banking channels with more stringent money laundering controls. Other indications of money laundering are what are known as “wash trading” or offsetting transactions. These transactions involve the entry of matching buys and sells in particular securities, which creates the illusion of trading.

Retail broker-dealers are the industry’s frontline defense —and its most vulnerable access point. A money launderer can potentially use this to his advantage by promising a large or steady
commission stream

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Money laundering through casinos generally occurs in the placement stage, i.e., converting the funds to be laundered from cash to checks.

One laundering technique connected with horse-racing and gaming is when the person will actually gamble the money to be laundered, but in such a way as to be reasonably sure of ultimately recovering his stake in the form of checks issued by the gambling or betting agency and reflecting verifiable winnings from gaming. This method makes it more difficult to prove the money laundering because the person has actually received proceeds from gambling

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The false invoicing scheme, whether over-billing or under-billing for the reputed goods or services provided, is a common money laundering technique.

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The following transactions are also vulnerable, and require
additional attention:

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•Payments or returns to persons other than the owner — If one person delivers precious metal for refining and asserts ownership of the metal and authority to sell it, but directs payments to be made to another person, that transaction may be questionable.

•Precious metal pool accounts — These accounts are maintained by a small number of large and sophisticated precious metal companies and have world-wide scope. They receive and hold precious metal credits for a customer, which can be drawn on by that customer. The customer can request the return of the precious metals, the sale and return of monetary proceeds, or the delivery of precious metal to another person.

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The multi-million-dollar fine art industry can also serve as a convenient money laundering vehicle. Anonymous agents at art auction houses bid millions of dollars for priceless works.

Art and antiques dealers and auctioneers should follow these tips to lessen their money laundering risks:

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•Require all art vendors to provide names and addresses. Ask that they sign and date a form that states that the item was not stolen and that they are authorized to sell it.
•Verify the identities and addresses of new vendors and customers. Be suspicious of any item whose asking price is not commensurate with its market value
•Look critically when a customer asks to pay in cash.
•Avoid accepting cash payments unless there is a strong and reputable reason.
•Be aware of money laundering regulations.
•Appoint a senior staff member to whom employees can report suspicious activities.

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Travel Agencies

Travel agencies can also be used as a means for money launderers to mix illegal funds with clean money to make the illegal funds look legitimate, by providing a reason to purchase high priced airline tickets, hotels and other vacation related expenses.

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Ways money laundering can occur in travel agencies include:

•Purchasing an expensive airline ticket for another person who then asks for a refund.
•Structuring wire transfers in small amounts to avoid recordkeeping requirements, especially when the wires are from foreign countries.

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Most money laundering cases dealing with vehicle dealers have one common element: the unreported use of currency to pay forthe automobiles.

There have also been cases where authorities have charged that a car dealer laundered money by allowing a drug dealer to trade in his cars for cheaper models and to be paid in checks, not cash, for the difference.


Laundering risks and ways laundering can occur through vehicle
sellers include:

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•Structuring cash deposits below the reporting threshold, or purchasing vehicles with sequentially numbered checks or money orders.
•Trading in vehicles and conducting successive transactions of buying and selling new and used vehicles to produce complex layers of transactions.
•Accepting third-party payments, particularly from jurisdictions with ineffective money laundering controls

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Gate keepers : Notaries , Accounta nts, Auditors , Law yers

The responsibilities of such gatekeepers include requiring them to identify clients, to conduct due diligence on their clients, to maintain records about their clients and to report “suspicious” client activities. Some of these rules also prohibit gate keepers from informing or “tipping off” clients who are the subject of the suspicious transaction reports. Violations may subject gatekeepers to prosecution, fines and even imprisonment.

In its typology report of 2000-2001, FATF says that the following functions provided by lawyers, notaries, accountants and other professionals are the most useful to a potential money launderer:

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•Creating corporate vehicles or other complex legal arrangements, such as trusts. Such arrangements may serve to confuse the links between the proceeds of a crime and the perpetrator.
•Buying or selling property. Property transfers serve as either the cover for transfers of illegal funds (layering stage) or the final investment of proceeds after they pass through the initial laundering process (integration stage).
•Performing financial transactions. Sometimes these professionals may carry out various financial operations on behalf of the client
•Providing financial and tax advice.
•Providing introductions to financial institutions

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Commodity futures and options accounts are vehicles that could be used to launder illicit funds.

What are they?

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•Commodities: Goods such as food, grains and metals that are usually traded in large amounts on a commodities exchange, usually through futures contracts.
•Commodity pools: Combines funds from various members and uses them to trade in futures or options contracts
•Futures/futures contracts: Contracts to buy or sell a quantity of a commodity at a future date at a set price.
•Omnibus accounts: Accounts held by one futures commission merchant (FCM) for another. Transactions of multiple account holders are combined and their identities are unknown to the holding FCM.
•Options/options contracts: Contracts that create the right, but not the obligation, to buy or sell a set amount of something, such as a share or commodity, at a set price after a set expiration date.

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Here are several ways the commodities industry is susceptible to money
laundering:

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•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 with 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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Trust and company service providers (TCSP) include those persons and entities that, on a professional basis, participate in the creation, administration or management of corporate vehicles.

• 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.

Trust and company services may well be provided by lawyers and other professionals. For example, in most, if not all, jurisdictions, lawyers will be engaged in the formation of foreign companies for clients to hold assets outside of that client’s jurisdiction.
According

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The real estate sector is frequently used in money laundering activities.

Proceeds of crimes can be readily funneled through the property using such transactions as deposits, down payments, mortgages, lawyers’ trust accounts and even construction costs.

Laundering may be accomplished either by way of buying and selling
real estate to hide the illicit source of funds (the layering phase), or by investment in, for example, tourist or holiday complexes that lend an appearance of legality (the integration phase).

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Countless real estate and business deals are closed every day using escrow funds. Escrow accounts, generally maintained by real estate agents and brokers and other fiduciaries, are
designed to hold funds entrusted to someone for protection and proper disbursement. They are attractive to money launderers because of the large number of diverse transactions that can pass through them in any deal.

The monies ultimately may simply be paid outright by the escrow agent as cashier’s checks
obtained by him, as wire transfers, or as corporate or escrow checks to strawmen or shell corporations.

To a bank and other observers, the disbursement of funds at a closing may appear to be all one legitimate set of transactions. Money laundering can be easily hidden because the size and
volume of routine escrow account activity smoothes out the “spikes” (which describe sudden ups and downs in an account)or multiple deposits associated with money laundering.

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In this industry we also see the “reverse flip.” A money launderer might find a cooperative property seller who agrees to a reported purchase price well below the actual value of the property and then accepts the difference “under the table.” This way, the launderer can purchase a $2 million dollar property for $1 million, secretly passing the balance to the cooperative seller. After holding the property for a time, the launderer sells it for its true value of $2 million.

In the “loan back” money laundering method, a criminal provides an associate with a specific amount of illegitimate money. The associate then provides a “loan or mortgage” back to the trafficker for the same amount with all the necessary “loan and/or mortgage” documentation. This creates an illusion that the trafficker’s funds are legitimate. The scheme is reinforced through “legitimately” scheduled payments made on the loan by the traffickers.

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They found that over-pricing or under-pricing imports and exports
facilitates tax evasion, money laundering and terrorist financing.

The professors concluded that the most popular fraudulent pricing scheme is to under-value exports instead of over-pricing imports. The government watches imports closely because of the revenues generated by import duties, but little attention is paid to the pricing of exports, leaving that avenue open to exploitation.

In a June 2006 report, called “Trade-Based Money Laundering, ”FATF defined trade-based money laundering as the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimize their illicit origins.

Moreover, trade-based money laundering techniques vary in complexity and
are frequently used in combination with other money laundering techniques to further obscure the money trail. Money launderers can move money out of one country by simply using their illicit funds to purchase high-valued pro

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The Black Market Peso Exchange (BMPE) is a process by which money in the U.S. (could also be in another country, for example, countries in Europe) derived from illegal activity is purchased by Colombian (and other countries’) “peso brokers” and deposited in U.S. bank accounts that the brokers have established. The brokers sell checks and wire transfers drawn on those accounts
to legitimate businesses, which use them to purchase goods and services in the U.S.

Colombian importers created the BMPE in the 1950s as a mechanism for buying U.S. dollars on the black market to avoid domestic taxes and duties on the official purchase of U.S. dollars
and on imported goods purchased with dollars.

In the 1970s, Colombian drug cartels began using the BMPE to convert drug dollars earned in the U.S. to pesos in Colombia.

The Financial Crimes Enforcement Network (FinCEN) has issued advisories to U.S. financial institutions and corporations seeking help in combating this billion-dollar currency exchange and moneyla

Front 39

A significant money laundering risk for a financial institution offering online customer services is that there is greater difficulty in matching the customer with the provided identification documentation.

Other risks:

•The nature of online banking itself, with the elimination of face-to-face contact between customer and employee, necessarily makes it more difficult to know who is actually controlling the account.
•The ease of access through the Internet enables crossborder movements of funds from nearly every physical location.
•The rapidity of electronic transactions enables the execution of multiple, complex transactions within very short timeframes.

Back 39

To combat cyber laundering, FATF suggests that:

•Internet service providers establish log files with traffic data that produces Internet-protocol numbers of subscribers and telephone numbers used for server connections.
•Information collected through the servers be shared with law enforcement agencies.
•Information collected be maintained for up to a year.
•Internet service providers keep records, including identification information, on those who transit through their servers.

Front 40

Online banking will attract money launderers because of its potential to aid them in the three classic areas of money laundering:

Back 40

•Placement
•Layering
•Integration

Front 41

Despite attempts to deal with the potential problems of Internet gambling through
regulation, requiring operating licenses, or banning such services outright, a number of concerns remain. For example, transactions are primarily performed through credit cards, and the offshore location of many Internet gambling sites makes locating and prosecuting relevant parties difficult, if not impossible.

Some credit card issuers no longer allow use of its credit cards for online gambling, thus decreasing the money laundering opportunities through cyberspace

Back 41

How does an institution know whether a credit card is used for online gambling? The card relies on codes that indicate types of transactions. Many credit card statements list those category codes showing what customers spent on entertainment or travel, for example. The bank
can thus block transactions coded for Internet gambling.

Nevertheless, online gambling provides an excellent methodof money laundering because transactions are conductedprincipally through credit or debit cards. Site operators are typically
unregulated offshore firms.

Front 42

Pre-paid cards have the same characteristics that make cash attractive to criminals: they are portable, valuable, exchange able and anonymous. The cards, many of which are branded by Visa or MasterCard, can be purchased and “loaded” with money by one person and used like regular debit cards by another person to make purchases or ATM withdrawals anywhere in the world.

Prepaid payment cards provide access to monetary funds that are paid in advance by the cardholder.

The report identified these potential risk factors:
•Anonymous card holders;
•Anonymous funding;
•Anonymous access to funds;
•High value limits and no limits in the number of cards individuals can acquire;
•Global access to cash through ATMs;
•Offshore card issuers that may not observe laws in all jurisdictions; and
•Substitute for bulk-cash smuggling.

Back 42

Measures that might limit the vulnerability to money laundering associated with these payment technologies are:

•Limiting the functions and capacity of smart cards (including the maximum value and turnover limits, as well as the number of smart cards per customer).
•Linking new payment technology to financial institutions and bank accounts.
•Requiring standard documentation and recordkeeping procedures for these systems to facilitate their examination.
•Allowing for the examination and seizure of relevant records by investigating authorities.
•Establishing international standards for these measures.

Front 43

Shelf company: A corporation that has had no activity. It has been created and put on the “shelf.” This corporation is then later usually sold to someone who would prefer to have a previously registered corporation than a new one.

Shell company/corporation: A company that at the time ofincorporation has no significant assets or operations.


Shell corporations and nominees are widely used
mechanisms to launder the proceeds from crime. The ability
for competent authorities to obtain and share information regarding the identification of companies and their beneficial owner(s) is therefore essential for all the relevant
authorities responsible for preventing and punishing moneylaundering.

Back 43

Four related reasons to establish or control a shell company for money laundering purposes:

1. Shell companies accomplish the objective of converting the cash proceeds of crime into alternative assets.
2. Through the use of shell companies, the launderer can create the perception that illicit funds have been generated from a legitimate source.
3. Once a shell company is established, a wide range of legitimate and/or bogus business transactions can be used to further the laundering process.
4. Shell companies can also be effective in concealing criminal ownership. Nominees can be used as owners, directors, officers or shareholders.

Front 44

Criminal enterprises also use real businesses to launder illicit money.
These businesses differ from shell companies in that they operate legitimately, offering industrial, wholesale or retail goods or services.

Techniques used in conjunction with criminally controlled companies:

•Using Nominees as Owners or Directors
•Layering —
•Loans —
•Fictitious business expenses/False invoicing —
•Sale of the business — When the criminal sells the business, he has a legitimate source of capital.
•Buying a company already owned by the criminal enterprise —
•Paying out fictitious salaries

Back 44

Bearer bonds and bearer stock certificates, or “bearer shares,” are prime money laundering vehicles because they belong, on the surface, to the “bearer.”

Bearer shares offer lots of opportunities to disguise their legitimate ownership. FATF, in its 40 Recommendations, suggests that employees of financial institutions ask questions about the identity of beneficial owners before issuing, accepting or creating bearer shares and trusts.

Front 45

The most basic difference between terrorist financing and moneylaundering involves the origin of the funds. Terrorist financing uses funds for an illegal political purpose, but the money is not
necessarily derived from illicit proceeds. On the other hand, money laundering always involves the proceeds of illegal activity. The purpose of laundering is to enable the
money to be used legally.

Terrorists use methods similar to those of criminal organizations: cash smuggling, structuring, purchase of monetary instruments, wire transfers, and use of debit or credit cards. The hawala system also has played a role in moving terrorist related funds. In addition, money raised for terrorist groups is also used for mundane expenses like food and rent, and is not always strictly used for just the terrorist acts themselves.

Back 45

To avoid becoming conduits for terrorist financing, institutions are told they can look at, among other things, the following factors:

• Use of an account as a front for a person with suspected terrorist links.
• Appearance of an accountholder’s name on a list of suspected terrorists.
• Frequent large cash deposits in accounts of non-profit organizations.
• High volume of transactions in the account.
• Lack of a clear relationship between the banking activity and the nature of the accountholder’s business.

Front 46

Hawala, hundi or so-called “underground banking” are alternative remittance systems or informal value transfer systems that are often associated with ethnic groups from Africa, Asia and the Middle East, and commonly involve the international transfer of value outside the legitimate banking system. These informal value transfer systems are based on trust.

Back 46

Because hawala is a remittance system, it can be used at any
phase of the money laundering cycle. It can provide an effective
means of placement.
A component of many layering schemes is transferring money from one account to another, while trying not to leave a paper trail. A basic hawala transfer leaves little if any paper trail. Hawala transfers can be layered to make following the money even more difficult. This can be done by using hawala brokers in several countries, and by distributing the transfers over time.

Hawala techniques are used to transform money into almost any form, offering many possibilities for establishing an appearance of legitimacy in the integration phase of the money launderingcycle.

Hawalas are attractive to terrorist financiers because they, unlikeformal financial institutions, are not subject to formal governmentoversight and do not keep detailed records in a standard form.Although some hawaladars do keep ledgers, their records are oftenwritten in idiosyncratic shorthand

Front 47

Charities or non-profit organizations have the following characteristics that are particularly vulnerable to misuse for terrorist financing:


•Enjoying the public trust.
•Having access to considerable sources of funds.
•Being cash-intensive.
•Frequently having a global presence, often in or next tothose areas that are exposed to terrorist activity.
•Often being subject to little or no regulation and/orhaving few obstacles to their creation.

Back 47

Charities or non-profit organizations have the following characteristics that are particularly vulnerable to misuse for terrorist financing:

•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.
•Often being subject to little or no regulation and/or having few obstacles to their creation.

FATF recommends that non-profit organizations:
•Maintain and be able to present full program budgets that account for all expenses.
•Conduct independent internal audits and external field audits, the latter to ensure funds are being used for intended purposes.

Front 48

Describe the FATF 40 Recommendations on Terrorist Financing

Back 48

•The first eight Special Recommenations were adopted on October 31,2001 and the ninth on October 22, 2004. The 2012 revisions combined the Nine Special Recommendations into the 40 Recommendations.
•Ratification and implementation of UN instruments – confirmation & implementation
•Criminalizing the financing of terrorism and associated money laundering
•Freezing and confiscating the terrorist assets
•Reporting suspicious transactions related to terrosim
•International Co-operation- assistance with other countries.
•Alternative Remittance
•Wire Transfers
•Non-profit organizations
•Cash Couriers

Front 49

Explain the Customer Due Diligence for Banks Paper of the Basel Committee

Back 49

•Establish a Business Relationship
•Carry out an occasional transaction or wire transfer above the specified threshold – to gather additional info
•Have a suspicion of money laundering or terrorist finanacing
•Have doubts about the veracity or adequacy of previously obtained customer identification information

Front 50

Are the European Union Directives on Money Laundering binding? If so, for whom?

Back 50

•European Union member states – Yes binding for members only
•Directive applies only to EU member states and not to other countries

Front 51

How can FATF, with no enforcement authority, be the leading international organization in establishing global policies and measures in the AML field?

Back 51

All nations meet minimum standards for GDP, Banking size, Size of Global Financial Systems
AML Laws and Efforts of each country
Peer pressure & reputation for BP, guideline

Front 52

In which areas of money laundering controls has the Wolfsberg Group issued guidelines? Are they binding?

Back 52

The Wolfsberg Group, which has no enforcement powers, issued the guidelines to manage its members’ own risks, to help make sound decisions about clients and to protect their operations from criminal abuse.
They recommend a “sufficient” monitoring system that uses the private banker’s knowledge of the types of activity that would be suspicious for particular clients. They also outline mechanisms that can be used to identify suspicious activity, including meetings, discussions and in-country visits with clients and steps that should be taken when suspicious activity is detected.
The principles also address:
•Reporting to management of money laundering issues
•AML training
•Retention of relevant documents
•Deviations from policy
•Creation of an anti-money laundering department and an AML policy

Front 53

6.How can members of the Egmont Group help improve a
nation’s efforts against money laundering?

Back 53

•The goal of the group is to provide a forum for FIUs around the world to improve cooperation in the fight against money laundering and financing of terrorism and to foster the implementation of domestic programs in this field

Front 54

What is the role of the Basel Committee in the fight against
money laundering and terrorism financing?

Back 54

The Basel Committee, established by the central bank governors of the G-10 countries in 1974, promotes sound supervisory standards worldwide. It has recognized that sound Customer Due Diligence (CDD) policies and procedures are critical in protecting the safety and soundness of banks and the integrity of banking systems, and, in October 2001, it issued a paper called “Customer Due Diligences for Banks.

Front 55

What is OFAC?

Back 55

Office of Foreign Assets and Controls

Front 56

What are the due diligence requirements for foreign correspondent accounts with U.S financial institutions?

Back 56

•Correspondent accounts are accounts established by one financial institution with another financial institution to hold deposits, make payments on its behalf, and process other transactions understanding the respondent institutions business, reputation, supervision and AML controls; obtaining management approval of such relationships; documenting the responsibilities of each institution; taking appropriate controls to mitigate risks associated with payable through accounts and taking steps to established for shell banks.

Front 57

What implications could the extraterritorial reach of the U.S. laws have in the global commercial relationships of non-U.S. financial institutions and individuals?

Back 57

OFAC rules prohibit transactions and require the blocking of assets of persons and organizations that appear on one of a series of lists that OFAC issues periodically. The agency has the power to impose significant penalties on those who are found to be in violation of the blocking orders.

Front 58

How can the operations and customers of a non-U.S institution be affected by U.S. laws and regulations?

Back 58

All U.S. persons must comply with OFAC regulations, including all U.S. citizens and permanent resident aliens, regardless of where they are located, all persons and entities within the United States; and all U.S. incorporated entities and their foreign branches.

Front 59

What are the key elements of a customer identification program?

Back 59

Full identification of customer and business entities, including source of funds and wealth when appropriate.
Development of transaction and activity profiles of each customer’s anticipated activity.
Definition and acceptance of the customer in the context of specific products and services.
Assessment and grading of risks that the customer orthe account present.
Account and transaction monitoring based on the risks presented.
Investigation and examination of unusual customer or account activity.
Documentation of findings.

Front 60

What is risk-scoring, and what are the factors that determine the risk for a product or customer?

Back 60

A risk-scoring model generally uses numeric valuesto determine the catergory of risk (geography, customer type, and products and services), as well as overall customer risk.

Front 61

What are the indicators of money laundering in a broker-dealer setting?

Back 61

The customer appears to be acting as an agent for an undisclosed principal, but declines or is reluctant, without legitimate commercial reasons, to provide information, or is otherwise evasive regarding that
person or entity.
•For no apparent reason, the customer has multiple accounts under a single name or multiple names, with a large number of inter-account or third-party transfers.
•The customer’s account has unexplained or sudden extensive wire activity, especially in accounts that had little or no previous activity.
•The customer makes a funds deposit for the purpose of purchasing a long-term investment followed shortly thereafter by a request to liquidate the position and
transfer the proceeds from the account.
•The customer engages in excessive journal entries between unrelated accounts without any apparent business purpose.
•The customer requests that a transaction be processed in such a manner so as to avoid the firm’s normal documentation requirements.
•The customer, for no apparent reason

Front 62

What are the basic situations in which an internal investigation might be appropriate?

Back 62

•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

Front 63

When a financial institution is served with a search warrant, what should it do?

Back 63

•Call the financial institution's in-house or outside counsel.
•Review the warrant to understand its scope.
•Ask for and obtain a copy of the warrant.
•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 financial institution is allowed to see the affidavit, the financial institution can learn more about the purpose of the investigation.
•Remain present while the agents record an inventory of all items they seize and remove from the premises. Keep track of the records taken by the agents.
•Ask for a copy of law enforcement's inventory of what they have seized.
•Write down the names and agencies.

Front 64

What are gateways for cross-border information sharing in money laundering investigations or cases?

Back 64

•Mutual Legal Assistance Treaties (MLATs).
•Exchange of information between Financial Intelligence Units (FIUs).
•Exchange of information between supervisory agencies.