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88 Cards in this Set
- Front
- Back
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Define money laundering |
Concealment or disguise of the true nature, source, location, ownership, etc knowing that it is derived from a criminal offense |
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Define "willful blindness" |
Deliberate avoidance of knowledge of the facts, willful indifference |
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Difference between money laundering and terrorist financing |
Money laundering - derived from criminal activities Terrorist financing - may include funds from perfectly legitimate sources used to finance acts of terrorism |
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Stage of money laundering |
Placement Layering Integration |
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Placement |
Physical disposal of cash or other assets derived from criminal activity - placing funds into circulation through banks, casinos, shops, etc |
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Examples of placement |
Breaking up large amounts of cash into smaller sums and depositing them directly into a bank account Transporting cash across borders to deposit in foreign banks or to buy high-value goods that can be resold for payment by check or wire |
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Layering |
Separation of illicit proceeds from their source by layers of financial transactions intended to conceal the origins of the proceeds. Converts proceeds into another form, creating complex layers of financial transactions to disguise audit trail, source and ownership of funds |
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Examples of layering |
Sending wires to/from accounts Converting deposits cash into monetary instruments Reselling high-value goods and prepaid access/stored products Investing in real estate and legitimate businesses Placing money in investments such as stocks, bonds or life insurance Using shell companies |
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Integration |
Supplying apparent legitimacy to illicit wealth through re-entry of funds into the economy in what appears to be normal businesses or personal transactions
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Effects of ML and terrorist financing on emerging markets |
Increased crime and corruption Undermining the legitimate private sector Weakening financial institutions |
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Economic effects of ML |
Loss of control/mistakes in decisions regarding economic policy - illicit proceeds may dwarf govt budgets Economic distortion and instability - investing in activities not economically beneficial to the country Loss of tax revenue Risks to privatization efforts Country reputation risk Social costs |
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Special areas of concern for ML |
Electronic transfer of funds Correspondent banking Payable-Through Accounts Concentration Accounts Private Banking Structuring |
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Define electronic transfer of funds |
Any transfer of funds initiated by electronic means, such as ACH, computer, ATM, etc |
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Why are electronic transfer of funds attractive for ML |
Offers a fast conduit for moving money between countries and accounts. Used for layering, to move funds from one account to another |
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Indicators of ML using electronic transfers of funds |
Transfers to/from financial secrecy haven, or high-risk geographic location w/o apparent business reason, or activity inconsistent with customer's business/history Large, incoming transfers on behalf of foreign client w/o no explanation/reason Many small incoming transfers via check/money orders that are immediately wired to another account Unexplained or repetitive activity, or shows unusual patterns No apparent link to legitimate contracts/goods/services Transfers sent/received from same person/accounts |
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Correspondent Banking |
Provision of banking services by one bank (correspondent bank) to another bank (respondent bank) |
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Why is correspondent banking vulnerable to ML |
Indirect relationships - providing services for individuals/entities for which it has neither verified identifies not obtained any first-hand knowledge Large volumes processed customer's customers, makes it difficult to identify suspect transactions, b/c generally don't have info on actual parties conducting the transaction to know if it is unusual |
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Patriot Act provisions re: correspondent banking |
Section 312 - importance of ML control standards for correspondent accounts Section 313 - prohibits correspondent accounts for foreign shell banks Section 319 - requires US institutions to maintain records with the names/contact info of owners of foreign banks for correspondent accounts |
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Payable-Through Accounts |
Respondent bank's customers permitted to conduct their own transactions without needing to clear transactions through respondent bank |
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How are payable-through accounts different from normal correspondent accounts |
Respondent bank's customers have the ability to directly control funds at the correspondent bank. Traditional accounts, respondent bank takes orders from customers and pass them on to the correspondent bank |
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Elements of payable-through accounts that threaten correspondent bank's ML defenses |
Foreign institutions licensed in offshore sectors w/ weak/absent supervisions/laws Arrangements where the correspondent bank regards the respondent bank as its sole customer and doesn't apply CDD to the customers of the respondent bank Arrangements in which sub-account holders have currency deposit and withdrawal privileges |
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Define Concentration Accounts |
Internal accounts established to facilitate the processing and settlement of multiple or individual customers transactions within the bank, usually on the same day |
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Other names for concentration accounts |
Special-use, omnibus, settlement, suspense, intraday, sweep |
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What are concentration accounts used for |
Facilitate transactions for private banking, trust and custody accounts, funds transfer, international affiliates |
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Risks in concentration accounts |
If the customer-identifying information is separated from the financial transaction, audit trail is lost and accounts may be misused or administered improperly |
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Anti-ML practices for concentration accounts |
Dual signatures on GL tickets Prohibiting direct customer access to accounts Capturing transactions in custom account stmts Prohibiting customer's knowledge of concentration accounts Retaining transaction and customer id info Reconciling accounts Establish timely discrepancy resolution process Identifying and monitoring recurring customer names |
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Vulnerabilities in private banking |
Perceived high profitability Intense competition Powerful clientele High level of confidentiality Close relationship of trust w/ clients Commission-based compensation Culture of secrecy and discretion |
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Define structuring |
Designing a transaction to evade triggering a reporting or recordkeeping requirement |
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Define cuckoo smurfing |
Criminal funds transferred through the accounts of unwitting persons who are expecting genuine funds or payments from oversees |
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Main different between traditional structuring and cuckoo smurfing |
In cuckoo smurfing, the third parties who hold the bank accounts being used are not aware that illicit money is being deposited in their accounts |
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How to combat cuckoo smurfing |
- controls to identify depositors who pay cash into third-party accounts - monitor for unusual cash deposits that are structured or placed in branches other than where the customer's account is held |
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Define microstructuring |
Same as structuring, but at a much smaller level - i.e., taking $18,000 and breaking it into 20 depotis of $900 each |
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Means of detecting microstructuring |
Use of counter deposit slips instead of preprinted Frequent activity in an account immediately following the opening of the account w/ only preliminary and incomplete documentation Frequent visits to make cash deposits of nominal amounts inconsistent with typical activity Cash deposits followed by ATM withdrawals Cash deposits made into business accounts by third parties w/ no apparent connection to the company |
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Types of non-bank financial institutions |
Credit card industry Money remitters Money exchange houses Insurance companies Securities broker-dealers |
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How are credit cards most likely to be used in ML |
Layering/integration - put ill-gotten funds in accounts at banks offshore and then access these funds using credit and debit |
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Why are credit cards not likely to be used in initial placement stage of ML |
Industry generally restricts cash payments |
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Define money remitter |
Transfer funds for customers - receive cash from clients which is transferred to designated beneficiaries against payment of a commission |
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Biggest misconception about money remitters |
Minimal oversight - many are actually subject to a variety of national/local regulators and have tight compliance programs in place |
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Most important aspects of due diligence when establishing a relationship with a money transmitter |
Confirm that the customer is properly licensed |
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Most significant risks in the insurance industry |
Life insurance - some policies have investment value that can create a cash value if cancelled Annuities - allow criminals to exchange illicit funds for an immediate or deferred income stream |
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Indicator of ML in insurance policies |
Potential policyholder is more interested in a policy's cancellation terms than its benefits |
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Vulnerabilities in the insurance sector |
Lack of oversight/controls over intermediaries Decentralized oversight over aspects of the sales force Sales-driven objectives |
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Assessment of risks in insurance industry |
Whether it permits customers to: - use cash of cash equivalent to purchase insurance products - purchase insurance product with a single premium or lump-sum payment - borrow money against an insurance product's value |
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Difficulties in dealing with ML in securities |
Little currency is involved |
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When in ML are securities generally used |
After launderers have disposed of their cash through other methods |
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Aspects of securities that increase exposure to ML |
International nature Speed of transactions Ease of conversion of holdings to cash Routine wires through multiple jurisdictions Competitive, commission-driven environment Practice of brokerage firms of maintaining securities accounts as nominees/trustees which allows concealment of the identities of the true beneficiaries |
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Wash trading |
Entry of matching buys and sells in particular securities, which creates the illusion of trading. |
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How does ML through casinos generally occur |
Placement - converting funds to be laundered from cash to check |
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Why is gold attractive to ML? |
High intrinsic value in a relatively compact form Easy to transport Bought and sold easily w/ anonymity Holds value regardless of the form it takes |
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High-Value Transactions that are vulnerable to ML |
Payments or returns to persons other than owner - one delivers metal for refining and directs payments to someone else Precious metal pool accounts - maintained by small number of companies that receive and hold metal credits for a customer which can be drawn on by that customer |
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Tips for art/antiques dealers to lessen ML risk |
Require all vendors to provide names/addresses and attest that item was not stolen and they are authorized to sell it Verify identities/addresses Utilize Art Loss Register, database of stolen art Avoid cash payments |
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Use of travel agencies for ML |
Purchase expensive airline ticket for another person who then asks for refund Structuring wire transfers in small amounts to avoid recordkeeping requirements, esp when the wire are from foreign countries Mix illegal funds with clean money, providing reason to purchase high-priced airline tickets |
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Laundering risks and ways laundering can occur through vehicle sellers |
Structuring cash deposits below the reporting threshold, purchasing vehicles w/ sequentially numbered checks or money orders Trading in vehicles and conductive successive transactions of buying and selling new and used vehicles to produce complex layers of transactions Accepting third-party payments, particularly from jurisdictions w/ ineffective ML controls |
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Common element in most ML cases dealing w/ vehicle dealers |
Unreported use of currency to pay for the automobiles |
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Responsibilities of gatekeepers |
Identify clients, conduct due diligence on their clients, maintain records about their clients, report suspicious client activities |
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Most useful gatekeeper functions to ML |
Creating corporate vehicles to confuse links between proceeds and perpetrator Buying/selling property Performing financial transactions Providing financial and tax advise Providing introductions to financial institutions |
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Define commodities
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Goods that are usually traded in large amounts on an exchange, usually through futures contracts |
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Define commodity pools |
Combines funds from various members and uses them to trade in futures or options contracts |
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Define futures/futures contracts |
Contracts to buy/sell a quantity of a commodity at a future date at a set price |
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Define omnibus account |
Accounts held by one futures commission merchant for another. Transactions of multiple account holders are combined and their identities are unknown to the holding merchant |
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Define options/options contracts |
Contracts that create the right, but not the obligation, to buy or sell a set amount of something at a set price after a set expiration date |
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How are investment and commodity advisors susceptible to ML? |
Withdrawal of assets through transfers to unrelated accounts or high-risk countries Frequent additions/withdrawals from accounts Checks/wires from accounts of third parties with no relation to the client Clients who request custodial arrangements that allow them to remain anonymous Transfer of funds to the advisor 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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What are trust and company service providers |
Participate in the creation, administration or management or corporate vehicles |
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Why focus on service providers instead of the company/trust? |
Companies/trusts are merely the tools through which the launderers operate. Service providers can reduce the risk of abusing the vehicles with which they have a relationship |
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Why is real estate frequently used in ML? |
Provides housing and shelter for criminals, rural properties ideal for growing and storing drugs. Proceeds of crimes readily funneled through the property for deposits, down payments, mortgages, etc |
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Why are escrow accounts attractive to ML |
Large number of diverse transactions that can pass through them in any deal |
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Define trade-based ML |
Process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimize their illicit origins - misrepresentation of price, quantity or quality of imparts and exports |
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Black Market Peso Exchange (BMPE) |
Money in the US derived from illegal activity is purchased by "peso brokers" and deposited in US bank accounts that the brokers established. The brokers sell checks and wire transfers drawn on those accounts to legitimate businesses, which use them to purchase goods and services. |
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Why was the BMPE created |
Mechanism for buying US dollars on the black market to avoid domestic taxes and duties on the official purchase of US dollars and on imported goods purchased with dollars |
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ML risk for online services |
Greater difficulty in matching the customer with the provided identification documentation More difficult to know who is controlling the account Ease of access through the internet enables cross-border movement of funds from nearly every physical location Rapidity of electronic transactions enables the execution of multiple, complex transactions within very short timeframes |
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How to combat cyberlaundering |
ISP should establish log files with traffic data that produces IP addresses of subscribers and telephone numbers used for server connections Info collected through servers should be shared w/ law enforcement Info collected should be maintained for up to a year ISPs should keep records, including identification information, on those who transit through their servers |
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Why are prepaid cards attractive for ML? |
Same as cash - portable, valuable, exchangeable, anonymous |
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Risks of prepaid cards |
Anonymous card holders Anonymous funding Anonymous access to funds High value limits, no limits on # of cards Global access to cash through ATMs Offshore card issuers that may not observe laws Substitute for bulk-cash smuggling |
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Other term for prepaid card |
Stored-value card |
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Define shelf company |
A corporation that has no activity. Created and put on the "shelf". Usually later sold to someone who desires a previously registered corporation |
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Define shell company |
Company that at the time of incorporation has no significant assets or operations |
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Why shell companies? |
1. Convert cash into alternative assets 2. Create perception that funds are from a legitimate source 3. Utilize to conduct transactions to further the laundering process 4. Conceal criminal ownership |
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Define trust |
A legal relationship set up by a person (the "settlor") where assets are placed under the control of another person ("trustee") for the benefit of one or more persons (the beneficiaries) or a specified purpose |
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Significance of trusts in ML |
First step in converting illicit cash into less suspicious assets Hide criminal ownership of funds Essential link b/w different ML vehicles and techniques, such as RE, shell/active companies, nominees, etc |
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Why are bearer bonds attractive for ML |
They belong to the "bearer" - when securities are transferred, because there is no registry of owners, the transfer takes place by physically handing over the bonds/share certificates |
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Define bearer check |
Unconditional orders (negotiable instruments) that, when presented to a financial institution, must be paid out to the holder of the instrument rather than to a payee specified on the order itself |
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Techniques for evaluating for terrorist financing |
Use of account as a front for a person with suspected terrorist links Appearance of 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 b/w the banking activity and the nature of the accountholder's business |
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Where was hawala created |
India and China |
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How do hawala systems work |
Party deposits money with a third party (hawala banker) who arranges for the funds to be made available for withdrawal from another hawala banker in another country. The two bankers settle accounts through the normal process of trade |
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Why are hawala systems attractive for ML |
Leaves little to no paper trail |
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Why are hawala systems attractive for terrorist financing |
Unlike formal financial institutions, are not subject to formal government oversight and do no keep detailed records in a standard form |
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Characteristics of charities/nonprofits that make them vulnerable to ML |
Enjoy public trust Access to considerable sources of funds Being cash-intensive Frequently have a global presence, often in or next to those areas exposed to terrorist activity Subject to illicit or no regulation and/or few obstacles to creation |
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Best practices for non-profits |
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 Use formal bank accounts to store and transfer funds |
