Acams Certification exam- Chapter 1 PDF

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ACAMS Certification exam

1. Risks and Methods of Money Laundering and Terrorist Financing Particulars 1

Details Details Definition of Money Laundering United nations 2000 conventions against transnational organized crime aka “Palermo convention”

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FATF 40 Recommendation on Money laundering and terrorist financing/ 4th European Union Directive on prevention and use of the financial system for the purpose of money laundering and terrorist financing (2015) -

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Terrorist Financing

Legal principle of “willful blindness” to prove knowledge

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Concealing/disguising illicit source/assisting/evadingillegal consequences Concealment of Location/disposition/moveme nt/rights of property Acquisition/possession/useproperty-crime Knowledge/intent-prove money laundering offence— based on factual circumstances.

-prerequisite-money laundering definition-"Knowledge" that money derived from criminal offence "Willful blindness"="Deliberate avoidance of Knowledge of illegal sources of funds"/actual knowledge of illegal source of fund-intentions of customers Willful blindness = Purposeful indifference funds from perfectly legitimate sources Hide the purpose and destination

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3 stages of Money Laundering

Placement

Layering

-physical disposal of cash/other assets-criminal activity - introduce funds-FIs - place in funds circulation via FIs/casinos/legitimate businesses(national-international)

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Conceal origin/separate – illicit source –layers of financial transaction Converting proceedsanother form

rather than source funds-operating expenses of terrorist/terrorist acts. funds in circulation through financial institutions Blending of funds-commingling illegitimate and legitimate funds foreign exchange- buy with illegal funds Breaking up amounts-small amountdepositing-under threshold Currency Smuggling-physical -cross border Loans- repayment - cash Electronically moving fundscountries/dividing financial options/market - Moving FIs- accounts - Converting cash-monetary instruments - Reselling high value goods - Reselling-prepaid cards/store value products - Investing real estate/legitimate business - Stocks/bonds/life insurance - Shell companies-obscure ultimate beneficiary/assets

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Integration

The Economic and Social Consequence of Money Laundering

- illicit wealth legitimate - Re-enter funds in economy as business/personal txn - difficult -legal vs illegal wealth - increase wealth by proceeds of crime Increase Crime and Corruption

Undermining the Legitimate Private Sector

Weakening Financial Institutions

spot integration disparity in person source of income and person income e.g.: buy luxury properties investments into business -ML haven- attract criminals -low number of predicate crime (criminal offences) for money launder -limited types of institutions/persons covered by money laundering laws -No enforcement of laws/penaltiesfree -limited supervising compliance to money laundering laws - increase in corruption -weaker laws and enforcementcorruption-money laundering. Use Front Companies-legitimate business-commingle funds -Subsidize products and services below market rates difficult to compete against misallocation of resources from artificial distortion prices of assets/commodity prices-control whole industries/sector -front companies-vehicle for evading taxes -first internet bank-European union bank-riggs

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Dampening effect on Foreign Investments

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Loss of control/mistakes/decisions regarding economic policy

Significant civil money penalties loss of charter Commercial and financial sectors are perceived to be compromised/influence by organized crime -dwarf government budgets measurement errors in macroeconomic statistics-control or mistakes in economic policy volatility in exchange and interest rates due to unanticipated crossborder transfers of funds as a result money shifts from one country to another-resulting in misleading monetary data threat of monetary instability due to the misallocation of resources from artificial distortions in assets and commodity prices

Economic distortion and instability

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loss of tax revenue

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Risks to privatization

-not profit generation from the investment-protecting/hiding proceeds. - invest not economically beneficialeconomic growth suffer

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Tax evasion-macro economic impact - Honest taxpayers-higher tax - Government collection difficult - corruption/insider dealings govt award privatization tender to criminal org. - criminals purchase ports/resorts/casinos hide illicit proceeds

Reputation risk for the -country

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Risk of International Sanctions

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social costs

Loss global opportunitiesextra scrutiny-too expensive Legitimate business-loss market access-extra scrutiny and controls Financial reputation damagehuge costs-restore

-Office of Foreign Assets Controls (OFAC) of us department of the treasury] administers economic and trade sanctions -Comprehensive sanctions: prohibits virtually all transaction with specific country -Targeted Sanctions: prohibit txn -specified individual, entity, OFAC specifically designated ind. and blocked parties list - OFAC list- high risk-non-cooperative jurisdictions - FATC-countermeasure -jurisdictionEDD to business relations/transactions-natural/legal person-improve AML/CFT regime -increase govt. exp--increased law enforcement/treat drug patients Other adverse consequences incl. concentration risk for FIs. -loss-profitable biz

-liquidity prob.- withdrawal of funds -termination of corresponding banking facilities -investigation costs and fines -asset seizures -loan losses -reduce stock value of FIs 15

Reputational risk

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Operational risk

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legal risk

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Concentration risk

-loss of public confidenceorganization -loss-high quality borrowers-reduce loans portfolio -unanticipated withdrawals-liquidity crisis -terminated inter-bank or correspondent banking services -increased borrowing and funding costs -Legal risks: lawsuits, adverse judgements, unenforceable contracts, fines and penalties -unenforceable contracts by the fraud of criminal customer -fines/penalties -too much loan/credit -one/group borrower -not knowing beneficial owner of the large borrower--may be criminally linked. --aggravated when common source of income/assets for repayment -loss-unenforceable contract-fictitious person

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2015

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2015

Financial Crimes Enforcement Network (FinCEN) of US department of Treasury and US FIU Memorandum on “Individual Accountability and Corporate Wrongdoing” from US Department of Justice’s Deputy Attorney General, Sally Quillian Yates United Kingdom, the Financial Conduct Authority (FCA) published financial rules for Senior Manager Regime

Advisory to FIs

New York Specific Applies to-banks/trusts/private banks/saving banks/saving and loans ---chartered pursuant -New York banking law All branches and agencies of foreign banking corporations licensedunder banking law- conduct banking operations New York - Non-banking FIs with Banking Law License- check cashers and money transmitters

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June 30, 2016

New York State of Department of Financial services (DFS) issued Final rule requiring related Institutions to maintain “Transaction Monitoring and Filtering Program”

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Methods of Money Laundering

FATF and FATF-style Regional bodies publish periodic typology reports to “monitor

Strong culture of compliance - Entire staff responsible for AML/CFT compliance -

Investigations- corporate misconduct- focus-individual wrongdoing - Resolution of corporate caseno protection individualcriminal/civil liability - Individual accountability in banking sector - Money Laundering Reporting Officer (MLRO)= senior manager or executive level - Senior manager personally accountable - Monitor txn- compliance Bank Secrecy Act/ AML- SAR - Prevent unlawful txneconomic sanctions-OFAC BOD and senior officers - annual certification-taken necessary stepscomply transaction monitoring and filtering program by Jan 1, 2017

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Key methods and trend in these areas FATF 40 recommendation

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changes and better understand the underlying mechanism of money laundering and terrorist financing” Electronic Transfers of Fund

remain effective and relevant

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Indicators of Money laundering

Electronic means ACH, ATM, electronic terminals, mobile phones, telephone or magnetic tapes Federal Reserve Wire Network (FedWire), Society for worldwide Interbank Financial Telecommunication (SWIFT), Clearing House Interbank Payments System (CHIPS) Commingle funds

- cash advance- stolen credit card-put in a/c to receive funds - layering stage- varying amount sentunder threshold-using reputable org -fund transfer--financial secrecy haven/high geographical location no apparent biz reason-inconsistent pattern with customer history -large incoming fund transfers- behalf of foreign client-no reason -small, incoming fund transfersdeposits by checks/money orders-transfer to different geographical location--inconsistent pattern with customer business or history -payments/receipts-not link –contracts goods/services -sent/receipt same person--different

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Remote Deposit Capture

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Mitigations

Correspondent Bank

Due diligence of Respondent bank

-scan check-electronic image to bank -deposit -also, with mobile phones - banks -decrease cost-not paper based --ML-set up multiple imaging devices (scanners/mobiles phones) --allow others to process checks --ML-set up account for others and ability to deposit checks -- lead-violations of sanctions requirement- txn in sanction countries --Fraud-altered check or multiple deposits of same- as no human intervention -reviewed sequential number cheques -money order without payees -total volume of activity-an accountvia RDC--overall txn monitoring -limits on check deposit -facility to appropriate customer -provision of banking services by one bank (correspondent bank) to another bank(respondent) -check clearing, fcy exchange services/payable through a/c, wire trf - respondent banks- international financial txn-for themselves/customers-jurisdiction no physical presence -who owners are -nature of regulatory oversight

Money order is prepaid financial instrument

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Vulnerable Money Laundering

Payable through accounts

-based on credit risks for letters of credit/business account for credit card --provide non-credit, only cash management-less known respondent bank TWO MAIN REASONS -indirect relationship-services to individuals/entities-neither verified identities nor obtain first-hand knowledge -large volume of txn-not have information on actual parties conducting txn- difficult to identify suspicious Additional risks -difficult to determine-degree and effectiveness of supervisory regime of respondent bank but can know what laws govern respondent bank -effectiveness of respondent bank's AML controls- have rely on respondent bank for due diligence on the customers- questionnaire may give some comfort -respondent bank acting as correspondent bank for other institutions known as nesting- not know about sub-respondents/type of financial services -respondent bank's customer doing own txn (wire trf, deposit and withdraw, maintaining checking accounts)-via correspondent account-

Credit union- small cooperativenonprofit-return given to member MSB has specific meanings in different jurisdictions, but generally includes any business that transmits money or representatives of money, provides exchange such as Bordeaux de change, or cashes cheques or other money related instruments.

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Money laundering perspective

Concentration Account

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Money laundering perspective

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control policies

without clearing txn in respondent bank - directly control funds-corresponding account Risks: -unlimited number-sub-account holder - sub-account holder not identified -PTAs with licensed offshore-nascent supervision -respondent bank sole customer-fail CDD policies-respondent bank customer -PTA arrangement where currency deposit and withdrawal by sub account holder -PTAs used by respondent banks’ subsidiary, representative or other office -internal accounts-processing and settlement-multiple and individual customer txns within bank-same day -known as special use, omnibus, settlement, suspense, intraday, sweep or collection -aggregate funds -centralized account -used for private banking, trust and custody accounts, fund trf and international facilities -Customer-identifying information like txn amt& account number separated from financial txn-audit trial lostmisuse a/c -dual signatures-general ledger ticket

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Private Banking

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Money laundering perspective

Shell company-hold assets-in

Private investment companies

(approve by, prepared by) -prohibit direct access -customer txn shown in customer statement -no knowledge to customers - information on txn and customer identifying information -independent reconciliation -timely discrepancy resolution -monitoring recurring names -highly personalized- confidentialwealthy client- at fees-under "assets under management" - semi-autonomous - competitive - compensation based on assists under management -high profitability -intense competition -powerful clientele -high confidentiality -close trust -clients -commission based compensation -culture of secrecy and discretionrelationship manager -RM advocate-client -using private investment companiesof reduce transparency of beneficial owner -client-personal/business wealth in numerous jurisdictions -client control legal entities for estate planning -private banking customer

Hold mail services

offshore-for tax/trust relate matters-client confidentiality /conceal beneficial owner via nominee/a

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Politically exposed person

FATF’s International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation (2012)

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Foreign PEPs

Domestic PEPS

Structuring

-international financial centers or offshore-non-residents -assets moved overseas-corporate vehicles-PIC- secrecy havens -established by bank customers and others -offshore-hold assets -are shell companies-client confidentiality-tax or trust related -conceal beneficial owner -company formation agent-nominee director-hold title to company -attorney-client privilege-undisclosed beneficial owners -private bank establish PICs through affiliated trust company-offshore secrecy haven -complex shell company networkscompany in one offshore linked to other offshore company. -prominent public functions -heads of state or government, senior politicians, senior government, judicial or military officials, senior executives state owned corporations, important political party officials -prominent public functions domestic country -government, senior politicians, senior government, judicial or military officials, senior executives state owned corporations, important political party officials -evade triggering reporting/record keeping

The Bank maintains a registry with all related bank documents for enrolled clients, who have the option of collecting them at their convenience.

smurfing

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Foreign Money Brokers

Micro structuring Detecting

-reported by filing STR -depositing cash/purchase monetary inst. - done in banking, MSB, casinos Multiple individuals-multiple cash deposits or purchasing monetary instrumentsreporting thresholder Foreign money broker-numerous checking accounts-fictitious namesidentification of dead people. -open accounts -inconspicuous amounts -deposit funds to cover living exp -account opened-blank check signedleaving payee, date, amt blanks -send checks money broker in another country-by courier - Lot of checking account two dozen or more -accumulated -withdrawn to pay exports -breaking large txn very small amounts -counter deposit slips instead of preprinted deposit slips (identifying customer) -frequent activity -account with incomplete documentation -frequent cash deposits-nominal account-inconsistent pattern -cash deposit-ATM withdrawals-high risk -cash deposit by third party-business

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Smurfing

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Credit Unions and Building Societies

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account-no relation to company -multiple persons-multiple cash deposits-multiple purchase monetary inst under reporting -not-for-profit, member-owned, democratic financial cooperatives -members are owners -financial needs of members -one member-one vote -member purchase initial capital shares- accessing product/services - common bond-linked by depositing and borrowing-particular community, organization, religion, place of employment -few to hundred members-thousands of dollars in assets under management - personal banking relationship but may include—small to medium corporations -no trade-based, correspondent banking, large corporate relationship with international financial needs Credit Union central

-trade associations for credit unions -owned by member trade credit unions -services like capital liquidity, research, training, advocacy -shared operational, back-office processes check clearing, electronic fund transfers -shared contracts for common services -included in FATF definition of

Financial institution, -national AML/CFT regime that follow FATF recommendations will treat credit union similar to banks 2006 November

UK Joint Money Laundering Steering Group (JMLSG)

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2014 November

Credit union vulnerable to ML large financial services-high risk large clientele-large range conceal funds

JMLSG guidance High risk transactions: - money trf to third parties - third party paying cash to someone else - reluctance to provide identity information- opening account - erratic behavior - txn larger than usual amounts. - Unusual activity in minor account-account draw less attention

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Non-Bank Financial Institutions (financial intermediaries) Credit Card Industry Credit card association (American Express/Master card/Visa)

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Issuing Bank Acquiring bank

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Third-party payment processors (TPPP)

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License member bank to issue bank cards - Authorize merchant to accept the card -solicit customers -issue cards -process transactions for merchantsaccept credit cards -contract with issuing or acquiring banks - provide payment processing-

Not subject to AML/CFT requirements

Money laundering perspective

2002

Extent of money laundering through credit cards is unknown, US Government Accountability Office, the congressional watchdog of United states

Money laundering perspective

Third party payment processors