CAMS Outline 6th Edition PDF

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Chapter 1 Risks and Methods of Money Laundering and Terrorist Financing 1. Money Laundering – Act(s) of making/converting dirty money into clean money a. Conversion of property, knowing it has been derived from a criminal offense for the purpose of disguising its illicit original b. ML does not always include cash c. Knowledge – broad definition. Mental state may be inferred from “objective factual circumstances”. Knowledge also = “willful Blindness”, “deliberate avoidance of knowledge of facts” or “purposeful indifference”. Willful blindness is the equivalent of actual knowledge of illegal source of funds or of the intentions of a customer in money laundering transaction. d. Diff between Money Laundering and Terrorist Financing i. ML = illegitimate money  used for legitimate or illegitimate purpose ii. TF = Legitimate or illegitimate funding  used for terrorist activities iii. Both terrorists and ML use the same methods to move their money in ways to avoid detection 2. Three Stages in the ML Cycle a. Placement – physical disposal of cash or asset derived from criminal activity. Introduces illegal proceeds into financial system (financial institutions, casinos, shops etc) i. Includes structuring of money ii. Transporting cash across borders or buying high value items (artwork, antiques, precious metals that can be resold for cash) b. Layering – Separation of illicit proceeds from their source by layers of financial transactions intended to conceal the original of the proceeds i. Involves converting proceeds of the crime into another form and creating complex layers of transactions to disguise audit trail, source and ownership of funds 1. Ex: sending multiple wires, converting cash to money order, reselling high value goods, investing in real estate or legit business, buying stocks c. Integration – Lending apparent legitimacy to illicit wealth through the reentry of funds into the economy through normal business or personal transactions i. Through RE transactions, just using debit card etc, this stage provides launderer the opportunity to increase his wealth with proceeds of crime. 3. Economic and Social Consequences of ML a. Increased Exposure to Organized Crime and Corruption – If it’s easy to do, more people will do it Compliance Prep CAMS Prep Course Outline

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i. Limited numbers of predicate crimes for money laundering (i.e., criminal offenses that may permit a jurisdiction to bring a money laundering charge). ii. Limited types of institutions and persons covered by money laundering laws and regulations. iii. Little to no enforcement of the laws, and weak penalties or provisions that make it difficult to confiscate or freeze assets related to money laundering. iv. Limited regulatory capacity to effectively monitor and supervise compliance to money laundering and terrorist financing laws and regulations. v. In countries with weaker laws and enforcement, it is corruption that triggers money laundering. b. Undermining Legitimate Private Sector – i. Micro effect, illegal money that funds front business have unfair advantage over legit business because comingling funds, illegitimate business can price items lower and gain advantage of other stores. ii.

Macro effect – against free market principles, easy to evade taxes

c. Weakening Financial institutions i. Criminal activity has been associated with a number of bank failures around the world such as the first internet bank, the EU Bank as well as Riggs Bank. d. Dampening Effect on Foreign Investments i. When a country’s commercial and financial sectors are perceived to be compromised and subject to the influence of organized crime the country will suffer from reduced investments. 4. Economic Effects of ML a. Loss of control, mistakes in, decisions regarding economic policy – Sometimes money laundering can be so big it dwarfs the local economy. Also, money laundering is usually unreported money therefore making it difficult to make economic policy if money isn’t properly allocated or accounted for b. Economic Distortion and Instability – Money Launderers don’t look for the best investments, they look to hide their money. Economic growth suffers as a result c. Loss of Tax Revenue – Less taxes collected means less money that can be used for infrastructure projects and to provide basic services for the country. d. Risk to Privatization Efforts – Criminal orgs can outbid legitimate purchasers for former government owned entities. They can then use these for ML purposes e. Reputation Risk for Country – Diminishes legitimate global opportunities because foreign financial institutions may decide to limit their transaction Compliance Prep CAMS Prep Course Outline

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with institutions located in ML havens bc the necessary extra scrutiny will make them more expensive. Makes it harder for legit businesses in these places because they have reduced access to world markets. f. Social Costs – Costs associated with health care (for drug addicts) will increase as well as the fee for law enforcement. g. Risk for an institution suspected of money laundering i. Reputational – adverse publicity regarding organizations business practices and associations. Results in loss of confidence in the org and could lead to loss of business (credit and deposit sides) ii. Operational – Potential for loss resulting from inadequate internal processes, personnel or systems from external events. This is when banks incur reduced or terminated inter-bank or correspondent banking services or an increased cost for these services. iii. Legal – Potential for lawsuits, adverse judgments, unenforceable contracts, fines and penalties. iv. Concentration Risks – potential for loss resulting from too much credit or loan exposure to one borrower or group of borrowers. Lack of knowledge about a customer, or who is behind the customer, can place a bank at risk (KYC) 5. AML CFT Compliance Programs and Individual accountability a. Yates Memo i. Reminds prosecutors that criminal and civil investigations into corporate misconduct should also focus on individuals who perpetrated the wrongdoing. Further, it does not provide protection to individuals from criminal or civil liability. b. UK Senior Managers Regime i. In the United Kingdom, the Financial Conduct Authority (FCA) published rules for the Senior Managers Regime (2015) designed to improve individual accountability within the banking sector. The Senior Managers Regime requires a financial institution to give explicit responsibility to a senior manager, such as an executive level Money Laundering Reporting Officer (MLRO), for ensuring that the institution’s efforts to combat financial crime are effectively designed and implemented. The senior manager is personally accountable for any misconduct that falls within the institution’s AML/CFT regime. c. NY DFS i. June 30, 2016 – NY DFS issued final rule requiring regulated institutions to maintain “Transaction Monitoring and Filtering Programs” reasonably designed to: 1. Monitor transactions after their execution for compliance with the Bank Secrecy Act (BSA) and anti-money laundering (AML) laws and regulations, including suspicious activity reporting requirements; and Compliance Prep CAMS Prep Course Outline

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2. Prevent unlawful transactions with targets of economic sanctions administered by the US Treasury Department’s Office of Foreign Assets Control (OFAC). 6. Methods of ML -Trend has been a shift from ML in traditional banking sector to non-bank financial sector and non financial businesses and professionals a. Banks and other Deposit Institutions i. Electronic Transfers of Funds (ETF) – Transfer of funds that is initiated by electronic means, ex: ATM, Automated Clearinghouse, wire, phone, internet, magnetic tape. ETF is fast and impersonal 1. Indicators of ML using ETF a. Transfers that’s occur to or from a financial secrecy haven, high risk area, without business reason, or when activity is inconsistent with customers history b. Large incoming funds transfers received on behalf of foreign client with no reason or explanation c. Many small incoming transfers of funds or deposits using MO or Checks, and then almost immediately all or most money is wired to another account in diff city or country d. Funds activity that is unexplained, repetitive or shows unusual patterns e. Payments or receipts received with no link to legitimate contracts, goods or services f. Fund Transfers that are sent or received from same person to or from diff accounts ii. Remote Deposit Capture 1. A product offered by banks that allows customers to scan a check and transmit an electronic image to the bank for deposit. 2. Without proper controls, RDC can also be misused to facilitate violations of sanctions requirements (e.g., processing transactions in a sanctioned country). 3. The ability to identify potential fraud indicators, such as an altered check or multiple deposits of the same item, decreases. Often, the resulting fraud is not prevented but rather detected after it has already occurred. 4. Combat the risks by ensuring that a. Items submitted via RDC are reviewed for sequentially numbered checks and money orders without payees; b. The total volume of activity processed for an account via RDC is incorporated into the overall transaction monitoring; c. Appropriate limits are placed on a customer’s ability to deposit checks via RDC; Compliance Prep CAMS Prep Course Outline

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d. The product is offered to customers to whom it is appropriate; and e. Appropriate action is taken quickly when fraud is detected via RDC items. iii. Correspondent Banking – Provision of banking services by one bank (correspondent bank) to another bank (respondent bank). Enables smaller banks to undertake international financial transactions for themselves and their customers in places where they don’t have a presence (wire transfers, payable through accounts, foreign exchange services etc) 1. Vulnerabilities a. C Bank provides services for indiv or entities which it has neither verified nor obtained first hand knowledge of b. Large amount of money flows through correspondent accounts, makes it difficult to identify the suspected transactions as C bank does not have info on actual parties conducting transactions to see if they are unusual 2. Additional Risk incurred by C Bank a. Don’t have firsthand knowledge of effectiveness of supervisory regime that R bank is under b. Don’t have real knowledge of R banks AML controls. Questionnaires can only provide so much info c. Some C banks don’t always ask R banks if they provide this services to other institutions (nesting, C Bank provides services to R bank who provides services to another R bank) This removes C bank further from the customer 3. US Patriot Act provisions dealing with Foreign Correspondent Banking Customers a. Section 312 – Institutions must set up risk based DD to mitigate ML risks posed by foreign financial institutions. Correspondent accounts maintained for foreign banks operating under offshore license or granted a license by a high risk jurisdiction, the C bank must take steps to identify owners of R bank, to watch the Correspondent account closely, and to figure out if R bank is helping other R banks through nesting. b. Section 313 – Prohibits US financial institutions from opening or maintaining correspondent accounts for foreign shell banks and C bank must take “reasonable steps” to ensure that a C count of a foreign bank isn’t used indirectly to provide banking services to a shell bank. (Shell Bank = no physical presence in any country (at least 1 full time employee, maintains records, subject Compliance Prep CAMS Prep Course Outline

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to banking authority of country/jurisdiction that gave them license) c. Section 319 – Required financial institutions to maintain records with name and contact info of owners of foreign banks who they maintain C accounts for. C bank must also get agent so that they can received services in case US gov't wants to sue foreign bank. iv. Payable Through Accounts (PTA) 1. Type of C Account where R bank’s customers are permitted to conduct their own transactions (including sending wires, making deposits, maintaining checking accounts) through the R bank’s C account without needing to clear the transactions through the R bank. Foreign Banks customers have ability to directly control funds at C bank. Diff from normal C relationships where R bank will take orders from customer and pass them to C bank. In these R bank has the ability to perform some oversight before executing transaction. 2. PTA can have virtually unlimited number of sub accounts (indiv, businesses, or even other foreign banks). Services offered sub account holders and terms of PTA are agreed upon by C and R banks. 3. Sometimes sub-account holders are not identified to C bank a. Risks to C Bank in a PTA Relationship i. Doing business with foreign institutions in offshore financial services with weak supervision and weak licensing laws ii. Relationships where C bank only considers R bank its customer and doesn’t apply Customer Due Diligence policies to customers of R bank iii. PTA arrangements where sub account holders have currency deposit and withdrawal priv. v. Concentration Accounts - Internal accounts established to facilitate processing of multiple or individual customer transactions within the bank, usually on the same day. Frequently used to facilitate transaction for private banking, trust and custody accounts, fund transfers and international affiliates 1. Risks occur when Customer Identification info is separated from financial transaction. 2. AML practices for these accounts a. Dual signatures on general ledger tickets b. Prohibiting direct customer access to concentration accounts c. Capturing transactions in account statements Compliance Prep CAMS Prep Course Outline

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d. Prohibiting customers knowledge of concentration accounts or their ability to direct employees to conduct transaction through the account e. Reconciling accounts frequently by individual who is independent from transactions f. Establishing a timely discrepancy resolution process g. Identifying and monitoring recurring customer names vi. Private Banking 1. Problem – Compensation paid to relationship managers in PB is based on AUM that they bring to the bank 2. AML concerns related to PB a. Perceived high profitability b. Intense competition c. Powerful Clients d. Close relationship between client and manager, including secrecy, managers become advocates to protect client e. High level of confidentiality associated with PB f. Commission based job 3. Often PB customers are non-resident aliens and conduct their banking outside their home area. Their assets move overseas in the name of corporations established in secrecy havens. Private Investment Companies (PIC) are corps established by individual bank customers in offshore jurisdictions to hold assets. They are a form of shell companies. The beneficial owner is hidden by using nominal owners or attorney client privilege. PBs sometimes form these for their PB customers using offshore secrecy haven. PEP’s also use PB a lot. vii. Structuring – act of designing a transaction to evade triggering a reporting or recordkeeping requirement. 1. Most common ML method and is a crime in many countries and must be reported by filing an STR. 2. Not just in banking, can be done anywhere, where there are reporting requirements 3. Ex: Customer breaks large deposit into two or more smaller ones (same with large withdrawals). Ex: Large transaction broken into two or more smaller transactions conducted by two or more people viii. Cuckoo Smurfing – form of ML linked to Alternative Remittance systems, in which criminal funds are transferred through accounts of unwitting persons who are expecting genuine funds or payments from overseas. Prominent in the UK Compliance Prep CAMS Prep Course Outline

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1. Diff b/w Cuckoo Smurfing and Structuring –First is where third parties who hold the bank accounts being used are not aware of the fact that illicit money is being deposited into their accounts. 2. Requires work of an insider within a financial institution (KYE) 3. To combat, banks should identify depositors who pay cash into third-party accounts ix. Microstructuring – Same as structuring, except at a much smaller level 1. Structuring - $18k deposit split into 2, Microstructuring - $18k deposit, split into 20 deposits for $900 2. Ways to detect Microstructing a. Use counter deposit slips as opposed to preprinted deposit slips b. Frequent activity in an account just opened c. Frequent deposits of nominal amounts inconsistent with normal business practices d. Cash deposits followed by ATM withdrawals, especially in high risk countries e. Cash deposits made into a business account by third party with no apparent connection to the company x. Bank Complicity 1. KYE is as important as KYC xi. Credit Unions/Building Societies 1. Not a huge area of concern for ML as they are smaller in size and offer less services and suspicious activity can be more easily discovered bc the smaller volume of transactions. Risk is that credit unions contain high levels of cash transactions that increase the risk of ML and TF. 2. In November 2014 guidance by the JMLSG, the group concluded that high-risk transactions include: a. Money transfers to third parties, b. Third parties paying in cash for someone else, and c. Reluctance to provide identity information when opening an account. b. Non-Bank Financial Institutions i. Credit Card Industry – Includes CC associations (Amex, Visa etc), Issuing Banks (Chase who issues visa card), banks that process CC transactions, and third party processors 1. CC accounts are not usually used in initial placement state of ML bc industry restricts cash payments, more likely to be used in layering or integration stage. Compliance Prep CAMS Prep Course Outline

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ii. Third Party Payment Processors (TPP) 1. Generally bank customers that provide payment-processing services to merchants and other business entities and often use their commercial bank accounts to conduct payment processing for their merchant clients. Oftentimes, they are not subject to any AML/CFT requirements. 2. TPPs traditionally contracted with US retailers (i.e., merchants) that had physical locations in the United States in order to help collect monies owed by customers. These merchant transactions primarily included credit card payments, but also covered Automated Clearing House (ACH) debits and creating and depositing remotely created checks (RCCs) or demand drafts. 3. Examples of risks posed by TPP include a. The TPP may have relationships with multiple financial institutions b. May be used to launder money by sending funds directly to a FI from a foreign jurisdiction through an international ACH payment (TPPP have large #’s of transactions to these may go undetected) c. High return rates from Unauthorized transactions iii. Money Remitters and Money Exchange Houses (AKA Money Services Business) 1. EX; check cashers, issuers, sellers and redeemers of money orders and travelers checks, currency exchange houses, and prepaid value card companies. (Think western union, money gram) a. The scrutiny to which money remitters are subject can vary greatly, bc of the ease with which some money transmitters can set up business and not be subject to regulation. Banks need to do DD when establishing relationship with money transmitter esp. to confirm that the customer is properly licensed. 2. Provider and Seller of Prepaid Access – two types (open & closed loop) a. Open loop prepaid cards - can be used for purchases at any merchant that accepts cards issued for use on the payment network associated with the card and to access cash at any ATM that connects to the affiliated ATM network. Examples of open loop prepaid access usually are branded with the network logo such as American Express, Visa, and Master Card. b. Closed loop prepaid cards are typically limited to buying goods or services from the merchant issuing the card. Sellers of prepaid access are those who exceed a Compliance Prep CAMS Prep Course Outline

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certain threshold of prepaid access to one i...