Chapter 1 Flashcards

Question

What are some of the risks listed by FATF in its 2010 report titled “Guidance For A Risk-Based Approach Prepaid Cards, Mobile Payments And Internet-Based Payment Services”?

Answer 1

- Some of the risks on new products and services, according to FATF, include anonymity - geographic reach - alternative to physical cross-border transportation - easy access to cash - the fact that several entities are required to issue prepaid cards—the program manager, issuer, acquirer, payment network, distributor and agents—that may be hard to all supervise or monitor.

Answer 2

One of the primary concerns with regard to the use of virtual currencies is the fact that beneficial ownership information may be difficult to obtain.

Answer 3

- Self-funding by foreign terrorist fighters - terrorists raising funds through the use of social media - new payment products and services - exploitation of natural resources

Answer 4

The concept of willful blindness is the “deliberate avoidance of knowledge of the facts” or “purposeful indifference,” and is the equivalent of actual knowledge.

Answer 5

• 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, and • 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’ customers. 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.

Answer 6

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.

Answer 7

Designing a transaction to evade triggering a reporting or recordkeeping requirement is called “structuring.” Microstructuring is essentially the same as structuring, except that it is done at a much smaller level. Instead of taking $18,000 and breaking it into two deposits, the microstructurer might break it into 20 deposits of approximately $900 each. This level of structuring makes it extremely difficult to detect.

Answer 8

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. The launderer buys a policy with illicit money and then tells the insurance company that he has changed his mind and does not need the policy. After paying a penalty, the launderer redeems the policy and receives a clean check from a respected insurer.

Answer 9

* 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. * If there is reason to believe an item might be stolen, immediately contact the Art Loss Register (www. artloss.com), the world’s largest private database of stolen art. * Look critically when a customer asks to pay in cash. * Be aware of money laundering regulations. * Appoint a senior staff member to whom employees can report suspicious activities.

Answer 10

There are several ways commodity and futures accounts are susceptible to money laundering, including: • Withdrawal of assets through transfers to unrelated accounts or to high-risk countries, • Frequent additions to or withdrawals from accounts, • Checks drawn on, or wire transfers from, accounts of third parties 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, and • Movement of funds to disguise their origin.

Answer 11

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. They refer to any person or business that provides any of the following services to third parties: • Acting as a formation agent of legal persons, • Acting as (or arranging for another person to act as) a director or secretary of a company, a partner of a partnership, or a similar position in relation to other legal persons, • Providing a registered office, business address or correspondence for a company, a partnership or any other legal person or arrangement, • Acting as (or arranging for another person to act as) a trustee of an express trust, and • Acting as (or arranging for another person to act as) a nominee shareholder for another person.

Answer 12

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

Answer 13

- The significance of a trust account — whether onshore or offshore — in the context of money laundering cannot be understated: It can be used as part of the first step in converting illicit cash into less suspicious assets - it can help hide criminal ownership of funds or other assets - it is often an essential link between different money laundering vehicles and techniques, such as real estate, shell and active companies, nominees and the deposit and transfer of criminal proceeds.

Answer 14

Bearer bonds and bearer stock certificates, or “bearer shares,” are prime money laundering vehicles because they belong, on the surface, to the “bearer.” When bearer securities are transferred, because there is no registry of owners, the transfer takes place by physically handing over the bonds or share certificates. Bearer shares offer lots of opportunities to disguise their legitimate ownership.

Answer 15

The most basic difference between terrorist financing and money laundering 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.

Answer 16

FATF’s report entitled “Guidance for Financial Institutions in Detecting Terrorist Financing” published April 24, 2002 describes general characteristics of terrorist financing that a financial institution can look at to avoid becoming conduits for terrorist financing, including: (a) Use of an account as a front for a person with suspected terrorist links, (b) Appearance of an accountholder’s name on a list of suspected terrorists, (c) Frequent large cash deposits in accounts of non-profit organizations, (d) High volume of transactions in the account, and (e) Lack of a clear relationship between the banking activity and the nature of the accountholder’s business.

Answer 17

Hawalas are attractive to terrorist financiers because they, unlike formal financial institutions, are not subject to formal government oversight and do not keep detailed records in a standard form. Although some hawaladars do keep ledgers, their records are often written in idiosyncratic shorthand and are maintained only briefly.

Answer 18

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

Answer 19

* 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. * 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.

Answer 20

* Placement is the physical disposal of cash or other assets derived from criminal activity. * Layering is the separation of illicit proceeds from their source by layers of financial transactions intended to conceal the origin of the proceeds. * Integration is supplying apparent legitimacy to illicit wealth through the re-entry of the funds into the economy in what appears to be normal business or personal transactions.

Answer 21

Section 312, which requires institutions to set up risk based due diligence to mitigate the money laundering risks posed by foreign financial institutions. Section 313, which prohibits U.S. financial institutions from opening or maintaining correspondent accounts for foreign shell banks and requires them to take “reasonable steps” to ensure that a correspondent account of a foreign bank is not being used indirectly to provide banking services to a shell bank. Section 319(b), which requires U.S. financial institutions to maintain records of the identity of the owners of foreign banks for which they maintain correspondent accounts.

Answer 22

* 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, and * The relationship managers becoming client advocates to protect their clients.

Answer 23

Ensuring the money remitter is properly licensed.

Answer 24

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. This process allows the money launderer to get an insurance check, which represents cleaned funds. However, as more insurance companies are subject to AML program requirements, this type of money laundering is more readily detected and reported.

Answer 25

Lawyers often serve as trustees by holding money or assets “in trust” for clients. This enables lawyers to conduct transactions and to administer the affairs of a client. Sometimes, the illicit money is placed in a law firm’s general trust account in a file set up in the name of the client, a nominee, or a company controlled by the client.

Answer 26

The industry defined as “vehicle sellers” includes sellers and brokers of new vehicles, such as automobiles, trucks, and motorcycles; new aircraft, including fixed-wing airplanes and helicopters; new boats and ships, and used vehicles. Laundering risks and ways laundering can occur through vehicle sellers include: • 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.

Answer 27

* 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, and * Social costs.

Answer 28

* Spreading the anti-money laundering message worldwide, * Monitoring implementation of the FATF Recommendations among FATF members, and * Reviewing money laundering trends and counterm asures.

Answer 29

* The identification of risks and development of appropriate policies, * The criminal justice system and law enforcement, * The financial system and its regulation, * The transparency of legal persons and arrangements, and * International cooperation.

Answer 30

Countries and financial institutions should assess the risks associated with developments of new products, business practices, delivery mechanisms and technology. Financial institutions should assess these risks prior to launching new products; they should also take appropriate measures to mitigate the risks identified.

Answer 31

In 1988, the Basel Committee issued a Statement of Principles called “Prevention of Criminal Use of the Banking System for the Purpose of Money Laundering” in recognition of the vulnerability of the financial sector to misuse by criminals. This was a step toward preventing the use of the banking sector for money laundering, and it set out principles with respect to: • Customer identification, • Compliance with laws, • Conformity with high ethical standards and local laws and regulations, • Full cooperation with national law enforcement to the extent permitted without breaching customer onfidentiality, • Staff training, and • Record keeping and audits.

Answer 32

• Trust, nominee and fiduciary accounts, • Corporate vehicles, particularly companies with nominee shareholders or entities with shares in bearer form, • Introduced businesses, • Client accounts opened by professional intermediaries, such as “pooled” accounts managed by professional intermediaries on behalf of entities such as mutual funds, pension funds and money funds, • Politically exposed persons, • Non-face-to-face customers, i.e., customers who do not present themselves for a personal interview, and • Correspondent banking.

Answer 33

* Customer identification, * Risk management, * Customer acceptance, and * Monitoring.

Answer 34

The Basel Committee’s October 2004 paper called “Consolidated KYC Risk Management” addresses the need for banks toadopt a global approach and to apply the elements necessary for a sound KYC program to both the parent bank or head office and all of its branches and subsidiaries. These elements consist of: • Risk management, • Customer acceptance and identification policies, and • Ongoing monitoring of higher-risk accounts.

Answer 35

* It specifically includes the category of trust and company service providers, * It covers all dealers trading in goods who trade in cash over 15,000 Euros, and * The definition of financial institution includes certain insurance intermediaries.

Answer 36

Under Section 312 of the USA Patriot Act, a private banking account is defined as an account with a minimum aggregate deposit of $1 million for one or more non-U.S. persons and which is assigned to a bank employee acting as a liaison with the non-U.S. person.

Answer 37

The European Union’s Second Directive on Prevention on the Use of the Financial System for the Purpose of Money Laundering (2001) extended the scope of the First Directive beyond drug-related crimes. The definition of “criminal activity” was expanded to cover not just drug trafficking, but all serious crimes, including corruption and fraud against the financial interests of the European Community.

Answer 38

The due diligence program for foreign correspondent accounts for non-U.S. persons must include “appropriate, specific and risk-based,” and, where necessary, enhanced policies, procedures and controls reasonably designed to identify and report suspected money laundering in a correspondent account maintained in the United States. This due diligence program must also be included in the institution’s anti-money laundering program. The due diligence program must address three measures: • Determining whether enhanced due diligence is necessary, • Assessing the money laundering risk presented by the correspondent account, • Applying risk-based procedures and controls reasonably designed to detect and report suspected money laundering.

Answer 39

FATF also designated specific thresholds that trigger AML scrutiny. For example, the threshold that financial institutions should monitor for occasional customers is €15,000 [Recommendation 10]; for casinos, including Internet casinos, it is €3,000 [Recommendation 22]; and for dealers in precious metals, when engaged in any cash transaction, it is €15,000 [Recommendation 22-23].

Answer 40

The Recommendations say that financial institutions must report to the Financial Intelligence Unit where they suspect or have reasonable grounds to suspect that funds are the proceeds of a criminal activity or are related to terrorist financing. The financial institutions and the employees reporting such suspicions should be protected from liability for reporting and should be prohibited from disclosing that they have reported such activity.

Answer 41

* Public officials, including individuals holding, or having held, positions of public trust, as well as their families and close associates, * High-risk countries, including countries “identified by credible sources as having inadequate anti-money laundering standards or representing high-risk for crime and corruption,” and * High-risk activities, involving clients and beneficial owners whose source of wealth “emanates from activities known to be susceptible to money laundering.

Answer 42

• AML/CFT policies and procedures [Recommendations 1-2], • money laundering and confiscation [Recommendations 3-4], • terrorist financing and financing of proliferation [Recommendations 5-8], • financial and non-financial institution preventative measures [Recommendations 9-23], • transparency and beneficial ownership of legal persons and arrangements [Recommendations 24-25], • powers and responsibilities of competent authorities and other institutional measures [Recommendations 26-35], and • international cooperation [Recommendations 36-40].

Answer 43

Countries should start by identifying, assessing and understanding the money laundering and terrorist financing risks they face. Then they should take appropriate measures to mitigate the identified risks. The risk-based approachallows countries to allocate their limited resources in a targeted manner to their own particular circumstances, thereby increasing the efficiency of the preventative measures. Financial institutions should also use the risk-based approach to identify and mitigate the risks they face.

Answer 44

The named countries had strategic deficiencies in their AML/CFT regimes.

Answer 45

• The jurisdiction should be strategically important based on quantitative and qualitative indicators and additional considerations • FATF’s geographic balance should be enhanced by the jurisdiction becoming a member • The country should provide a written commitment at the political/ministerial level • Within a maximum of three years after being invited to participate in FATF as an observer the mutual evaluation process for the country should be launched. • Membership is granted if the mutual evaluation is satisfactory

Answer 46

No, numbered accounts should not be prohibited but be subjected to exactly the same KYC procedures as other customer accounts. KYC tests may be carried out by select staff, but the identity of customers must be known to an adequate number of staff if the bank is to be sufficiently diligent. “Such accounts should in no circumstances be used to hide the customer identity from a bank’s compliance function or from the supervisors.”

Answer 47

EU members must transpose the Directives into law

Answer 48

The First Directive of 1991 confined predicate offenses for money laundering to drug trafficking as defined in the 1988 Vienna Convention. However, member states were encouraged to extend the predicate offenses to other crimes.

Answer 49

The threshold for entities obliged to report suspicious transactions (i.e., persons trading in goods or carrying out transactions) decreased from EUR 15,000 to EUR 10,000

Answer 50

The following high-level principles apply for both FATF and FSRBs: • Role: FSRBs play an essential role in identifying and addressing AML/CFT technical assistance needs for their individual members. In those FSRBs that carry out this co-ordination work, technical assistance necessarily complements mutual evaluation and follow-up processes by helping jurisdictions to implement FATF standards. • Autonomy: FATF and FSRBs are free-standing organizations that share the common goals of combating money laundering and the financing of terrorism and proliferation and of fostering effective AML/CFT systems. • Reciprocity: FATF and FSRBs operate on the basis of (mutual or joint or common) recognition of their work, which implies that FSRBs and FATF put in place similar mechanisms for effective participation and involvement in each other’s activities.

Answer 51

• Asia/Pacific Group on Money Laundering (APG). • Caribbean Financial Action Task Force (CFATF) • Council of Europe Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL, formerly PC-R-EV) • Eurasian Group (EAG) • Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) • Financial Action Task Force of Latin America (GAFILAT) (formerly known as Financial Action Task Force on Money Laundering in South America (GAFISUD) • Intergovernmental Action Group against Money- Laundering in West Africa (GIABA) • Middle East and North Africa Financial Action Task Force (MENAFATF) • Task Force on Money Laundering in Central Africa (GABAC)

Answer 52

The Caribbean Financial Action Task Force (CFATF), in 1990.

Answer 53

In May 1992, the Organization of American States (OAS), via the Inter-American Drug Abuse Control Commission, an OAS entity that goes by the acronym CICAD (Comisión Interamericana para el Control del Abuso de Drogas), became the first permanent international body to reach an agreement on model legislation aimed specifically at dealing with money laundering.

Answer 54

The Egmont Group of Financial Intelligence Units

Answer 55

The section also allows the Secretary of the Treasury or the Attorney General to subpoena records of a foreign bank that maintains a correspondent account in the United States. The subpoena can request any records relating to the account, including records located outside the United States. If the foreign bank fails to comply with or fails to contest the subpoena, the Secretary or the Attorney General can order the US financial institution to close the correspondent account within ten days of receipt of such order. Additionally, the section also requires foreign banks to designate a registered agent in the United States to accept service of subpoenas pursuant to this section. Furthermore, US banks and ecurities brokers and dealers that maintain correspondent accounts for foreign banks must keep ecords of the identity of the 25 percent owners of the foreign bank, unless it is publicly traded, as well as the name of the correspondent bank’s registered agent in the U.S.

Answer 56

Section 319(a) of the USA PATRIOT Act greatly strengthened the forfeiture powers over the funds of foreign persons and institutions. If the funds the United States pursues are deposited in a foreign bank that keeps an “interbank account” at a US bank, the United States may bring a case to forfeit the crime-tainted funds in the US account.

Answer 57

OFAC, the Office of Foreign Assets Control, is the division of the U.S. Department of Treasury that administers and enforces economic and trade sanctions based on US foreign policy and national security goals against targeted foreign countries, terrorists, international narcotics traffickers and those engaged in activities related to the proliferation of weapons of mass destruction. OFAC acts under presidential wartime and national emergency powers, as well as authority granted by specific legislation, to impose controls on transactions and to freeze foreign assets under US jurisdiction. Many of the sanctions are based on United Nations and other international mandates that are multilateral in scope and involve close cooperation with allied governments. OFAC sanction programs 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. OFAC has the power to impose significant penalties on those who are found to be in violation of the blocking orders within each of the sanction programs.

Answer 58

Approval of higher risk Correspondent Banking relationships at the time of on-boarding and periodic review shall be subject to a higher level of approvals by business and Compliance, or relevant control function. Periodic reviews shall be conducted of all high risk Correspondent Banking relationships, at minimum on an annual basis.

Answer 59

Risk is dynamic and needs to be continuously managed. It should also be noted that the environment in which each organization operates is subject to continual change. Externally, the political changes of a jurisdiction or whether economic sanctions are imposed or removed may impact a country-risk rating. Internally, organizations respond to market and customer demands by introducing new products and services and implementing new delivery systems. The combination of these changes makes it critical that the ML/TF risk model is subject to regular review. In some countries, there is a legislative obligation for such reviews to be undertaken on a regular basis — usually annually or when new products, delivery channels or customer types are introduced.

Answer 60

When assessing risk, FATF recommends considering: • Customer risk factors such as non-resident customers, cash-intensive businesses, complex ownership structure of a company, and companies with bearer shares. • Country or geographic risks such as countries with inadequate AML/CFT systems, countries subject to sanctions or embargos, countries involved with funding or supporting of terrorist activities, or those with significant levels of corruption. • Product, service, transaction or delivery channel risk factors such as private banking, anonymous transactions, and payments received from unknown third parties.)

Answer 61

As every financial institution develops transaction history with customers, it should consider modifying the risk rating of the customer, based on: • Unusual activity, such as alerts, cases and suspicious transaction report (STR) filings. • Receipt of law enforcement inquiries, such as subpoenas. • Transactions that violate economic sanctions programs. • Other considerations, such as significant volumes of activity where it would not be expected, such as a domestic charity engaging in large international transactions or businesses engaged in large volumes of cash where this would not normally be expected.

Answer 62

• The US State Department issues an annual “International Narcotics Control Strategy Report” rating more than 100 countries on their money laundering controls • Transparency International publishes a yearly “Corruption Perceptions Index,” which rates more than 100 countries on perceived corruption • FATF identifies jurisdictions with weak AML/CFT regimes and issues country-specific Mutual Evaluation Reports • In the United States certain domestic jurisdictions are evaluated based on whether they fall within government-identified higher-risk geographic locations such as High Intensity Drug Trafficking Areas (HIDTA) or High Intensity Financial Crime Areas (HIFCA).

Answer 63

While policies and procedures provide important guidance, the AML/CFT program also relies on a variety of internal controls, including management reports and other built-in safeguards that keep the program working. These internal controls should enable the compliance organization to recognize deviations from standard procedures and safety protocols. A matter as simple as requiring a corporate officer’s approval or two signatures for transactions that exceed a prescribed amount could be a critical internal control element that if ignored seriously weakens an institution’s AML/CFT program and attracts unwanted attention from supervisory authorities.

Answer 64

The sophistication of the compliance function should be based upon the institution’s nature, size, complexity, regulatory environment, and the specific risk associated with the products, services, and clientele. No two institutions will have exactly the same compliance structure because the risk facing each institution is going to be different, as identified in their respective risk assessments.

Answer 65

The compliance officer must also have the means to communicate at all levels of the organization — from front-line associates all the way up to the CEO and Board of Directors. It is critical for a compliance officer to be capable of articulating matters of importance to senior and executive management, particularly significant changes that may present risk to the organization, such as a sudden or substantial increase in STRs or currency transaction reports (CTRs). Other items of concern that need to be escalated to management may include changes to laws or regulations that may require immediate action. A compliance officer must have the skills necessary to be able to analyze and interpret these ongoing changes, determine what effect they may have on the institution, and suggest an action plan when appropriate.

Answer 66

The compliance function may establish risk-based quality assurance reviews and monitoring and testing activities to ensure the functions are being performed appropriately. This may include a review of the CDD collected to ensure completeness, monitoring reports of CDD completeness or defects to ensure the systems are working as expected, and performing testing to assess whether the monitoring and the business performance are satisfactorily measuring and ensuring compliance.

Answer 67

* Customer-facing staff * Operations personnel * AML/CFT compliance staff * Senior management and board of directors * Independent testing staff

Answer 68

Tests should be considered as a means to evaluate how well the training is understood with a mandatory passing score.

Answer 69

An institution’s training should be ongoing and on a regular schedule. Existing employees should at least attend an annual training session. New employees should receive appropriate training with respect to their job function and within a reasonable period after joining or transferring to a new job. Situations may arise that demand an immediate session. For example, an emergency training session may be necessary right after an examination or audit that uncovers serious money laundering control deficiencies. A news story that names the institution or recent regulatory action, such as a Consent Order, might also prompt quick-response training. Changes in software, systems, procedures or regulations are additional triggers for training sessions.

Answer 70

FATF recommends that financial institutions should be required to undertake CDD measures when: • Establishing business relationships. • Carrying out occasional transactions under certain circumstances. • There is a suspicion of money laundering or terrorist financing. • The financial institution has doubts about the veracity or adequacy of previously obtained customer identification data.

Answer 71

FATF indicates that when there are circumstances where the risk of money laundering or terrorist financing is higher, enhanced CDD measures should be taken.

Answer 72

A financial institution should consider obtaining additional information from high-risk customers such as: • Source of funds and wealth. • Identifying information on individuals with control over the ccount, such as signatories or guarantors. • Occupation or type of business. • Financial statements. • Banking references. • Domicile. • Proximity of the customer’s residence, place of employment, or place of usiness to the bank. • Description of the customer’s primary trade area and whether international ransactions are expected to be routine. • Description of the business operations, the anticipated olume of currency and total sales, and a list of major customers and suppliers. • Explanations for hanges in account activity.

Answer 73

A bank should not establish a banking relationship, or carry out any transactions, until the identity of the customer has been satisfactorily established and verified in accordance with FATF Recommendation 10.

Answer 74

Financial institutions should aim to apply their customer acceptance policy, procedures for customer identification, process for monitoring higher risk accounts and risk management framework on a global basis to all of their offices, branches and subsidiaries. The firm should clearly communicate these policies and procedures through ongoing training and regular communications, as well as conduct monitoring and testing to ensure compliance with the policies and procedures.

Answer 75

Sanctions can generally fall into one of the following categories: • Targeted Sanctions — aimed at specifically named individuals, such as key leaders in a country or territory, named terrorists, significant narcotics traffickers and proliferators of weapons of mass destruction. These sanctions often include the freezing of assets and travel bans where possible. • Sectoral Sanctions — aimed at key sectors of an economy to prohibit a very specific subset of financial dealings within those sectors to impede future growth. • Comprehensive Sanctions — generally prohibit all direct or indirect import/export, trade brokering, financing or facilitating against most goods, technology and services. These are often aimed at regimes responsible for gross human rights violations, and nuclear proliferation.

Answer 76

The Specially Designated Nationals and Blocked Persons (SDN) list

Answer 77

Before a financial institution starts doing business with a new customer or engaging in certain transactions (e.g., international wire payments), it should review the various country sanction program requirements as well as published lists of known or suspected terrorists, narcotics traffickers, and other criminal actors for potential matches.

Answer 78

The information contained in them — and the ability to positively match your customer with a PEP on a database — can be a challenge. These lists do not always provide all relevant information related to PEPs that would assist in identifying them. For instance, there is no unique identifier, such as a date of birth or address.

Answer 79

* Flexible — as money laundering and terrorist financing risks vary across jurisdictions, customers, products and delivery channels, and over time, * Effective — as companies are better equipped than legislators to effectively assess and mitigate the particular money laundering and terrorist financing risks they face, and * Proportionate — because a risk-based approach promotes a common sense and intelligent approach to fighting money laundering and terrorist financing as opposed to a “check the box” approach. It also allows firms to minimize the adverse impact of anti-money laundering procedures on their low-risk customers

Answer 80

• A system of internal policies, procedures and controls, • A designated compliance officer with day-to-day oversight over the AML program, • An ongoing employee training program, and • An independent audit function to test the AML program.

Answer 81

A person should be designated as the anti-money laundering compliance officer. This individual should be responsible for designing and implementing the program, making necessary changes and disseminating information about the program’s successes and failures to key staff members, constructing anti-money laundering-related content for staff training programs and staying current on legal and regulatory developments in the field.

Answer 82

Regulations and laws require financial institutions to have formal, written AML compliance programs that include “training for appropriate personnel.” A successful training program not only should meet the standards set out in the laws and regulations that apply to an institution, but should also satisfy internal policies and procedures and should mitigate the risk of getting caught up in a money aundering scandal. Training is one of the most important ways to stress the importance of anti-money laundering efforts, as well as educating employees about what to do if they encounter potential money laundering.

Answer 83

* Who to train, * What to train on, * How to train, * When to train, and * Where to train.

Answer 84

The independent audit should review Suspicious Transaction Reporting (STR) systems, which should include an evaluation of the research and referral of unusual transactions. Testing should include a review of policies, procedures and processes for referring unusual or suspicious activity from all business lines (e.g., legal, private banking, foreign correspondent banking) to the personnel or department responsible for evaluating unusual activity.

Answer 85

* Reviewing policies, procedures, and processes for suspicious activity monitoring, * Evaluating the system’s methodology for establishing and analyzing expected activity or filtering criteria, * Evaluating the appropriateness of the monitoring reports, and * Comparing the transaction monitoring typologies to the AML/CFT risk assessment for reasonableness.

Answer 86

``` • Private banking, • Offshore international activity, • Deposit-taking facilities, • Wire transfer and cash-management functions, • Transactions in which the primary beneficiary is undisclosed, • Loan guarantee schemes, • Travelers checks, • Official bank checks, • Money orders, • Foreign exchange transactions, • Trade-financing transactions with unusual pricing features, and • Payable Through Accounts (PTAs). ```

Answer 87

• Prohibited — The company will not tolerate any dealings of any kind given the risk. Countries subject to economic sanctions or designated as state sponsors of terrorism, such as Sudan or Iran, are prime candidates for prohibited transactions. Prohibited customers would include shell banks, • High-Risk – The risks here are significant, but are not necessarily prohibited. To mitigate the heightened risk resented, the firm should apply more stringent controls to reduce the risk, such as conducting nhanced due diligence and more rigorous transaction monitoring. Countries that are noted for corruption or rug trafficking are generally deemed high risk. High-risk customers may include PEPs; high-risk products and services may include correspondent banking and private banking, • Medium-Risk — Medium risks are more than a low- or standard-risk of money laundering, and merit additional scrutiny, but do not rise to the level of high-risk, and • Low- or Standard-Risk — This represents the baseline risk of money aundering; normal business rules apply.

Answer 88

• Casinos, • Offshore corporations and banks located in tax/ banking havens, • MSBs, including currency exchange houses, money remitters, check cashers, • Car, boat and plane dealerships, • Used-car and truck-dealers and machine parts manufacturers, • Travel agencies, • Brokers/dealers in securities, • Jewel, gem and precious metals dealers, • Import/ export companies, and • Cash-intensive businesses (restaurants, retail stores, parking).

Answer 89

The ultimate responsibility for the AML compliance program rests with the board of directors. Members must set the tone from the top by openly voicing their commitment to the program, ensuring that their commitment flows through all service areas and lines of business, and holding responsible parties accountable for compliance.

Answer 90

* Full identification of customer and business entities, including source of funds and wealth when ppropriate, * 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 or the account present, * Account and transaction monitoring based on the risks presented, * Investigation and examination of unusual customer or account activity, and * Documentation of findings.

Answer 91

A Know Your Employee (KYE) program means that the institution has a program in place that allows it to understand an employee’s background, conflicts of interest and susceptibility to money laundering complicity. Policies, procedures, internal controls, job descriptions, code of conduct/ethics, levels of authority, compliance with personnel laws and regulations, accountability, monitoring, dual control, and other deterrents should be firmly in place.

Answer 92

• Daily cash activity in excess of the country’s reporting threshold, • Daily cash activity just below the country’s reporting threshold (to identify possible structuring), • Cash activity aggregated over a period of time (e.g., individual transactions over a certain amount, or totaling more than a certain amount over a 30-day period) to identify possible structuring, • Wire transfer reports/logs (with filters using amount and geographical factors), • Monetary instrument logs/reports, • Check kiting/drawing on uncollected funds (significant debit/credit flows), • Significant change reports, and • New account activity reports.

Answer 93

While reporting procedures vary from country to country, a typical suspicious or unusual transaction reporting process within a financial institution includes: • Procedures to identify potential suspicious transactions or activity, • A formal evaluation of each instance, and continuation, of unusual transactions or activity, • Documentation of the suspicious transaction reporting decision, whether or not filed with the authorities, • Procedures to periodically notify senior management or the board of directors of suspicious transaction filings, and • Employee training on detecting suspicious transactions or activities.

Answer 94

* Payment made in cash by a third party with no connection to the underlying transaction, * Payment made by wire transfers from third parties unconncted to the underlying transaction, and * Payment made with checks, bank drafts or money orders not drawn on the account of the purchaser

Answer 95

• Transaction monitoring: scanning and analyzing data for potential money laundering activity, • Watch list filtering: screening new accounts, existing customers, beneficiaries and transaction counterparties against terrorist, criminal and other blocked-persons watch lists, • Automation of regulatory reporting: filing suspicious transaction reports (STRs), currency transaction reports (CTRs), or other regulatory eports with the government, and • A detailed audit trail: demonstrates compliance efforts to regulators.

Answer 96

A search warrant is a grant of permission from a court for a law enforcement agency to search certain designated premises and to seize specific categories of items or documents. Generally, the requesting agency is required to establish that probable cause exists to believe that evidence of a crime will be located. The warrant is authorized based on information contained in an affidavit submitted by a law enforcement officer.

Answer 97

* The institution has a criminal history, * The institution has cooperated with the investigation, * The institution discovered and self-reported the money laundering-related issues, * The institution has had a comprehensive and effective AML program, * The institution has taken timely and effective remedial action, * There are civil remedies available that can serve as punishment, or * Deterring wrongdoing by others is needed and will be served by a prosecution.

Answer 98

If an institution is served with a summons or subpoena compelling the production of certain documents, the institution should have its senior management and/or counsel review the summons or subpoena. If there are no grounds for contesting the summons or subpoena, the institution should take all appropriate measures to comply with the summons or subpoena on a timely and complete basis. Failure to do so can result in adverse action and penalties for the institution. Also, the financial institution should not notify the customer who is being investigated. If the government asks the bank to keep certain accounts open, such a request should be obtained in writing under proper letterhead and authority from the government.

Answer 99

1. Call the financial institution’s in-house or outside counsel, 2. Review the war cant to understand its scope, 3. Ask for and obtain a copy of the warrant, 4. Ask for a copy of the affidavit that supports the search warrant (the agents are not obligated to provide a copy of the affidavit, but, if a financial institution is allowed to see the affidavit, the financial institution can learn more about the purpose of the investigation), 5. 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, 6. Ask for a copy of law enforcement’s inventory of what they have seized, and 7. Write down the names and agency affiliations of the agents who conduct the search.

Answer 100

When an institution receives a subpoena, summons or other government request, the institution should do more than just produce the records or information being sought. Financial institutions should ensure that all grand jury subpoenas, as well as other information requests from government agencies, are reviewed by senior management, an investigations group or counsel to determine how best to respond to the inquiry and to determine if the inquiry or the underlying activity might pose a risk to the institution. In addition, the institution should maintain a centralized control over all requests and responses in order to ensure that the requests are responded to on a complete and timely basis and to establish a complete record of what is provided. This centralized record will also assist with regard to the institution’s own internal investigation.

Answer 101

With regard to investigations conducted by the government, employees should be informed of the investigation and should be instructed not to produce corporate documents directly, but, rather, should inform senior management or counsel of all requests for documentation and should provide the documents to them for production. In that way, the institution will know what is being requested and what has been produced. In addition, the institution can determine what, if any, requests should be contested. The same procedure should be followed with regard to requests for employee interview

Answer 102

* 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 overnment investigators are asking questions of institution employees, business associates, customers or even ompetitors, and * The filing of a civil lawsuit against the institution or a customer of the institution.

Answer 103

The purpose of the investigation will be to learn the nature and extent of any potential wrongdoing, to develop information sufficient to report—when necessary—to the authorities, to enable the institution to minimize its liability, and to stop any potential money laundering.

Answer 104

Based on its internal investigation, the institution should make an independent determination as to hether to close the account in issue. Some of the factors that the institution should consider are as follows: • The legal basis for closing an account, • The institution’s stated policies and procedures for closing an account, • How serious is the underlying conduct. If the conduct is serious and rises to the level where the account would ordinarily be closed, then the institution should consider closing the account, or • As stated above, if law enforcement requests the institution to keep the account open, the institution should request that the investigator or prosecutor make that request in writing on roper government agency letterhead with the appropriate authorized signature.

Answer 105

Notify the investigators or prosecutors.

Answer 106

A financial investigator’s main objective is to track the movement of money, whether through a bank, broker- dealer, money services business or casino. For example, banks maintain signature cards, which are collected at the opening of an account, account statements, deposit tickets, checks and withdrawal items and credit and debit memorandums. Banks also keep records on loans, cashier’s checks, certified checks, traveler’s checks and money orders. They exchange currency, cash third-party checks, and conduct wire transfers, as do most money services businesses. Banks also keep safe-deposit boxes and issue credit cards.

Answer 107

When performing an internal investigation, it is important to secure and review all relevant documentation and to interview all knowledgeable employees. It is important to interview these employees as soon as practicable so that their memories are the freshest and so that they can direct management or counsel to relevant documents and people on a timely basis.

Answer 108

If counsel for the institution prepares a written report of an investigation, the institution should take steps to not inadvertently waive the attorney-client privilege by distributing the report to persons who should not receive it. Every page of the report should contain a statement that it is confidential and is subject to the attorney-client privilege and work-product privilege. Copies of the report should be numbered, and a list of persons who are given copies to read should be maintained. After a set period of time, all copies should be returned. Persons obtaining the report should be instructed not to make notes on their copies. All copies should be maintained in a file separate from regular institution files in a further effort to maintain the highest level of protection.

Answer 109

1. The central authority of the requesting country sends a “commission rogatoire” (letter rogatory, or letter of request) to the central authority of the other country. The letter includes the information sought, the nature of the request, the criminal charges in the requesting country and the legal provision under which the request is made, 2. The central authority that receives the request sends it to a local financial investigator to find out if the information is available, 3. An investigator from the requesting country then visits the country where the information is sought, and accompanies the local investigator during visits or when statements are taken, 4. The investigator asks the central authority for permission to remove the evidence to the requesting country, 5. The central authority sends the evidence to the requesting central authority, thereby satisfying the request for mutual legal assistance, and 6. Local witnesses may need to attend court hearings in the requesting country.

Answer 110

* Mutual Legal Assistance Treaties, * Financial Intelligence Units, and * The Supervisory Channel.

Answer 111

Recommendations 36-40 deal with mutual legal assistance treaties, extradition, confiscation of assets and mechanisms to exchange information internationally.

Answer 112

Bearer negotiable instruments Include monetary instruments in bearer form such as: negotiable instruments (including checks, promissory notes and money orders) that are either in bearer form, are endorsed without restriction, are made out to a fictitious payee, or are otherwise in such form that title thereto passes upon delivery.

Answer 113

An agreement between two parties establishing a set of principles that govern their relationship on a particular matter. An MOU is often used by countries to govern their sharing of assets in international asset-forfeiture cases or to set out their respective duties in anti-money laundering initiatives. Financial Intelligence Units (FIUs), with the task of receiving and analyzing suspicious transaction reports on an ongoing basis and maintaining close links with police and customs authorities, share information among themselves informally in the context of investigations, usually on the basis of an MOU. The Egmont Group of FIUs has established a model for such MOUs. Unlike the Mutual Legal Assistance Treaty (see below), this gateway is ordinarily used not for obtaining evidence, but for obtaining intelligence that might lead to evidence.

Answer 114

Also known as letter rogatory, commission rogatoire is a written request for legal or judicial assistance sent by the central authority of one country to the central authority of another when seeking evidence from the foreign jurisdiction. The letter typically specifies the nature of the request, the relevant criminal charges in the requesting country, the legal provision under which the request is made, and the information sought.

Answer 115

The extension of one country’s policies and laws to the citizens and institutions of another. U.S. money laundering laws contain several provisions that extend its prohibitions and sanctions into other countries. For example, the “extraterritorial jurisdiction” of the principal U.S. anti-money laundering law can apply to a non-U.S. citizen if the “conduct” occurs “in part” in the U.S. (Title 18, USC Sec. 1956(f)).

Answer 116

A central governmental office that obtains information from financial reports, processes it and then discloses it to an appropriate government authority in support of a national anti-money laundering effort. The activities performed by an FIU include receiving, analyzing and disseminating information and, sometimes, investigating violations and prosecuting individuals indicated in the disclosures.

Answer 117

A business that commingles illicit funds with revenue generated from the sale of legitimate products or services. Criminals use front companies to launder illicit money by giving the funds the appearance of legitimate origin. Organized crime has used pizza parlors to mask proceeds from heroin trafficking. Front companies may have access to substantial illicit funds, allowing them to subsidize front company products and services at levels well below market rates or even below manufacturing costs. Front companies have a competitive advantage over legitimate firms that must borrow from financial markets, making it difficult for legitimate businesses to compete with front companies.

Answer 118

A variety of offshore corporate structures, alternately called “exempt companies,” which are dedicated to business use outside the incorporating jurisdiction, rapid formation, secrecy, broad powers, low cost, low to zero taxation, and minimal filing and reporting requirements.

Answer 119

Know Your Customer (KYC) refers to anti-money laundering policies and procedures used to determine the true identity of a customer and the type of activity that is “normal and expected,” and to detect activity that is “unusual” for a particular customer. Many experts believe that a sound KYC program is one of the best tools in an effective anti-money laundering program.

Answer 120

An agreement among countries allowing for mutual assistance in legal proceedings and access to documents and witnesses and other legal and judicial resources in the respective countries, in private and public sectors, for use in official investigations and prosecutions.

Answer 121

he physical cross-border transportation of currency is defined as any in-bound or out-bound transportation of currency or bearer negotiable instruments from one country to another. The term includes: (1) physical transportation by a natural person, or in that person’s accompanying luggage or vehicle; (2) shipment of currency through cargo containers; and (3) the mailing of currency or bearer negotiable instruments.

Answer 122

A warning signal that should bring attention to a potentially suspicious situation, transaction or activity.

Answer 123

Remittance services are also referred to as giro houses or casas de cambio. Remittance services are businesses that receive cash or other funds that they transfer through the banking system to another account. The account is held by an associated company in a foreign jurisdiction where the money is made available to the ultimate recipient.

Answer 124

A money laundering system named after Charles Ponzi, an Italian immigrant who spent 10 years in jail in the U.S. for a scheme that defrauded 40,000 people out of $15,000,000. Ponzi’s name became synonymous with the use of new investors’ money to pay off prior investors. Ponzi schemes involve fake, non-existent investment schemes in which the investors are tricked into investing on the promise of unusually attractive returns. The operator of the scheme can keep the operation going by paying off early investors with the money from new investors until the scheme collapses under its own weight and/or the promoter vanishes with the remaining money. The scheme recently engaged in by Bernie Madoff is an example of a Ponzi scheme. The prime bank guaranty, roll program, bank debenture program and high yield promises are frequently used to entice investors into participating in Ponzi schemes.

Answer 125

Safe harbor is defined as legal protection for financial institutions, their directors, officers and employees from criminal and civil liability for breach of any restriction on disclosing information imposed by contract or by any legislative, regulatory or administrative prohibition, if they report their suspicions in good faith to the Financial Investigation Unit (FIU), even if they did not know precisely what the underlying criminal activity was, and regardless of whether illegal activity actually occurred.

Answer 126

A commonly used money laundering method, smurfing involves the use of multiple individuals and/or multiple transactions for making cash deposits, buying monetary instruments or bank drafts in amounts under the reporting threshold.

Answer 127

Countries that offer special tax incentives or tax avoidance to foreign investors and depositors.

Answer 128

The improper or illegal act of notifying a suspect that he or she is the subject of a Suspicious Transaction Report or is otherwise being investigated or pursued by the authorities.

Answer 129

A trustee may be a paid professional or company or unpaid person that holds the assets in a trust fund separate from the trustee’s own assets. The trustee invests and disposes of the assets in accordance with the settlor’s trust deed, taking into consideration any letter of wishes.

Answer 130

A funds exchange system in Indian and Chinese civilizations used to facilitate the secure and convenient cross-border movement of funds. Hawala was born centuries before Western financial systems. Merchant traders wishing to send funds to their homelands would deposit them with a hawala broker or hawaladar who normally owned a trading business. For a small fee, the banker would arrange for the funds to be available for withdrawal from another banker, normally also a trader, in another country. The two bankers would settle accounts through the normal process of trade. Today, the technique works much the same, with businesspersons in various parts of the world using their corporate accounts to move money internationally for third parties. Deposits and withdrawals are made through hawaladars, rather than traditional financial institutions. The practice is vulnerable to terrorist financing and money laundering—funds do not actually cross borders, and transactions tend to be confidential, as records are not stringently kept. In Pakistan, the system is called hundi. See Alternative Remittance System.

Answer 131

A legal principle that operates in money laundering cases in the U.S. and is defined by courts as the “deliberate avoidance of knowledge of the facts” or “purposeful indifference.” Courts have held that willful blindness is the equivalent of actual knowledge of the illegal source of funds or of the intentions of a customer in a money laundering transaction.

Answer 132

ccording to the Basel Committee on Banking Supervision’s paper entitled “Compliance and the compliance function in banks,” the bank’s board of directors is responsible for overseeing the management of the bank’s compliance risk. The board should approve the bank’s compliance policy, including a formal document establishing a permanent and effective compliance function. At least once a year, the board or a committee of the board should assess the extent to which the bank is managing its compliance risk effectively.

Answer 133

* They help to protect banks’ reputation and the integrity of banking systems by reducing the likelihood of banks becoming a vehicle for or a victim of financial crime and suffering consequential reputational damage, and * They constitute an essential part of sound risk management (e.g. by providing the basis for identifying, limiting and controlling risk exposures in assets and liabilities, including assets under management).

Chapter 1 Flashcards

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