Vulnerabilities and red flags for Trust and company service providers (TCSPs).
• Unknown or inconsistent application of regulatory guidelines regarding identification and reporting
requirements
• Limited market restriction on practitioners to ensure adequate skills, competence and integrity
• Inconsistent record keeping across the industry
• Potential for TCSPs to operate in an unlicensed enviromnent
• Potential for a TCSP’s CDD to be performed by other financial institutions, depending on the
jurisdictional requirements
What are the Three Stages of Money Laundering with definitions.
•Placement: The physical disposal of cash or other assets derived from criminal
activity.
•Layering: The separation of illicit proceeds from their source by layers of financial
transactions intended to conceal the origin of the proceeds.
•Integration: Supplying apparent legitin1acy to illicit wealth through the reentry of
the funds into the economy in what appears to be normal business or personal transactions
Correspondent banking is vulnerable to money laundering for what two main reasons.
- A financial institution carries out financial transactions on behalf of customers of another institution. The correspondent bank provides services for which it has neither verified the identities nor obtained any firsthand knowledge.
- They process large volumes of transactions for their customers’ customers. This makes it more difficult to identify suspect transactions, because the financial institution generally does not have the information on the actual parties conducting the transactionto know whether they are unusual.
Examples of risks posed by TPPP
- Multiple financial institution relationships: The TPPP may maintain relationships at multiple institutions, which hinders a financial institution’s ability to see the entire customer relationship.
- Money laundering: TPPPs can be used by criminals to mask transactions and launder the proceeds of crime. One way to engage in money laundering through a TPPP is to send funds directly to a financial institution from a foreign jurisdiction through an international ACH payment.
- High return rates from unauthorized transactions: TPPPs engaged in suspicious activity or being used by crinlinals may have higher than average return rates related to unauthorized transactions. At the merchant level, the criminal merchant may have acceptable return rates compared to the percentage of the TPPP’s total transaction volume, but when compared against individual originators, the return rate will be significantly higher.
Types of entities that are considered Gatekeepers?
Professionals, such as lawyers, notaries, accountants, investment advisors and trust and company service providers, who assist in transactions involving the movement of money and are deemed to have a particular role in identifying, preventing and reporting money laundering.
What is the Yates Memo?
Reminds prosecutors that criminal and civil investigations into corporate misconduct should also focus on individuals who perpetrated the wrongdoing. Further, it notes that the resolution of a corporate case does not provide protection to individuals from criminal or civil liability.
What are Payable Through Accounts?
Transaction account opened at a depository institution by a foreign financial institution through which the foreign institution’s customers engage, either directly or through subaccounts, in banking activities and transactions in such a manner that the financial institution’s customers have direct control over the funds in the account.
AML risks associated with Payable Through Accounts
- PTAs with foreign institutions licensed in offshore financial service centers with weak or nascent bank supervision and licensing laws.
- PTA arrangements where the correspondent bank regards the respondent bank as its sole customer and fails to apply its Customer Due Diligence policies and procedures to the customers of the respondent bank
- PTA arrangements in which subaccount holders have currency deposit and withdrawal privileges
- PTAs used in conjunction with a subsidiary, representative or other office of the respondent bank, which may enable the respondent bank to offer the same services as a branch without being subject to supervision
Six ways to execute trade-based money laundering.
- • Overinvoicing: By invoicing the goods or service at a price above the fair market price, the
seller is able to receive value from the buyer (i.e., the payment for the goods or service will
be higher than the value that the buyer receives when it is sold on the open market).
• Underinvoicing: By invoicing the goods or service at a price below the fair market price,
the seller is able to transfer value to the buyer (i.e., the payment for the goods or service is
lower than the value that the buyer will receive when it is sold on the open market). - Overshipping or short-shipping: The difference in the invoiced quantity of goods and the
quantity of goods that are shipped whereby the buyer or seller gains excess value based on the
payment made - Ghost-shipping: Fictitious trades where a buyer and seller collude to prepare all the documentation
indicating goods were sold, shipped and payments were made, but no goods were
actually shipped - Shell companies: Used to reduce the transparency of ownership in the transaction
- Multiple invoicing: Numerous invoices issued for the san1e shipment of goods, thus allowing
the money launderer the opportunity to make numerous payments and justify them with the
invoices - Black market trades: Commonly referred to as the Black Market Peso Exchange, whereby a
domestic transfer of funds is used to pay for goods by a foreign importer
Definition of a Shell and Shelf Corporation.
• Shelf company: A corporation that has had no activity. It has been created and put on the shelf.
This corporation is then later sold to someone who prefers a previously registered corporation
over a new one.
• Shell company or corporation: A company that at the time of incorporation has no significant
assets or operations.
Seven potential risk factors with prepaid cards.
- Anonymous cardholders
- Anonymous funding
- Anonymous access to funds
- High value limits and no limits on the number of cards individuals can acquire
- Global access to cash through ATMs
- Offshore card issuers that may not observe laws in all jurisdictions
- Substitute for bulk-cash smuggling
Exan1ples of placement transactions.
• Foreign exchange: Purchasing of foreign exchange with illegal funds
• Breaking up an1otmts: Placing cash in small an1ounts and depositing them into numerous
bank accounts in an attempt to evade reporting requirements
• Currency smuggling: Cross-border physical movement of cash or monetary instrun1ents
• Loans: Repayment of legitin1ate loans using laundered cash • Blending of funds: Commingling of illegitin1ate funds with legitimate funds, such as placing
the cash from illegal narcotics sales into cash-intensive, locally owned restaurant
Examples of layering transactions.
• electronically moving funds from one country to another and dividing them into advanced
financial options and/or markets;
• moving funds from one financial institution to another or within accounts at the san1e
institution;
• converting the cash placed into monetary instruments;
• reselling high-value goods and prepaid access/stored value products;
• investing in real estate and other legitimate businesses;
• placing money in stocks, bonds or life insurance products; and
• using shell companies to obscure the ultin1ate beneficial owner and assets.
Examples of integration transactions.
• purchasing luxury assets, such as property, artwork, jewelry or high-end automobiles; and
• getting into financial arrangements or other ventures where investments can be made in
business enterprises.
Indicators of money laundering using electronic transfers of funds.
• Funds transfers occur to or from a financial secrecy haven, to or from a high-risk geographic
location without an apparent business reason or when the activity is inconsistent with the
customer’s business or history.
• Large, incoming funds transfers are received on behalf of a foreign client, with little or no
explanation or apparent reason.
• Many small, incoming transfers of funds are received or deposits are made using checks and
money orders. Upon credit to the account, all or most of the transfers or deposits are wired to
another account in a different geographic location in a manner inconsistent with the customer’s
business or history.
• Funds activity is unexplained, repetitive or shows unusual patterns.
• Payments or receipts are received that have no apparent link to legitin1ate contracts, goods or
services.
• Funds transfers are sent or received from the same person to or from different accounts.
Vulnerabilities of private banking with regard to money
laundering.
• Perceived high profitability
• Intense competition
• Powerful clientele
• The high level of confidentiality associated with private banking
• The close trust developed between relationship managers and their clients
• Commission-based compensation for relationship managers
• A culture of secrecy and discretion developed by the relationship managers for their clients
• The relationship managers becoming client advocates to protect their clients
• Use of private investment companies by clients to reduce transparency of the beneficial owner
• Clients maintaining personal and business wealth in numerous jurisdictions
Clients being able to utilize and control numerous legal entities for personal and fanuly estate
planning purposes
What stages of money laundering are used in the credit card industry.
layering or integration stages.
Credit card accounts are not likely to be used in the initial placement stage of money laundering
because the industry generally restricts cash payments.
Difference between open and closed loop prepaid cards.
- Open loop 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 or MasterCard.
- Closed loop are typically limited to goods or services from the merchant issuing the card. Sellers of prepaid access are those who exceed a certain threshold of prepaid access to one individual on a given day.
Vulnerabilities in the insurance sector.
- Lack of oversight/controls over intermediaries: Insurance brokers have a great deal of control and freedom regarding policies.
- Decentralized oversight over aspects of the sales force: Insurance companies may have employees (i.e., captive agents) who are subject to the full control of the insurance company. Noncaptive agents offer an insurance company’s products but are not employed by an insurance company. They often work with several insurance companies to find the best mix of products for their clients and may fall between the cracks of multiple insurance companies. Some may work to find the company with the weakest AML oversight if they are complicit with the money launderer.
- Sales-driven objectives
Three types of participants involved with Virtual Currency.
• A User is a person who obtains virtual currency to purchase goods or services.
• An Exchanger is a person engaged as a business in the exchange of virtual currency for real
currency, funds or other virtual currency.
•
An Administrator is a person engaged as a business in issuing a virtual currency and who has
the authority to redeem such virtual currency.
Four reasons to establish or control a shell
company for money laundering purposes:
- Shell companies accomplish the objective of converting the cash proceeds of crime into alternative assets.
- The launderer can create the perception that illicit funds
have been generated from a legitimate source. Once a shell company is established, commercial accounts can be created at banks or other financial institutions. - A wide range of legitin1ate and/or bogus business transactions can be used to further the laundering process.
- an also be effective in concealing criminal ownership.
Charities or nonprofit organizations have the following characteristics that are particularly vulnerable to misuse for terrorist financing.
- Enjoying the public trust
- Having access to considerable sources of funds 79 v6.32 Chapter 1 RISKS AND METHODS OF MONEY LAUNDERING AND TERRORIST FINANCING
- Being cash-intensive
- Frequently having a global presence, often in or next to areas exposed to terrorist activity
- Often being subject to little or no regulation and/or having few obstacles to their creation
Reasons for legitimate use of hawala
cheaper and faster money transmission, lack of banking access in the remittance-receiving country, cultural preference and lack of trust in the formal banking system.
Why is Hawala attractive for Money Launderers?
It leaves little to no paper trail because the details of the customers who will receive the funds are communicated to the receiving brokers via telephone, fax and email.
