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**Money Laundering** involves taking criminal charges and disguising their illegal sources in order to use the funds to perform legal or illegal activities. It is the process of making dirty money appear clean. The goal is to use the funds of illegal activities that are very profitable without drawi...

**Money Laundering** involves taking criminal charges and disguising their illegal sources in order to use the funds to perform legal or illegal activities. It is the process of making dirty money appear clean. The goal is to use the funds of illegal activities that are very profitable without drawing attention to the underlying activity or persons generating such profits. Criminals achieve the goal by disguising the source of the funds, changing the form of the currency, or moving the money to a place where it is less likely to attract attention. **Predicate crimes** -- criminal activity that lead to money laundering can include illegal arms sales, narcotics trafficking, contraband smuggling, embezzlement (The unlawful act of taking or misappropriating funds entrusted by an employer or organization for one\'s own use), insider trading (Insider trading is** buying or selling a public company\'s stock with non-public, material information),** bribery, computer fraud schemes. **FATF Financial Action Task Force 1989** intergovernmental body created by the group of seven industrialized nations. They demystified that money laundering is done solemnly by cash transactions. **Palermo Convention 2000 united nations convention against transnational organized crime, defines money laundering as**: Conversion or transference of property, [knowing it is derived from a criminal offense], for the purpose of concealing or disguising its illicit origin or of assisting any person who is involved in the commission of the crime to evade legal consequences of his or hers action. The concealment or disguise of the true nature, source, location, disposition, movement, or rights with respect to or ownership of property, [knowing it is derived from a criminal offense]. The acquisition, possession, or use of property, [knowing at the time of its receipt that it was derived from a criminal offense] or from participation on a crime. Financial Action Task Force FAFT's 40 recommendations on money laundering and terrorism financing and the sixth European union directive on the prevention of the use of financial system for the purpose of money laundering and terrorism financing state that the "intent and knowledge required to prove the offense of money laundering includes the concept that such a mental state may be inferred from objective factual circumstances". In several jurisdictions, they use the term **willful blindness -- deliberate avoidance of knowledge of the facts or purposeful indifference** and courts argue that it is equivalent to the actual knowledge of the illegal source of funds. FATF extended their action to financing of terrorism after the events of 2001/11/09. Both money launderers and terrorist use the same methods to move their money in ways to avoid detection, such as structuring payments to avoid reporting, use of underground banking, money transfer service or value transfer systems, eg hawala, hundi, fei ch'ien (Financial service that accepts cash, checks and other monetary instruments that can store value in one location and pay a corresponding sum in cash or other form to a beneficiary in another location by means of a communication, message, transfer or through a clearing network to which the money/ value transfer service belongs. Transactions performed by such services can involve one or more intermediaries and a third-party final payment. A money or value transfer service may be provided by persons (natural or legal) formally through the regulated financial system (for example, bank accounts), informally through non-bank financial institutions and business entities or outside of the regulated system. In some jurisdictions, informal systems are referred to as alternative remittance services or underground (or parallel) banking systems.) The funds can be from legitime source in the case of terrorism and in money laundering they are from illegal sources. For terrorism, the objective is to hide the purpose for which the funds are used and as for money laundering the purpose is to hide the source of the funds. Terrorist funds could be to pay for transportation and food as well as paying for the terrorism materials. February 2012, FATF published 40 recommendations with a new one on preventing, suppressing and disrupting the proliferation of weapons of mass destruction. **3 stages of money laundering cycle** **Placement** the physical disposal of cash or other assets derived from criminal activity. Introducing the illicit proceeds into the financial system. - They place the funds into circulation through formal financial institutions, casinos and other legitimate businesses, both domestical and international. Examples of placement transactions: blending of funds -- commingling illegitimate funds with legitimate funds such as placing the funds of narcotics illegal sales into a cash extensive locally owned restaurant. Purchasing foreign exchange with illegal fundings or purchasing store value cards with money. Dividing cash into numerous bank accounts through deposits in an attempt to avoid reporting requirement. Currency smuggling cross border, repaying loans using illegitimate cash. **Layering** The separation of illicit proceeds from their source by layers of financial transactions intended to conceal the origin of the proceeds. 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 same institution Converting the cash placed into monetary instruments Reselling high-value goods and prepaid access or stored value products Investing in real estate and other legitimate businesses Placing money in stocks, bonds, or life insurance products Using shell companies to obscure the ultimate beneficial owner and assets **Integration** ---Supplying apparent legitimacy to illicit wealth through the reentry of the funds into the economy in what appears to be normal business or personal transactions. Invest the funds in real estate, financial ventures, or luxury assets. Integration is generally difficult to identify unless there are great disparities between a person's or company's legitimate employment, business, or investment ventures and a person's wealth or a company's income or assets. Purchasing luxury assets, such as property, artwork, jewelry, and high-end automobiles Entering into financial arrangements and other ventures in which investments can be made in business enterprises. **The Economic and Social Consequences of Money Laundering** Money laundering has significant negative economic and social consequences, especially for developing countries and emerging markets. The potential macroeconomic consequences of unchecked money laundering include: **Increased exposure to organized crime and corruption** (when a country is seen as a haven for money laundering, it can attract people who commit crimes. Typically, havens for money laundering and terrorist financing have: Limited numbers of predicate crimes for money laundering (i.e., criminal offenses that would permit a jurisdiction to bring a money laundering charge) Limited types of organizations and persons covered by money laundering laws and regulations Little to no enforcement of the laws and weak penalties or provisions that make it difficult to confiscate and freeze assets related to money laundering Limited regulatory capacity to effectively monitor and supervise compliance with money laundering and terrorist financing laws and regulations Criminals might try to bribe government officials, lawyers, and employees of financial and nonfinancial organizations so they can continue to run their criminal businesses. In countries with weaker laws and enforcement, it is often corruption that triggers money laundering. It also leads to increases in the use of bribery in financial organizations, among lawyers and accountants, in the legislature, in enforcement agencies, with police and supervisory authorities, and even with courts and prosecutors. A comprehensive AML/CFT framework, on the other hand, helps curb criminal activities, eliminates profits from such activities, and discourages criminals from operating in a country, especially where law is fully enforced and the proceeds from crime are confiscated.) **Undermining the legitimate private sector** Money launderers are known to use front companies, that is, businesses that appear legitimate and engage in legitimate business, but are in fact controlled by criminals who commingle the proceeds of illicit activity with legitimate funds to hide the unlawful gains. These front companies have a competitive advantage over legitimate firms because they have access to substantial illicit funds, allowing them to subsidize products (to help with money so that the product is more competitive) and services sold at below-market rates. This makes it difficult for legitimate businesses to compete against front companies. Clearly, the management principles of these criminal enterprises are not consistent with traditional free market principles, which results in further negative macroeconomic effects. By using front companies, particularly multiple front companies, and other investments in legitimate companies, money laundering proceeds can be used to control whole industries and sectors of the economy of certain countries. This increases the potential for monetary and economic instability due to the misallocation of resources from artificial distortions in asset and commodity prices. It also provides a vehicle for evading taxes, thus depriving the country of revenue. **Weakening financial organizations** (affecting stability of security firms, banks and insurance companies, it can close down banks as it has happened in the past to European Union Bank, the first internet bank due to lack of robust AML policies and Riggs Bank - due to sanctions and lack of trust in the bank leading to clients withdrawing their funds due to reputational damage, this bank was connected to 9/11 terrorism funding and money laundering scandals with dictator Pinochet) ** Dampening effect on foreign investments** (if a countries' commercial and financial sectors are perceived as compromised and subject to organized crime, there is a dampening effect on foreign direct investment and it contributes to non-development of economy) **Loss of control of, or mistakes in, decisions regarding economic policy** (due to significant amount of money from illicit proceedings, it might dwarf government economic budgets resulting in the loss of control of economic policy by governors or policy mistakes due to measurement errors in macroeconomic statistics). High cost of compliance might lead to higher interest rates (juros) because it leads to higher operational costs to the bank. If there is more ML, the regulations will tighten and the costs will be higher. If the interest rates are low, it is easier to obtain loans, so the economic activity is higher and it is easier to disguise funds from ML. **Economic distortion and instability** (the funds are investment in activities where they can hide the origin of the funds and not in activities that would benefit the country and so economic growth can suffer) **Loss of tax revenue** (money laundering affects tax revenue for the government affecting honest taxpayers since this translates into higher tax rates. International Monetary Fund and Organization for Economic Cooperation and Development work on improving tax collection capabilities and tax transparency) ** Risks to privatization efforts (**there is a risk of privatization of state owned properties being used not for fostering the economy but for money laundering by hiding the funds) ** Reputation risk for the country** (being a ML haven harms the reputation of the country and foreign financial institutions find the scrutiny of dealing with such countries to be to difficult and of higher costs, so they do not engage and this causes harm to the economic development and growth of this countries and legitimate businesses suffer due to lack of access to the markets and the countermeasures taken by international organizations and countries can reduce government assistance programs) ** Risk of international sanctions** (the United States, European Union, United Nations can apply sanctions on individuals, enterprises, countries, terrorist or terrorist groups, drug traffickers and other security threats -- OFAC Office for foreign assets control USA and US Department of the Treasury. Comprehension sanctions prohibit transactions with a specific country and targeted sanctions prohibit transactions with specific individuals, entities or industries SDN Special Designated Nationals and Blocked Persons. Failure to comply can result in civil and criminal penalties. FAFT Financial Action Task Force maintains a list of countries that do not meet international standards for compliance controls and as a result the members must apply Enhanced Due Diligence to business relationships and transactions with these jurisdictions to try and persuade them to have better controls) ** Social costs** (increased costs for government to treat drug addicts in health centers and for law enforcement to combat the augmentation of crime and for financial institutions the costs can be being excluded from the international financial market, loss of profitable business, difficulties with gathering legitimate clients, investigation costs and fines, asset seizure, reduced stock value, loan losses, termination of correspondent banking facilities, liquidity problems through withdrawal of funds) ** Reputational risk** (adverse publicity regarding the business will cause a loss of confidence of the public in this business regardless of whether it is accurate or not. Borrowers, depositors and investors can stop the business relationship. Depositors might withdrawal the funds resulting in liquidity problems) ** Operational risk** (increased borrowing or funding costs are a component of operational risk) ** Legal risk** (potential for lawsuits, adverse judgement, unenforceable contracts, fines and penalties that generate losses, increased expenses and potentially the closing down of the institution. Clients can sue the organization due to having lost money and becoming victim of the crime. The investigations by law enforcement authorities and regulators can translate into expenses. Due to fraud on the part of the criminal customer, certain contracts can be unenforceable.) ** Concentration risk** (potential loss deriving from too much loan exposure or credit for a group of borrowers or borrower. It is important to know the customer and who interacts and controls the customer as well as the source of the payment funds. For these reasons, international bodies have issued statements, such as the Basel Committee on Banking Supervision's guidelines on the Sound Management of Risks Related to Money Laundering and Financing of Terrorism and FATF's International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation) A **funnel account** is a money laundering method that exploits branch networks of financial institutions. It involves depositing illegal funds into an account at one geographic location and giving criminals immediate access to the money via withdrawals in a different geographic location. The transaction amounts are kept under the AML reporting requirements in an attempt to avoid detection. In 2014, the Financial Crimes Enforcement Network (FinCEN) of the US Department of the Treasury and the US financial intelligence unit (FIU) issued an advisory to financial organizations, reminding them to maintain a strong culture of compliance and specifying that the entire staff is responsible for AML/CFT compliance. This advisory was followed in 2015 by a memorandum on "Individual Accountability for Corporate Wrongdoing" from the US Department of Justice's Deputy Attorney General, Sally Quillian Yates. The Yates Memo, as it is often referred to, 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. In the United Kingdom, the Financial Conduct Authority (FCA) published final rules for the Senior Managers and Certification Regime (SM&CR), which are designed to improve individual accountability within the banking sector. In relation to financial crime, the SM&CR requires a financial organization to give explicit responsibility to a senior manager, such as an executive-level money laundering reporting officer (MLRO), for ensuring that its efforts to combat financial crime are effectively designed and implemented. The senior manager is personally accountable for any misconduct within the organization's AML/CFT regime. The New York State Department of Financial Services (DFS) issued a Final Rule requiring regulated organizations to maintain "transaction monitoring and filtering programs" reasonably designed to monitor transactions after their execution for compliance with the Bank Secrecy Act (BSA) and AML laws and regulations, including suspicious activity reporting requirements, and prevent unlawful transactions with targets of economic sanctions administered by OFAC. This Final Rule, which went into effect on January 1, 2017, includes very specific requirements concerning the implementation of transaction monitoring systems, including: Risk-Based Models: Models should be risk-based and commensurate with the organization's own risk assessment and profile. Model Performance Calibration: Organizations must perform ongoing analysis and testing of the AML/CFT models to assess the scenario logic, performance, model technology, assumptions, and model parameter settings. End-to-End, Pre- and Post-Model Implementation Testing: End-to-end testing is required to ensure rules are validated and data are complete and accurate. This Final Rule also requires regulated Individual professionals are increasingly being held accountable for sector specific crimes, through prosecution (accusing and bringing to trial) of linked financial crime offenses such as fraud. They may also be held accountable for their organizations' AML/CFT failures. When prosecuted, individuals have been imprisoned, fined, suspended, or debarred from professional activities in regulated sectors. Compliance professionals must recognize the risks and specific accountability that they personally face in their work environments. They should ensure that they are fully up-to-date with legislative and regulatory requirements specific to their role and sector. If they have any concerns regarding integrity or behavior within their firm or business, they should escalate issues through the appropriate formal reporting or whistleblowing channels and document the fact. Methods of Money Laundering Illicit money can move through numerous commercial channels, including products such as checking, savings, and brokerage accounts; loans; wires (Electronic transmission of funds among financial institutions on behalf of themselves or their customers. Wire transfers are financial vehicles covered by the regulatory requirements of many countries in the anti-money laundering effort) and transfers (paypal); and financial intermediaries, such as trusts and company service providers, securities dealers, banks, and money services businesses. FATF and FATF-style regional bodies (FSRBs) publish periodic typology reports to monitor changes and better understand the underlying mechanisms of money laundering and terrorist financing. The objective of these reports is to provide information on the key methods and trends in these areas and to ensure that the FATF 40 Recommendations remain Certified Anti-Money Laundering Specialist Version 6.5 Page 21 effective and relevant. 1. Money Laundering methods in Banks Electronic transfer of funds An electronic transfer of funds is any transfer of funds that is initiated by electronic means, such as internet-based transfers, an automated clearing house (ACH), an [automated teller machine (ATM),] mobile telephones, and other devices. Electronic funds transfers can happen within a country and across borders. Systems such as the US Federal Reserve wire network, or Fedwire, the Society for Worldwide Interbank Financial Telecommunication (SWIFT), and the Clearing House Interbank Payments System (CHIPS) move millions of wires and transfer messages daily. As such, illicit fund transfers can be easily hidden among the millions of legitimate transfers that occur each day. For example, [money launderers might initiate unauthorized domestic or international electronic transfers of funds---such as ACH debits or cash advances on a stolen credit card---and place the funds into an account established to receive the transfers. Another example is] [stealing credit cards and using the funds to purchase merchandise that can be resold to provide the criminal with cash.] To avoid detection at any stage, money launderers can take basic precautions, such as [varying the amounts sent, keeping the transfers relatively small and under reporting thresholds, and, when possible, using reputable organizations.] Transaction monitoring software providers have developed sophisticated algorithms to help detect and trigger alerts that might indicate money laundering or other suspicious activity using electronic transfers of funds. Following are some indicators of money laundering using electronic transfers of funds: [Funds transfers occur to or from a financial secrecy haven or 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. ] [ Checks and money orders are used to receive many small, incoming transfers of funds or to make deposits. 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 reveals unusual patterns. ] [ Payments or receipts are received that have no apparent link to legitimate contracts, goods, or services. ] [ Funds transfers are sent or received from the same person to or from different accounts.] Remote deposit capture (RDC) is a product offered by banks that allows customers to scan a check and transmit an electronic image to the bank for deposit. The convenience provided by RDC can be abused by [money launderers because they no longer need to go into the bank and risk detection. Because RDC minimizes human intervention in reviewing cleared items, it decreases the ability to identify potential fraud indicators, such as an altered check and multiple deposits of the same item.] Often, the resulting fraud is not prevented but rather detected after it has already occurred. Correspondent banking is an arrangement whereby one bank acts as the agent of another bank in a foreign country. A local, or respondent, bank has customers who want banking services in a foreign country, so it contracts with a foreign correspondent bank to provide those services. By establishing multiple correspondent relationships, a local bank can undertake international financial transactions for itself and its customers in jurisdictions where it has no physical presence. Large international banks often act as correspondents for thousands of other banks. The indirect nature of correspondent banking relationships means that the correspondent bank provides services for individuals and entities for which it has neither verified the identities nor obtained any firsthand knowledge. [Correspondent banking is vulnerable to financial crime, especially because correspondent banks do not know the customers of the respondent directly and rely on the respondent bank's internal controls. In addition, less information is available to help the correspondent recognize suspicious activity.] [Some respondents are, themselves, correspondents to third banks, a practice called "nesting." Nested accounts further shield correspondent banks from knowing the parties involved.] Senior management support is essential for compliance officers to effectively execute their duties. Organizations that ignore red flags associated with a customer relationship can suffer significant reputational, regulatory, and financial consequences. Nested accounts are high-risk because o Correspondent banks should include periodic reviews of their respondent bank's AML/CFT framework as part of their larger AML/CFT framework. Correspondent banks need to undertake risk assessments and ensure that their policies and procedures regarding respondent bank relationships and their transactions are adequate to mitigate against identified risks, especially in high-risk relationships. In some correspondent relationships, the respondent bank's customers are permitted to conduct their own transactions---including sending wire transfers, making and withdrawing deposits, and maintaining checking accounts--- through the respondent bank's correspondent account without first clearing the transactions through the respondent bank. Those arrangements are called payable-through accounts (PTAs). Elements of a PTA relationship that can threaten a correspondent bank's AML/CFT defenses include the following: [ PTAs with foreign institutions licensed in offshore financial service centers with weak or under-developed bank supervision and licensing laws ] [PTA arrangements in which the correspondent bank regards the respondent bank as its sole customer and fails to apply its customer due diligence (CDD) 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 might enable the respondent bank to offer the same services as a branch without being subject to supervision 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. They do this by aggregating funds from several locations into one centralized account (i.e., the concentration account). Concentration accounts are also known as special-use, omnibus, settlement, suspense, intraday, sweep, and collection accounts. They are frequently used to facilitate transactions for private banking, trust and custody accounts, funds transfers, and international affiliates. [Money laundering risks can arise in concentration accounts when the customer-identifying information, such as name, transaction amount, and account number, is separated from the financial transaction. When separation occurs, the audit trail is lost, and accounts can be misused or administered improperly.] Banks that use concentration accounts should implement adequate policies, procedures, and processes covering operation and recordkeeping for these accounts, including: Requiring dual signatures on general ledger tickets Prohibiting direct customer access to concentration accounts Capturing customer transactions in the customers' account statements Prohibiting customers' knowledge of concentration accounts and their ability to direct employees to conduct transactions through these accounts Retaining appropriate transaction and customer identification information Frequently reconciling accounts by an individual who is independent of the transactions Establishing a timely discrepancy-resolution process Identifying and monitoring recurring customer names Private banking provides highly personalized and confidential products and services to wealthy clients at fees that are often based on "assets under management." Private banking often operates semi-autonomously from other parts of a bank. Fierce competition among private bankers for the high-net-worth individuals who are their main clientele has given rise to the need for tighter government controls worldwide. Competition brings increased pressures on relationship managers and marketing officers to obtain new clients, increase their assets under management, and contribute a greater percentage to the net income of their organizations. In addition, the compensation paid to most relationship managers in private banking is based largely on the assets under management that they bring to their organizations. The following factors can contribute to the vulnerabilities of private banking to money laundering: [Perceived high profitability ] [ Intense competition ] [ Powerful clientele ] [ High level of confidentiality] [Close trust developed between relationship managers and their clients ] [ Commission-based compensation for relationship managers ] [ Culture of secrecy and discretion developed by the relationship managers for their clients ] [ Role of relationship managers as client advocates to protect their clients ] [ Use of private investment companies by clients to reduce transparency of their beneficial owners] [ Clients maintaining personal and business wealth in numerous jurisdictions, including offshore jurisdictions ] [ Clients' ability to utilize and control numerous legal entities for personal and family estate planning purposes] The close relationships established in private banking often require a high degree of confidentiality. However, compliance checks should not be reduced or minimized. Strong AML/CFT compliance programs are successful only if organizations follow the policies and procedures that support them. Failure to follow regulations can lead to fines, even if no actual financial crime event occurred. Use of Private Investment Companies in Private Banking private investment companies (PICs) are corporations established by individual bank customers and others in offshore jurisdictions to hold assets. They are shell companies formed to maintain clients' confidentiality and serve various tax- and trust-related purposes. PICs have been an element of many high-profile laundering cases because they are effective laundering vehicles. [The secrecy laws of the offshore havens where PICs are often established can conceal the true identities of customers' beneficial owners.] Facilitating tax evasion is a serious offense that can lead to large fines and negatively impact a regulated firm's ability to do business with certain customers and jurisdictions. Politically Exposed Persons According to FATF, there are three types of politically exposed persons (PEPs). 1\. Foreign PEPs: Individuals who are or have in the past been entrusted with prominent public functions by a foreign country (e.g., heads of state or of government; senior politicians; senior government, judicial, and military officials; senior executives of state-owned corporations; and important political party officials). 2\. Domestic PEPs: Individuals who are or have in the past been entrusted domestically with prominent public functions (e.g., heads of state or of government; senior politicians; senior government, judicial, and military officials; senior executives of state-owned corporations; and important political party officials). 3\. International organization PEPs: Individuals who are or have in the past been entrusted with a prominent function (e.g., managing director, secretary general, executive director, chairperson, and president) by an international organization, such as the United Nations' six principal organs and multiple specialized agencies, the IMF, the World Bank, the North Atlantic Treaty Relatives and close associates of PEPs are also considered to be PEP. Designing a transaction to evade triggering a reporting or recordkeeping requirement is called structuring. Structuring is one of the most common money laundering methods. It is a crime in many countries and must be reported by filing a suspicious activity report (SAR). ["Smurfing" is a common structuring technique that involves multiple individuals making multiple cash deposits and/or buying multiple monetary instruments or bank drafts in amounts under the reporting threshold to evade detection.] Organizations need to limit the number of customers' daily transactions and the number of bills per transaction. IDMs are a form of ATM that accepts cash and check deposits. Microstructuring is another method of placing large amounts of illicit cash into the financial system. It is essentially the same concept as structuring, although it is done at a much smaller level. Instead of taking \$18,000 and breaking it into two deposits to evade reporting requirements, the microstructurer breaks it into 20 deposits of approximately \$900 each, making the suspicious activity extremely difficult to detect. [Microstructuring red flags include: ] [ The use of counter deposit slips instead of preprinted deposit slips] [ Frequent activity in an account immediately following the opening of the account with only preliminary and incomplete documentation ] [ Frequent visits to make cash deposits of nominal amounts that are inconsistent with typical business or personal banking activity ] [ Cash deposits followed by ATM withdrawals, particularly in high-risk countries ] [ Cash deposits made into business accounts by third parties with no apparent connection to the company] Credit unions, (membership has to do with location, employment, church, trade union or labor union sindicato syndicate etc). which are also known as building societies in some jurisdictions, are not-for-profit member-owned-and-operated democratic financial cooperatives. Credit unions do not have clients or customers; rather, they have members who are also owners. Credit unions serve only the financial needs of their members and are governed by a "one-member, one-vote" philosophy. A member must purchase an initial capital share of the credit union, permitting him to access the products and services offered by the credit union. Credit union membership is based on a common bond, a linkage shared by savers and borrowers who belong to a specific community, organization, religion, or place of employment. Credit unions can vary significantly in both size and complexity. Some credit unions have a few hundred members, and others have hundreds of thousands of members with tens of billions of dollars in assets under management. Some credit unions focus on meeting only a few niche needs of their members, while others offer a full suite of products and services to rival most retail banks. With respect to regulatory requirements and oversight, credit unions operate very similarly to banks in most jurisdictions. They have capital, liquidity, risk management, recordkeeping, and reporting obligations similar to banks, although there might be minor differences between institutions that are subject to the oversight of regional versus federal regulators and regulations. Because credit unions are included under FATF's definition of a financial institution, national AML/CFT regimes that follow FATF's recommendations treat credit unions similarly to banks. The United Kingdom's Joint Money Laundering Steering Group (JMLSG) states in its sectoral guidance that credit unions potentially pose lower money laundering and terrorist financing risks, because they typically have a restricted or localized customer base and offer fewer products and services, with more limitations, than retail banks. Credit unions are also less exposed to third-party transfers. However, the guidance notes that, while their limited functionality and flexibility makes them lower risk for money laundering, these restrictions might not fully deter potential terrorist financiers. [One risk factor highlighted is adult parents or guardians who use a child's account to launder funds. Other risk factors include allowing transfers to or from third parties; frequent cash payments; customers engaging in large one-time transactions; unusual loans or savings transactions (e.g., early repayment of a loan from an unknown income source); and reluctance from a customer to provide evidence of identity or information about the purpose or nature of the business relationship.] **"financially excluded,"** i.e., unable to access the traditional banking system. Ongoing monitoring can potentially be easier for credit unions, especially if they are smaller, because there is a narrower range of expected activity to monitor against, and transactions are often processed manually, making it easier to identify unusual activity. Additionally, smaller credit unions have fewer organizational hurdles to overcome when reporting suspicious activity to the nominated officer. 2. Non bank financial institutions Credit card industry The credit card industry includes: Credit card associations, such as American Express, MasterCard, and Visa, which license member banks to issue bank cards, authorize merchants to accept those cards, or both Issuing banks, which solicit potential customers and issue the credit cards Acquiring banks, which process transactions for merchants who accept credit cards Third-party payment processors (TPPP), which contract with issuing and acquiring banks to provide payment-processing services to merchants and other business entities, typically initiating transactions on behalf of merchant clients that do not have a direct relationship with the TPPP's financial institution Credit card accounts are not typically used in the initial placement stage of money laundering, because the industry generally restricts cash payments. They are more likely to be used in the layering and integration stages. A ML can prepay the card with funds already introduced in the financial system, apply for a refund, and then use it to buy something -- layering and integration. Third-Party Payment Processors TPPPs (they process payments for a business and handle everything with the customer's bank eg paypal) are generally bank customers that provide payment-processing services to merchants (comerciante) and other business entities. They often use their commercial bank accounts to conduct payment processing for their merchant clients. Often, they are not subject to AML/CFT requirements. Considering the expansion of services and the fact that a financial organization maintains a relationship with the TPPP and not the underlying merchant, it becomes difficult for the financial organization to know on whose behalf it is processing a transaction. [The third party payment processors are used by criminals on the layering stage as it involves multiple transactions and it is difficult to know the merchant. ] [High return rates from unauthorized transactions: TPPPs engaged in suspicious activity, and those being used by criminals might have higher than average return rates related to unauthorized transactions. At the merchant level, the criminal merchant might have acceptable return rates compared to the percentage of the TPPP's total transaction volume, but when compared with individual originators, the return rate will be significantly higher] Therefore, it is important to have strong CDD, EDD, customer due diligence and enhanced due diligence and transaction monitoring controls to detect suspicious activity and customers that fall outside an organization's risk appetite. A money services business (MSB) or money or value transfer service (MVTS), (they change currencies and can also be like a prepaid check that we can send to someone) as defined by FATF, transmits or converts currencies. These businesses typically provide currency exchange, money transmission, check-cashing services, and money order services. Traditional MSBs typically provide services to the underserved or unbanked individuals. The focus on this market leads them to locate their operations in regions with limited or no banking services. Additionally, they typically provide lower cost services compared with financial institutions for certain service offerings. For example, engaging in domestic or international wire transfers through a financial institution can be time consuming and costly for a consumer. Conducting similar transactions through an MSB can occur quickly and at a much lower cost. Additional services could include bill payments, payday lending, and commercial check cashing Paypal is a money transmitter since it is authorized to send money internationally and domestically to friends or to buy things only, it is a money service business since it transfers money and it is a TPPP by facilitating transactions between buyer and seller. Mbway is not TPPP but it is MSB and MT. Revolut offers currency exchange and money transfers so it is a MB and also a TPPP because they initiate payments and can access other financial institutions data with our consent. MSBs can be categorized into principals or agents. Principals primarily provide MSB services and act as the issuers of money orders and traveler's checks or the providers of money transmission. In the United States, principal MSBs are required to have written AML policies, procedures, and internal controls, appoint a BSA officer; provide education and training; conduct independent reviews and audits; and monitor transactions for suspicious activity. Agents are entities that seek to provide MSB-type services in addition to their existing products and services. An agent could be a principal MSB because it offers check cashing as its primary service but an agent because it provides money-transmission services through a principal money transmitter MSB. [Fraud in the healthcare industry is rising. Healthcare businesses, such as home healthcare companies, might engage in fraudulent practices by presenting checks derived from fraud to check cashers that they know will not ask for proof of the payee's identity, will either not file or file false currency transaction reports (CTRs), and will not report them to the government for engaging in suspicious activity.] [Criminals obtain low-cost workers' compensation insurance policies by grossly deflating payroll amounts. After securing certificates of insurance, organizers rent the certificates to other individuals and businesses for a fee. Because the policies are obtained fraudulently, employees are not covered and are therefore left vulnerable to high medical costs when they incur an on-the-job injury. The payroll amounts are then concealed by cashing checks at an MSB that circumvents proper bookkeeping measures. The criminal makes a significant amount of money to the detriment of workers. ] [ Money launderers use money remitters and currency exchanges to make funds available to criminal organizations at a destination country in the local currency. The launderer or broker then sells the criminal dollars to foreign businesspeople wishing to make legitimate purchases of goods for export.] [However, the scrutiny applied to MSBs can vary significantly, in large part due to the ease with which some MSBs can establish their business. Additionally, many MSBs are small (i.e., one-store operators) and might not have robust AML/CFT programs compared with their larger national counterparts.] MSBs must comply with the same AML requirements as banks. Small MSBs might lack resources and experience, leading to compliance issues. The cash-intensive and transactional nature of MSBs can facilitate money laundering. MSBs offer valuable services and are important for financial inclusion. The insurance industry provides risk transfer, savings, and investment products to a variety of consumers worldwide, ranging from individuals to large corporations to governments. An important aspect of the way the insurance industry operates is that most of the business conducted by insurance companies is transacted through intermediaries, such as agents and independent brokers. Insurers, with some exceptions, are subject to AML requirements. For example, policies for property, casualty, title, and health insurance typically do not offer investment features, cash buildups, the option to transfer funds from one to policy another, or other means of hiding and moving money. However, certain sectors of the insurance industry, such as [life insurance and annuities], are a primary target of criminals who engage in money laundering and terrorist financing. In several ways, the sector's vulnerability to money laundering is similar to that of the securities sector; in some jurisdictions, life insurance policies are even viewed as [investment vehicles] similar to securities. [For criminals seeking to launder funds, life insurance products with no cash surrender value (value received upon cancellation in some life insurances) are the least attractive. Products that feature payments of cash surrender value and the opportunity to nominate beneficiaries from the first day of the policy are the most attractive and therefore higher risk.] [Annuities are another type of insurance policy with cash value. An annuity is an investment that provides a defined series of payments in the future in exchange for an up-front sum of money. Annuity contracts can allow criminals to exchange illicit funds for an immediate or deferred income stream, which typically takes the form of monthly payments starting on a specified date. In both cases, a policyholder can place a large sum of money into a policy with the expectation that it will grow based on the underlying investment, which can be fixed or variable. Unit-linked policies and insurance wrappers are also high-risk insurance products because of their high value accumulation and flexibility in adding and managing assets. Typical features of high-risk insurance products include:] [ Offers the ability to fold funds and assets into the policy ] [ Full or partial underlying investments under the control of the customer] [ Can offer the option of asset transfers] [ Can have a high upper limit for the amount of funds held] [Another indicator of possible money laundering in the insurance industry is when a potential policyholder is more interested in a policy's cancellation terms than its benefits.] Vulnerabilities in the insurance sector include the following: 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 can have employees (i.e., captive agents) who are subject to the full control of the insurance company. Non captive agents offer an insurance company's products, but they 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. Agents who are complicit with money launderers might work to find the company with the weakest AML oversight. Sales-driven objectives: The focus of brokers is on selling the insurance products; therefore, they might overlook signs of money laundering, such as a lack of explanation for wealth and unusual methods for paying insurance premiums. Examples of how money can be laundered through the insurance industry include: Certain insurance policies operate in the same manner as unit trusts or mutual funds. The customer can overfund the policy and move funds into and out of the policy while paying early withdrawal penalties. When such funds are reimbursed by the insurance company (e.g., by check), the launderer has successfully obscured the link between the crime and the generated funds. The purchase and redemption of single premium insurance bonds are key laundering vehicles. The bonds can be purchased from insurance companies and then redeemed prior to their full term at a discount. In such cases, the balance of the bond is paid to a launderer in the form of a sanitized check from the insurance company. 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 receive 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. 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. The FATF Money Laundering Typologies report provides some additional typologies related to the insurance industry: Third parties that fund insurance policies (i.e., not the policyholder) have not been subject to regular identification procedures when the insurance contract was concluded. The source of funds and the relationship between policyholder and the third party might be unclear to the insurance company. Some customers actually do not seek insurance coverage; rather, it is an investment opportunity. Money laundering is enabled by using large sums of money to make substantial payments into single-premium life insurance policies, which serve as wrapped investment policies. A variation on this method is the use of large premium deposits to fund annual premiums. Such policies, which are comparable to single-premium policies, also enable the customer to invest substantial amounts of money with an insurance company. Because the annual premiums are paid from an account that must be funded with the total amount, a life insurance product with apparently lower money laundering risk will bear the features of the higher risk single-premium policy. In the insurance sector, most of the business is conducted through intermediaries. As a result, often it is the intermediaries' application of AML regulatory requirements that is unsatisfactory. When an insurance company assesses money laundering and terrorist financing risks, it must consider whether it permits customers to: Use cash or cash equivalents to purchase insurance products Purchase an insurance product with a single premium or lump-sum payment Borrow money against an insurance product's value The securities industry provides opportunities for criminals to engage in money laundering and terrorist financing anonymously, given the varying levels of AML program requirements in different types of businesses and the high volume of transactions. [The difficulty in dealing with money laundering in the securities field is that typically little currency is involved. It is an industry that runs by electronic transfers and paper. Its use in the money laundering process is generally after launderers have placed their cash in the financial system through other methods.] Aspects of the securities industry that increase its exposure to money laundering include: International nature Speed of transactions Ability to conduct free-of-payment asset transfers, in which securities are transferred without a corresponding transfer of funds Ease of conversion of holdings to cash without significant loss of principal Routine use of wire transfers to, from, and through multiple jurisdictions Competitive, commission-driven environment, which, like private banking, provides ample incentive to disregard the customers' source of funds Practice of brokerage firms of maintaining securities accounts as nominees or trustees, thus permitting concealment of the identities of the true beneficiaries Weak AML programs that do not have effective CDD, suspicious activity monitoring, and other controls The illicit money laundered through the securities sector can be generated by illegal activities, both from outside and within the sector. For illegal funds originating outside the sector, securities transactions for the creation of legal entities can be used to conceal or obscure the source of these funds (i.e., layering). In the case of illegal activities within the securities market itself (e.g., embezzlement, insider trading, securities fraud, and market manipulation), the transactions and manipulations generate illegal funds that must then be laundered. In both cases, the securities sector offers money launderers the potential for a double advantage: allowing them to launder illegal funds and acquire additional profit. Wash trading (Wash trading is a form of market manipulation where a trader simultaneously buys and sells the same financial instrument to create a misleading appearance of market activity. This practice can artificially inflate trading volumes or prices without any actual change in the trader's market position - Wash trading is the illegal process of buying shares of a company through one broker, while selling shares through a different broker) through multiple accounts generates offsetting profits and losses, as well as transfers of positions between accounts that do not appear to be commonly controlled. The FATF Money Laundering and Terrorist Financing in the Securities Sector typologies report identifies the following areas as presenting the greatest money laundering vulnerabilities in the securities industry: Wholesale markets Unregulated funds Wealth management Investment funds Bearer securities Bills of exchange Several compliance challenges that are unique to the securities sector include: Variety and complexity of securities: Security offerings are broad, with some products tailored to the needs of a single customer and others designed for sale to the general public. Products range from the simple and almost universally known to the relatively complex and esoteric. Some knowledge of the underlying security is typically required to address risk. High-risk securities: Although most securities are issued by legitimate companies, securities that are underregulated or established for illegitimate purposes pose risks. In the United States, securities that are not traded on regulated exchanges are typically sold over-the-counter, with tiers such as "pink sheets" that require only minimal reporting. These products make it easier to obscure information such as beneficial ownership and make it difficult to determine associations with sanctioned jurisdictions and companies. Securities firms are required to identify securities that might pose risks and develop processes to restrict trading of those securities, often on dozens of platforms. Multiple layers and third-party risk: The securities industry involves many participants, including financial organizations and broker-dealers, financial advisors, transfer agents, securities lenders, custodians, introducing brokers, and sales agents. The many layers of intermediaries, who may also cross borders, make standardizing controls difficult and further challenge overall compliance. FATF has identified a number of suspicious indicators within the global securities markets. Those particularly relevant to the securities sector include: A customer with a significant history with the securities firm who abruptly liquidates all of her assets in order to remove wealth from the jurisdiction A customer who opens an account or purchases a product without regard to loss, commissions, or other costs associated with that account or product, including early cancellations of long-term securities A securities account that is used for payments or outgoing wires with little or no securities activity (e.g., account appears to be used as a depository account or a conduit for transfers) A customer's transactions that include a pattern of sustained losses, which might indicate the transfer of value from one party to another Transactions in which one party purchases securities at a high price and then sells them at a considerable loss to another party, which might indicate the transfer of value from one party to another A customer who is unfamiliar with a financial product's performance and specifications but wants to invest in it nonetheless A customer who is known to have friends or family who work for the securities issuer, or a trading pattern that suggests he might have nonpublic information Two or more unrelated accounts at a securities firm that trade an illiquid or low-priced security, or "penny stock," suddenly and simultaneously A customer who deposits physical securities that (1) are in large quantities; (2) are titled differently from the name of the account; (3) do not bear a restrictive legend, even though the history suggests that they should; or (4) lack sense in terms of the method by which they were acquired Retail broker-dealers are the industry's frontline defense---and its most vulnerable access point. They are under constant management pressure to expand their client base and manage more assets. The more assets in a client's account, the more commission will be generated. Money launderers can potentially use this situation to their advantage by promising a large or steady commission stream. Therefore, it is important for broker-dealers to understand who they conduct business with and to monitor customers for suspicious activity. Solution: Implement AML programs that include an appointed BSA officer, CDD, suspicious activity monitoring, training, and independent audits. They also subject broker-dealers to oversight by the SEC, FINRA Financial Industry Regulatory Authority, or both to monitor if and how they are complying with the AML program requirements. Weak or nonexistent AML program requirements can result in substantial monetary and criminal penalties. 3. Nonfinancial Businesses and Professions Casinos Casinos are among the most proficient cash-generating businesses. High rollers, big profits, credit facilities, and a variety of other factors combine to generate a significant amount of cash that flows from the casino, or "house," to the players and back. Where gambling is legal, billions of dollars can readily flow between customers and a casino. Casinos and other businesses associated with gambling, such as bookmaking, lotteries, and horse racing, are associated with money laundering because they provide an excuse for recently acquired wealth with no apparent legitimate source. [Money laundering through casinos generally occurs in the placement and layering stage, for example, converting the funds to be laundered from cash to checks and using casino credit to add a layer of transactions before the funds are ultimately transferred out.] [A launderer can buy chips with cash generated from a crime and then request repayment by a check drawn on the casino's account. Often, rather than requesting repayment by check in the casino where the chips were purchased with cash, the gambler claims to be traveling to another country in which the casino chain has an establishment, requests credit to be made available there, and then withdraws it in the form of a check in the other jurisdiction.] [Junkets, a form of casino-based tourism (Imagine a casino in Macau inviting a group of high rollers from Hong Kong. The casino arranges for their flights, provides luxury hotel accommodations, and offers fine dining experiences, all with the expectation that these guests will spend a substantial amount of time and money gambling at the casino), also present significant money laundering risk, because junket participants largely rely on third parties, or junket operators, to move the funds across borders and through multiple casinos. This method creates layers of obscurity around the source of funds, ownership of the money, and the identities of the players.] FATF recognizes that several jurisdictions do not require licensing of junket operators and their agents, further increasing the risks of money laundering. FinCEN and FATF have identified specific behaviors to watch for, including: Attempts to evade AML reporting and recordkeeping requirements, such as: o A customer pays off a large credit debt, such as markers or bad checks, over a short period of time through a series of currency transactions, none of which exceeds the reportable threshold. o Two or more customers each purchase chips in small numbers, engage in minimal gaming, and then combine the funds to request a casino check for the chips presented. A customer receives a payout in excess of \$10,000, but requests currency of less than \$10,000 and the balance paid in chips. He then redeems the remaining chips in amounts lower than the reporting threshold. o A customer structures a transaction, often by involving another customer, to avoid filing of a CTR or another tax form. o When asked for identification, a customer reduces the number of chips presented for a cash-out to remain under the reportable threshold. Using the cashier\'s cage solely for its banking-like financial services, such as: o A customer wires funds derived from nongaming proceeds to or through a bank or nonbank financial organization located in a country that is not her residence or place of business. o A customer appears to use a casino as a temporary repository for funds by making frequent deposits into the casino account and, within a short period of time, requesting money transfers to a domestic or foreignbased bank account. Minimal gaming activity without a reasonable explanation, such as: o A customer purchases a large number of chips, engages in minimal gaming, and then redeems the chips for a casino check. o A customer uses an established casino credit line to purchase chips, engages in minimal gaming, pays off the credit in currency, and redeems the chips for a casino check. o A customer makes a large deposit using small-denomination bills, withdraws it in chips at the table, engages in minimal play, and then exchanges the chips at the cage for large-denomination bills. o A customer inserts a high number of small-denomination bills into a slot machine, known as "bill stuffing," engages in minimal or no play, and exchanges the voucher for large-denomination bills or requests a casino check for what appears to be a legitimate winning credit from a slot machine. A customer frequently purchases chips with currency under a reportable threshold, engages in minimal play, and leaves the casino without cashing out the chips. o A customer transfers funds to a casino for deposit into a front money account, withdraws it in chips at a table, engages in minimal play, and then asks for the chips to be exchanged for a casino check. Unusual gaming and transaction patterns, such as: o Two customers frequently bet large amounts to between them cover both sides of an even bet, such as betting both "red and black" or "odd and even" on roulette, betting both "with and against" the bank in baccarat and betting the "pass line" or "come line" and the "don't pass line" and "don't come line" in craps. o A customer routinely bets both sides of the same line for sporting events (i.e., betting both teams to win); the amount of overall loss to the customer is minimal, which is known as hedging. A customer requests that a casino check be issued payable to third parties or without a specified payee. A customer makes large deposits or pays off large markers with multiple instruments, such as cashier's checks, money orders, traveler's checks, and foreign drafts, in amounts of less than \$3,000, indicating an attempt to avoid identification requirements. A customer withdraws a large amount of funds from a deposit account and requests that multiple casino checks be issued, each less than \$10,000. o A customer establishes a high-value deposit that remains dormant for an extended period of time and then withdraws or transfers the funds. It is recommended that casinos require more information from certain customers who engage in high-risk transactions, such as international wire transfers and large cash deposits. Online gambling, including the following examples: A money launderer colludes with an operator of an offshore online gambling operation and deposits funds obtained from criminal activities into the gambling account and then withdraws them as winnings. The website operator keeps a percentage of the proceeds as a commission. The launderer declares the winnings to the tax authorities and then uses the funds for legitimate purposes. A money launderer deposits funds into an online gambling account using a stolen identity. He bets using the funds and receives payouts for the winnings or sustains acceptable losses. A money launderer logs on to the gambling account from multiple countries. A player is identified as a PEP. Casino cashiers can be exploited for placement. Intermediaries, such as junket agents and shell companies, can be used to place, layer, and integrate funds through casino operations. A VIP customer's commercial value must not protect them from suspicion, scrutiny, or AML controls. Dealers in High-Value Items (Precious Metals, Jewelry, Art, etc.) The European Directives on money laundering provide a common framework for including trade in precious metals, such as gold and diamonds, and other high-value items, such as jewelry and art, within AML monitoring programs. The USA PATRIOT Act requires certain dealers in covered and finished goods, including precious metals, stones, and jewels, to establish AML programs. However, in many other jurisdictions, these industries are not regulated for money laundering control purposes. Gold has high intrinsic value in a relatively compact form that is easy to transport. It can be bought and sold simply and often anonymously for currency in most areas of the world. It is more readily accepted than precious stones, especially because it can be melted down into many different forms. Gold holds its value regardless of the form it takes---whether as bullion or as a finished piece of jewelry---and is thus often used to facilitate the transfer of wealth. For some societies, gold carries an important cultural or religious significance that adds to its demand. Following are two of the key findings from the report: 1\. Gold is an extremely attractive vehicle for laundering money. It provides a way for criminals to convert their illicit cash into anonymous transferable assets. 2\. The gold market is a target for criminal activity because it is lucrative. Understanding and knowing the various stages of the gold market and types of predicate offenses is critical in identifying money laundering. In industries that deal in high-value items, it is possible that transactions in a particular scheme have not taken place at all, but they are represented with false invoicing. The paperwork is then used to justify transferring funds to pay for the shipments. The false invoicing scheme, whether overbilling or under billing for the reputed goods or services provided, is a common money laundering technique. The following transactions are also vulnerable and require additional attention: Payments or returns to persons other than the owner: A transaction is suspicious if one person delivers precious metal for refining and asserts ownership of the metal and authority to sell it, but directs payments to be made to another person. It is possible that the "dealer in precious metal" is being used to transfer an asset not only from one form into another--- unrefined gold to refined gold or money within the international finance system---but also from one person to another. Precious metal pool accounts: These accounts are maintained by a small number of large and sophisticated precious metal companies and have worldwide scope. They receive and hold precious metal credits for a customer, which can be drawn on by that customer. The customer can request the return of the precious metals, the sale and return of monetary proceeds, or the delivery of precious metal to another person. Thus, a refining customer in one country can deliver gold scrap for refining, establish a gold credit in the refiner's pool account system, and subsequently have delivery made by the refiner to another person, based upon that credit. As with gold, the simplest typology involving diamonds consists of the direct purchase of the gems with illegally obtained money. The illegal trade of diamonds is an important factor in armed conflicts in certain areas of the world, and terrorist groups can use diamonds from these regions to finance their activities. Regarding dealers in high-value items, FATF reports that common types of laundering activities include retail foreign exchange transactions, forged or fraudulent invoicing, commingling of legitimate and illicit proceeds in the accounts of diamond trading companies, and, in particular, international fund transfers among these accounts. Some of the detected schemes are covers for laundering the proceeds of illicit diamond trafficking. In others, diamond trading is used as a method for laundering the proceeds of other criminal activity. The multi-million-dollar fine art industry can also serve as a convenient money laundering vehicle. Anonymous agents at art auction houses bid millions of dollars for priceless works. Payment is later wired to the auction house by the agents' principals from accounts in offshore havens. It is a convenient mechanism for money launderers. Art and antiques dealers and auctioneers can follow these tips to decrease their money laundering risks: Require all art vendors to provide their names and addresses. Require them to 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. Be suspicious of any item with an asking price that does not reflect its market value. If there is reason to believe that an item was stolen, immediately contact the Art Loss Register, the world's largest private database of stolen art, antiques, and collectibles. The database contains more than 700,000 items reported by law enforcement agencies, insurers, and individuals as being stolen. Critically assess the situation when a customer asks to pay in cash. Avoid accepting cash payments unless there is a strong and reputable reason. Be aware of money laundering regulations. Appoint a senior staff member to whom employees can report suspicious activities. Converting illicit proceeds into precious metals and gems is attractive to financial criminals because: They have high value in a compact form, and their value tends to hold for long periods of time. They are easy to transport, so value can be transferred across borders without customs declarations. Their origins are difficult to trace. They can be easily exchanged for cash or used as currency in most areas of the world. Art markets are high risk. They are linked to serious criminal and terrorist offenses, due to the perceived anonymity of transactions, high value, and international movement of goods. Shell companies are often used to enhance secrecy. Governments have introduced primary and secondary legislation to regulate and enforce money laundering and terrorist financing standards across the art markets, including the following: o The Responsible Art Market Initiative o The Anti-Money Laundering Act of 2020 o The EU Fifth Directive Money laundering can occur in travel agencies and through their websites in the following ways: Purchasing an expensive airline ticket for another person who then asks for a refund Paying for services in installments that are actually structured wire transfers in amounts small enough to avoid recordkeeping requirements, a method used especially by criminals from foreign countries Establishing tour operator networks with false bookings and documentation to justify significant payments from foreign travel groups Travel agencies are cash-intensive businesses. Travel agencies solve logistics problems for terrorists. Travel agencies can allow the use of false identities. Travel agencies can be used to commingle legitimate and illegitimate fund. Travel agencies can be used in all three stages of money laundering. The vehicle sales industry 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. Money laundering risks, methods, and red flags in the vehicle sales industry include: Structuring cash deposits below the reporting threshold 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 Most money laundering cases involving vehicle dealers have one common element: the unreported use of currency to pay for the automobiles. Cases have also occurred in which car dealers laundered money by allowing drug dealers to trade in cars for less expensive models and to be paid in checks, not cash, for the difference. Cash-intensive businesses, such as car dealerships, are particularly vulnerable to money laundering. Fraudulent invoices can be used to hide buyers' identities. The purchase of luxury vehicles and other assets can be used to place large amounts of illicit money into the financial system seemingly legitimately. Gatekeepers: Notaries, Accountants, Auditors, and Lawyers The responsibilities of such gatekeepers include identifying clients, conducting due diligence on their clients, maintaining records about their clients, and reporting suspicious client activities. Some of these obligations also prohibit gatekeepers from informing, or "tipping off," clients who are the subject of SARs. Violations can subject gatekeepers to prosecution, fines, and even imprisonment. FATF's 40 Recommendations also cover independent lawyers, legal professionals, and other gatekeepers. FATF identified the following functions provided by lawyers, notaries, accountants, and other professionals as the most useful to potential money launderers: Creating and managing corporate vehicles and other complex legal arrangements, such as trusts, which might obscure the links between the proceeds of a crime and the perpetrator Buying or selling property: Property transfers can serve as the cover for illegal fund transfers (layering stage) or the final investment of proceeds after they pass through the initial laundering process (integration stage). Performing financial transactions: These professionals might carry out various financial operations on behalf of a client (e.g., issuing and cashing checks, making deposits, withdrawing funds from accounts, engaging in retail foreign exchange operations, buying and selling stock, and sending and receiving international funds transfers). Providing financial and tax advice: Criminals with large amounts of money to invest might pose as legitimate businesspeople to minimize tax liabilities or place assets out of reach in order to avoid future liabilities. Providing introductions to financial organizations Undertaking certain litigation Setting up and managing charities Criminals often use legal professionals to give the appearance of respectability in order to dissuade questioning or suspicion from financial organizations and to create an added step in the chain of any possible investigations. Additionally, legal professionals might deliberately misuse a client's legitimate accounts to conduct transactions without the client's knowledge. The FATF report also describes five categories of red flag indicators of money laundering or terrorism financing: 1. Characteristics of the client: 2. Characteristics of the involved parties: 3. Characteristics of the source of funds: 4. Characteristics of the lawyer: The issue of requiring attorneys to be gatekeepers in the AML/CFT area can be controversial, given the fact that attorneys have confidential relationships with their clients. Various alternatives have been discussed and debated, including: Deferring regulation until adequate education is conducted Imposing internal controls and due diligence duties on lawyers regarding unprivileged communications Using a joint government-private sector body to regulate lawyers who engage in financial activities, requiring registration with and regulation by an agency Devising a new hybrid approach, such as through guidance notes and best practices standards from FATF White collar crimes like tax evasion, bribery, and corruption. Lawyers, accountants, financiers, and other \"professional enablers" can abuse their positions to facilitate financial crimes via seemingly legitimate means. Professional service providers need to be aware of their responsibilities to identify, report, and avoid money laundering risks. Professional service providers need to ensure that they understand all the laws and regulations that apply to them, particularly when involved in multijurisdictional business. Professional enablers who commit crimes can be imprisoned and will likely be unable to operate again within their chosen profession. The special skills of gatekeepers enable them to help their clients evade detection using sophisticated money laundering schemes. Commodity futures and options accounts are vehicles that could be used to launder illicit funds. What are they? Commodities: Goods such as food, grains, and metals that are usually traded in large amounts on a commodities exchange, typically through futures contracts Futures/futures contracts: Contracts to buy or sell a set quantity of a commodity at a future date at a set price Options/options contracts: Contracts that create the right, but not the obligation, to buy or sell a set quantity of something, such as a share or commodity, at a set price after a set expiration date Commodity pool: A combination of funds from various investors to trade in futures or options contracts Omnibus accounts: Accounts held by one futures commission merchant (FCM) for another, in which case transactions of multiple account holders are combined, and their identities are unknown to the holding FCM future commissions merchant. Commodity trading advisors (CTAs) engage in the business of advising others, either directly or indirectly, regarding the value or advisability of trading futures contracts, commodity options, and swaps. Futures commission merchant (FCM): A firm or person that solicits or accepts orders on futures contracts or commodity options and accepts funds for their execution. [The investment and commodity advising industry is susceptible to money laundering in the following ways: ] [ Withdrawal of assets through transfers to unrelated accounts or high-risk jurisdictions] [ Frequent additions to or withdrawals from accounts ] [ Clients invest via checks drawn on, or wire transfers from, accounts of third parties with no relation to them] [Clients request custodial arrangements that allow them to remain anonymous ] [ Transfers of funds to the investment advisor, followed by transfers to accounts at other institutions that suggest a layering scheme ] [ CTAs or other professionals invest illegal proceeds for a client ] [ Movement of funds to disguise their origin] 1. **Over-Invoicing**: The criminal sells a commodity at an inflated price. The buyer, who is in on the scheme, pays the higher price, and the extra money is laundered. 2. **Under-Invoicing**: The criminal sells a commodity at a lower price than its market value. The buyer pays the lower price, and the difference is settled through illegal means, effectively laundering the money. 3. **Multiple Invoicing**: The same commodity is invoiced multiple times. This creates multiple payments for the same shipment, allowing the criminal to move money across borders. 4. **False Descriptions**: The commodity's quality or quantity is misrepresented. For example, a shipment of low-value goods might be described as high-value goods, allowing the criminal to justify large payments. 5. **Phantom Shipping**: No actual goods are shipped, but the paperwork is created to show a legitimate trade transaction. This allows the criminal to move money without any physical goods changing hands 6. Trust Arrangement among the property owner (the grantor), a beneficiary and a manager of the property (the trustee), whereby the trustee manages the property for the benefit of the beneficiary in accordance with terms set by the grantor. Trust and company service providers (TCSPs) are gatekeepers who set up trusts between parties and provide certain legal and administrative functions for corporations. According to the FATF report Guidance for a Risk-Based Approach for Trust and Company Service Providers, TCSPs include any person or business that provides any of the following services to third parties: Acting as an agent on behalf of legal persons to form a company 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, partnership, or any other legal person or arrangement Acting as (or arranging for another person to act as) a trustee of an express trust Acting as (or arranging for another person to act as) a nominee shareholder for another person The FATF report emphasizes the need for TCSPs to obtain detailed information on customers and the need for them to understand the source of funds and the general purpose of the structures they create for their clients' benefit. In addition, TCSPs should always be able to identify the beneficial owners and controlling persons for an account. FATF's report identifies the following vulnerabilities and red flags for the TCSP industry: 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 recordkeeping across the industry Potential for TCSPs to operate in an unlicensed environment Potential for a TCSP's CDD to be performed by other financial organizations, depending on the jurisdictional requirements Potential indicators of money laundering in the TCSP industry include: Transactions that require the use of complex and opaque legal entities and arrangements The payment of consultancy fees to shell companies established in other jurisdictions or jurisdictions known to have a market in the formation of numerous shell companies The use of TCSPs in jurisdictions that do not require TCSPs to capture, retain, or submit to competent authorities' information on the beneficial ownership of corporate structures formed by them The use of legal persons and legal arrangements established in jurisdictions with weak or absent AML/CFT laws and/or poor record of supervision and monitoring of TCSPs The use of legal persons or legal arrangements that operate in jurisdictions with strict secrecy laws Multiple intercompany loan transactions or multijurisdictional wire transfers that have no apparent or legal purpose Regulations should stipulate how the service provider conducts its business, including how directors selected by the provider meet their obligations as trustees or trusteeships. Regulations are not uniform; they range from a simple minimum capitalization requirement to full regulatory oversight. Often, the scope of the legislation is limited, excluding certain types of activities. Sometimes, the legislation bars regulators from gaining access to client files without client permission or a court order, thereby making checks on the adequacy of the license holder's CDD provisions extremely difficult. Furthermore, although some jurisdictions include service providers within their AML regulations---for example, by making compliance with the regulations a condition of licensing---many do not, leaving service providers free of any AML duties beyond those imposed upon the general public. According to Transparency International, because of these differing standards, individuals seeking to use a company or trust for criminal purposes can simply select a jurisdiction that lacks requirements or has only inadequate ones. Imagine you have a significant amount of assets and you want to ensure they are managed and distributed according to your wishes after your death. You could set up a trust, appoint a reliable trustee, and specify that your assets should be used to pay for your children's education and living expenses until they reach a certain age. The real estate sector is frequently used in money laundering activities. Investing illicit capital in real estate is a classic method of laundering illicit funds, particularly in countries with political, economic, and monetary stability. Escrow accounts can facilitate the movement of funds by cashier's checks, wire transfers, and company checks to seemingly legitimate individuals and companies. Given the high levels of activity expected in escrow accounts, money launderers can disguise illegal activity in an account while appearing to operate it legally. (escrow agent holds the money and asset until sale is completed, then gives the money to seller and asset to buyer). Each closing also entails numerous routine disbursements for payment of the proceeds to the seller, payoff of the mortgage, real estate commissions, taxes, satisfaction of liens, and other payments. To a bank and other observers, the disbursement of funds at a closing might appear to be one legitimate set of transactions. Money laundering can be easily hidden because the size and volume of routine escrow account activity smooths out the "spikes" (i.e., the ups and downs in an account) and multiple deposits associated with money laundering. The reverse situation can also occur in the real estate industry. A money launderer might find a cooperative property seller who agrees to a reported purchase price well below the actual value of the property and then accepts the difference in unreported cash. For example, a money launderer could purchase a \$2 million property for \$1 million and secretly give the balance to the cooperative seller. After holding the property for a time, the launderer could sell it for its true value of \$2 million. According to the brief, real estate is an attractive channel for laundering illicit funds because: It can be purchased with cash. The ultimate beneficial ownership can be disguised. It is a relatively stable and reliable investment. Value can be increased through renovations and improvements. Placement and layering phases. Properties can also be sold for a profit or retained for residential, investment, or vacation purposes in the integration phase. In Australia, common money laundering methods involving real estate include: Using third-party straw buyers described as \"cleanskins\" Using loans and mortgages as a cover for laundering, which might involve lump sum cash repayments to integrate illicit funds into the economy Manipulating property values to disguise undisclosed cash payments through overvaluing, undervaluing, or flipping through successive sales to increase value Structuring cash deposits used for the purchase Generating rental income to legitimize illicit funds Conducting criminal activity, such as the production of cannabis or synthetic drugs, at the purchased property Using illicit cash to make property improvements to increase the value and profits at sale Using front companies, shell companies, trusts, and other company structures to hide beneficial ownership and obvious links to criminals Using gatekeepers, such as real estate agents, conveyancers, and solicitors, to conceal criminal involvement, complicate the money laundering process, and provide a veneer of legitimacy to the transaction Investing by overseas-based criminals to conceal assets and avoid confiscation from authorities in their home jurisdiction These red flags include: Various uses of cash to aggregate funds for property purchase, down payment, and loan repayment Multiple purchases and sales in a short period of time, possibly involving property overvaluation, undervaluation, or straw buyers Use of offshore lenders Unknown sources of funds for purchase, such as incoming foreign wires in which the originator and beneficiary customer are the same Ownership being the customer's only link to the country in which the real estate is being purchased International Trade activity These components include banks, currency exchanges, free trade zones, cross-border payments, ports, invoices, goods, shipments, shell companies, and credit instruments that are often inherently complex transactions. Trade-based money laundering and the Black-Market Peso Exchange (BMPE) are two significant money laundering techniques that have proven successful in illicit finance. Typically, free trade zones are manipulated in both techniques. Free trade zones (FTZs) play an integral role in international trade. FTZs are designated geographic areas with special regulatory and tax treatments for certain trade-related goods and services. FTZs are often located in developing countries near ports of entry, but they are separate from traditional ports of entry and typically operate under different rules. Most major FTZs are also located in regional financial centers that link international trade hubs with access to global financial markets. Examples of FTZs are the Colón Free Trade Zone in Panama and the Shanghai Free Trade Zone (officially the China Pilot Free Trade Zone) in China. According to FATF, systemic weaknesses for FTZs include: Inadequate AML/CFT safeguards Minimal oversight by local authorities Weak procedures to inspect goods and legal entities, including inadequate recordkeeping and information technology systems Lack of cooperation between FTZs and local customs authorities FATF defines trade-based money laundering (TBML) as the process of disguising the proceeds of crime and moving value by using trade transactions to legitimize their illicit origins. In practice, this can be achieved through the misrepresentation of the price, quantity, or quality of imports and exports. Moreover, TBML techniques vary in complexity and are frequently used in combination with other money laundering techniques to further obscure the money trail. Money launderers can move money out of one country by using their illicit funds to purchase high-value products and then exporting them at low prices to a colluding foreign partner, who then sells them in the open market at their true value. Overinvoicing, underinvoicing, overshipping, shortshipping, ghost-shipping, shell companies, multiple invoicing, black market trades. FinCEN defines a funnel account as "an individual or business account in one geographic area that receives multiple cash deposits, often in amounts below the cash reporting threshold, and from which the funds are withdrawn in a different geographic area with little time elapsing between the deposits and withdrawals." Red flags of possible funnel account activity include: An account opened in one US state receives numerous cash deposits of less than \$10,000 (the currency reporting requirement) by unidentified persons at branches outside the geographic region in which the account is held. Business account deposits take place in a different geographic region from where the business operates. Individuals opening or making deposits to funnel accounts lack information about the stated activity of the account, the account owner, or the source of the cash. A business account receives out-of-state deposits with debits that do not appear to be related to its business purpose. There are notable differences between the handwriting on the payee, amount, and signature lines on checks issued from an account that receives out-of-state cash deposits. Wire transfers or checks issued from a funnel account are deposited into, or cleared through, the US correspondent account of a Mexican bank. Criminals use international trade to disguise illegal activities. Shell companies and fake invoicing are common techniques. Joint investigations mitigate cross-border and jurisdictional challenges. Criminals add complexity to cross border trade by commingling with legitimate activity. Black Market Peso Exchange A form of TBML, the BMPE is a process by which money in the United States derived from illegal activity is purchased by Colombian peso brokers and deposited in US bank accounts established by the brokers. The brokers sell checks and wire transfers drawn on those accounts to legitimate businesses, which use them to purchase goods and services in the United States. Although the United States is prominently figured in BMPE, the process is not limited exclusively to that country. Colombian importers created the BMPE in the 1950s as a mechanism for buying US dollars on the black market to avoid domestic taxes and duties on the official purchase of US dollars and imported goods purchased with dollars. In the 1970s, Colombian drug cartels began using the BMPE to convert drug dollars earned in the United States to pesos in Colombia. Why? It reduced their risk of losing their money through seizures, and they received their money faster, even though they paid a premium to the peso broker. Wildlife trafficking is defined as the illegal trade, smuggling, poaching, capture, and collection of endangered species and protected wildlife. It also includes wildlife derivatives and byproducts, such as leather, food, medicines, and exotic pets. The illegal wildlife trade threatens the extinction of several animal and plant species. The three stages of wildlife trafficking include: 1. Source: The first stage involves the location where the initial trafficking activities occur, such as the jurisdiction in which poaching (illegal hunt or catch) and initial transport takes place. Transit: The second stage involves the movement of poached or illegally obtained wildlife goods that are disguised and consolidated with other items for transportation. Destination: The final stage involves poached, illegally acquired or trafficked goods arriving at their final destination for sale. Because the sale of these products is illegal in some countries, they are often sold at in-person or online black markets, where profits for distributors are often the highest. Organizations can combat wildlife trafficking by: Joining the United for Wildlife Financial Taskforce and signing the Mansion House Declaration Using current suspicious activity reporting mechanisms to report potential wildlife trafficking Reviewing United for Wildlife Financial Taskforce intelligence alerts and implementing policies and procedures to support the detection and reporting of wildlife trafficking Reviewing FATF's Money Laundering and the Illegal Wildlife Trade report for valuable insights and red flags Prepaid Cards, Mobile Payments, and Internet-Based Payment Services Prepaid cards have the same characteristics that make cash attractive to criminals: They are portable, valuable, exchangeable, and anonymous. Typically, prepaid products require the consumer to pay in advance for future purchases of goods and services. Each payment is subtracted from the balance of the card or product until the total amount is spent. Prepaid cards can be categorized as either open loop or closed loop. Openloop prepaid cards, many of which are network branded by American Express, Visa, or MasterCard, can be purchased and loaded with money by one person and used like regular debit cards by the same person or another person to make purchases or ATM withdrawals anywhere in the world. Closed-loop prepaid products are of limited use for a specific purpose or service, such as with a certain merchant or retailer, whether online or at a physical location. A prepaid card can be either non reloadable, which means it is purchased for a fixed amount that cannot be reloaded as the funds are depleted, or reloadable, which permits adding funds on the card to replace what was previously spent. According to the FATF reports on this topic, the potential risk factors commonly associated with prepaid cards are: 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 might not observe laws in all jurisdictions Use as substitute for bulk-cash smuggling e-money is "a prepaid means of payment that can be used to make payments to multiple persons, where the persons are distinct legal or natural entities." E-money products can be card-based, app-based, or online account-based. They can be issued by financial organizations, building societies, and specialist e-money institutions. Examples of e-money include prepaid cards that can be used to pay for goods at a range of retailers and virtual purses that can be used to pay for goods and services online. Risk factors: High transaction or purse limits The ability of a customer to hold numerous purses or cards E-money issuers using complex business models (e.g., "white-label" products and outsourcing, particularly to overseas jurisdictions), resulting in a complex AML/CFT control environment Certain merchant activity with high-risk businesses, such as gambling, which allows for the movement of higher amounts of funds Funding with unverified persons, whether customers or third parties Funding with cash that leaves no electronic trail to the source of funds, as well as the ability for cash withdrawal Funding with other e-money that lacks verified persons and/or source of funds Non-face-to-face transactional activity Features that increase the functionality of the card in terms of how to execute transactions, such as person-to-person, business-to-person, business-to-business, and person-to-business transactions Controls: Conducting robust oversight of outsourced functions Placing limits on storage values, transactions, and turnover Implementing transaction monitoring systems that are able to detect money laundering patterns and deviations from normal transaction patterns Implementing systems to detect individuals holding multiple purses, accounts, and cards, including across multiple e-money issuers Utilizing geolocation, device-related information, and IP addresses to identify discrepancies in customer activity from the information provided at