CAMS Study Guide PDF 2024
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2024
John J. Byrne, Catalina Martinez
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This study guide provides information about the Certified Anti-Money Laundering Specialist (CAMS) examination, including details on money laundering, terrorist financing, and AML/CFT compliance programs.
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Certified Anti-Money Laundering Specialist STUDY GUIDE Version 6.5 acams.org Credits and Copyright CAMS Examination Task Force Task Force Executive Chair John J. Byrne, CA...
Certified Anti-Money Laundering Specialist STUDY GUIDE Version 6.5 acams.org Credits and Copyright CAMS Examination Task Force Task Force Executive Chair John J. Byrne, CAMS Project Manager Catalina Martinez We would like to thank the following individuals for their significant contribution in the development of the CAMS Examination and Study Guide through the work of the CAMS Examination Task Force. Bob Pasley, CAMS—Task Force Chair Kevin Anderson, CAMS—Task Force Chair Brian Stoeckert, CAMS—Task Force Chair Paul Osborne, CAMS—Task Force Chair Peter Wild, CAMS-Audit—Task Force Vice Chair Barbara Keller, CAMS—Task Force Vice Chair Hue Dang, CAMS-Audit (ACAMS Asia) Samantha Sheen, CAMS (ACAMS Europe) David Clark, CAMS—ACAMS Advisory Board Anna Rentschler, CAMS—ACAMS Advisory Board Rick Small, CAMS—ACAMS Advisory Board Nancy Saur, CAMS—ACAMS Advisory Board Vasilios Chrisos, CAMS—ACAMS Advisory Board Dennis Lormel, CAMS—ACAMS Advisory Board Abbas Bou Diab, CAMS Kenneth Simmons, CAMS-Audit Angel Nguyen, CAMS Kok Cheong Leong, CAMS-Audit Brian Vitale, CAMS-Audit Lauren Kohr, CAMS-Audit Brigette K. Miller, CAMS Lindsay Dastrup, CAMS-Audit Christopher Bagnall, CAMS Margaret Silvers, CAMS Christopher Randle, CAMS-Audit, Martin Dilly, CAMS-Audit CAMS-FCI Dave Dekkers, CAMS-Audit Nancy Lake, CAMS-Audit, CAMS-FCI Deborah Hitzeroth, CAMS-FCI Peter Warrack, CAMS acams.org Donna Davidek, CAMS-Audit Rachele Byrne, CAMS Ed Beemer, CAMS-FCI Sean McCrossan, CAMS-FCI Eric Wathen, CAMS Sharon McCullough, CAMS Gary Bagliebter, CAMS Steve Gurdak, CAMS Iris Smith, CAMS-Audit Susan Cannon, CAMS-Audit Iwona Skornicka Castro, CAMS Susanne Wai Yin Ong, CAMS Jack Sonnenschein, CAMS-Audit Tatiana Turculet, CAMS Jeremy Brierley, CAMS Venus Edano, CAMS Jim Vilker, CAMS William Aubrey Chapman, CAMS-Audit Joel Conaty Yevgeniya Balyasna-Hooghiemstra, CAMS Jurgen Egberink, CAMS Zachary Miller, CAMS-FCI Ana Padilla, CAMS Ahmad Tarteer, CAMS-Audit, CGSS André Castro Carvalho, CAMS Joyce Hsu, CAMS-FCI Jun Zhu, CAMS Jung Hyun Choi, CAMS Judith Assouly, CAMS Terumasa Kaku, CAMS Holger Pauco-Dirscherl, CAMS-RM, Gina Storelli, CAMS-Audit CAMS-Audit, CGSS ACAMS would also like to thank the ACAMS Chapters worldwide for their contribution in the development of the CAMS Examination. acams.org ACAMS Product Staff Eric Solecki Ronald Myers Edith Velasquez Astrid Rouleau, CAMS Brenda Fewox Tiffany Alcorn Amanda J. Dominique Marco Tham, CAMS Charles Ball Michelle Rance, CAMS Heather Carroll Shannon Field Yuen Cho Man, CAMS Crystal Ferguson Adam Cochran Lindsay Pfisterer Leslie Smith Iliana Colón, CAMS Nancy Peterson Meghan Cleereman Todd Beck, CAMS Shull Melinda Fleming This document is designed to be printed in black and white. © 2022 Association of Certified Anti-Money Laundering Specialists, LLC ("ACAMS"). All rights reserved. Only a licensed learner may download or print this document and such use must be limited to personal study. You may not otherwise share this material. No other use is allowed without express written permission from ACAMS. ISBN:978-0-9777495-2-2 acams.org Table of Contents Introduction.................................................................................................................. 1 About ACAMS.......................................................................................................................................................... 1 Risks and Methods of Money Laundering and Terrorist Financing................ 3 Overview................................................................................................................... 3 What Is Money Laundering?......................................................................................................................... 3 Three Stages of the Money Laundering Cycle............................................................................... 5 The Economic and Social Consequences of Money Laundering..................................... 7 Economic and social consequences of money laundering (Case example)........ 15 AML/CFT Compliance Programs and Individual Accountability...................................... 17 Individual accountability and consequences (Case example)......................................... 19 Methods of Money Laundering............................................................................................................... 20 Banks and Other Depository Institutions...................................................... 22 Electronic Transfer of Funds..................................................................................................................... 22 Remote Deposit Capture............................................................................................................................ 24 Correspondent Banking............................................................................................................................... 25 Correspondent banking (Case example: Methods of money laundering)..............27 Payable-Through Accounts...................................................................................................................... 29 Use of payable-through accounts (Case example: Methods of money laundering)............................................................................................................................................................ 30 Concentration Accounts.............................................................................................................................. 31 Private Banking................................................................................................................................................... 32 Private banking (Case example)............................................................................................................33 Use of Private Investment Companies in Private Banking....................................................35 Use of PICs in private banking (Case example: Methods of money laundering) 36 Politically Exposed Persons........................................................................................................................37 Structuring............................................................................................................................................................. 39 Structuring (Case example: Methods of money laundering)........................................... 42 Microstructuring................................................................................................................................................ 43 Credit Unions and Building Societies.................................................................................................. 44 Nonbank Financial Institutions......................................................................... 47 Credit Card Industry....................................................................................................................................... 47 Third-Party Payment Processors.......................................................................................................... 48 Money Services Business............................................................................................................................ 50 Use of MSBs (Case example: Methods of money laundering)......................................... 54 Certified Anti-Money Laundering Specialist Page i Version 6.5 Insurance Companies................................................................................................................................... 55 Securities Broker-Dealers........................................................................................................................... 59 Use of securities (Case example: Methods of money laundering)............................... 63 Securities and broker-dealers (Case example: Methods of money laundering) 64 Nonfinancial Businesses and Professions..................................................... 66 Casinos..................................................................................................................................................................... 66 Casinos (Case example: Methods of money laundering)....................................................72 Dealers in High-Value Items (Precious Metals, Jewelry, Art, etc.).................................. 74 Use of precious metals and gems to launder money (Case example: Methods of money laundering)...........................................................................................................................................77 Use of precious metals to conceal drug proceeds (Case example: Methods of money laundering).......................................................................................................................................... 78 Use of art to launder money (Case example: Methods of money laundering).... 80 Travel Agencies and Websites................................................................................................................ 82 Travel agencies (Case example: Methods of money laundering)................................. 82 Vehicle Sales........................................................................................................................................................ 83 Luxury vehicles (Case example: Methods of money laundering).................................. 84 Gatekeepers: Notaries, Accountants, Auditors, and Lawyers........................................... 85 Gatekeepers (Case example: Role of gatekeepers in facilitating money laundering)............................................................................................................................................................ 90 Role of Gatekeepers (Case example: Special skills)................................................................. 91 Investment and Commodity Advisors............................................................................................... 92 Trust and Company Service Providers.............................................................................................. 94 Real Estate............................................................................................................................................................. 97 International Trade Activity............................................................................. 101 Free Trade Zones............................................................................................................................................. 101 Trade-Based Money Laundering......................................................................................................... 102 Trade-based money laundering (Case example: Methods of money laundering)...................................................................................................................................................................................... 105 Black Market Peso Exchange................................................................................................................. 107 TBML and BMPE schemes (Case example: Methods of money laundering)....... 109 Complex TBML/BMPE schemes (Case example: Methods of money laundering)....................................................................................................................................................................................... 110 Wildlife Trafficking............................................................................................................................................ 111 Risk Associated with New Payment Products and Services.................. 113 Prepaid Cards, Mobile Payments, and Internet-Based Payment Services..............113 Virtual Currency................................................................................................................................................ 118 Use of virtual currency (Case example: Methods of money laundering).................121 Virtual currency (Case example: Dark web)................................................................................123 Certified Anti-Money Laundering Specialist Page ii Version 6.5 Corporate Vehicles Used to Facilitate Illicit Finance................................ 125 Public Companies and Private Limited Companies................................................................125 Shell and Shelf Companies...................................................................................................................... 128 Trusts.........................................................................................................................................................................131 Terrorist Financing............................................................................................. 133 Differences and Similarities between Terrorist Financing and Money Laundering.......................................................................................................................................................................................133 Detecting Terrorist Financing.................................................................................................................135 Detecting terrorist financing (Case example: The Maute Group)............................... 136 How Terrorists Raise, Move, and Store Funds.............................................................................. 137 Use of Hawala and Other Informal Value Transfer Systems............................................ 138 Detecting terrorist financing (Case example: Use of hawala and other informal value transfer systems)................................................................................................................................141 Use of Charities and Nonprofit Organizations (NPOs)..........................................................142 Detecting terrorist financing (Case example: Using NPOs)..............................................144 Detecting terrorist financing (Case example: NPOs and Islamic Defenders Front of Indonesia)....................................................................................................................................................... 146 Emerging Risks for Terrorist Financing............................................................................................147 Detecting terrorist financing (Case example: Islamic State and cryptocurrency)...................................................................................................................................................................................... 149 Detecting terrorist financing (Case example: Use of social media)........................... 150 International AML/CFT Standards...................................................................... 153 Financial Action Task Force............................................................................. 153 FATF Objectives................................................................................................................................................154 FATF 40 Recommendations................................................................................................................... 158 FATF Members and Observers............................................................................................................. 169 Noncooperative Countries........................................................................................................................172 The Basel Committee on Banking Supervision........................................... 176 Introduction........................................................................................................................................................ 176 History of the Basel Committee........................................................................................................... 179 European Union Directives on Money Laundering.................................... 190 First Directive..................................................................................................................................................... 190 Second Directive.............................................................................................................................................. 191 Third Directive................................................................................................................................................... 192 Fourth Directive................................................................................................................................................ 194 Fifth Directive..................................................................................................................................................... 197 Sixth Directive.................................................................................................................................................... 199 Certified Anti-Money Laundering Specialist Page iii Version 6.5 FATF-Style Regional Bodies............................................................................ 202 FATF-Style Regional Bodies and FATF and Associate Members................................. 202 Asia/Pacific Group on Money Laundering (APG)................................................................... 203 Caribbean Financial Action Task Force (CFATF)..................................................................... 205 Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL)........................................................................... 207 Financial Action Task Force of Latin America (GAFILAT).................................................. 208 Inter-Governmental Action Group against Money Laundering in West Africa (GIABA)................................................................................................................................................................. 209 Middle East and North Africa Financial Action Task Force (MENAFATF)................ 209 The Eurasian Group on Combating Money Laundering and Financing Terrorism (EAG).........................................................................................................................................................................211 Eastern and Southern African Anti-Money Laundering Group (ESAAMLG)..........212 Task Force on Money Laundering in Central Africa (GABAC).........................................213 Other Influencing Bodies..................................................................................214 Organization of American States: Inter-American Drug Abuse Control Commission.........................................................................................................................................................214 Egmont Group of Financial Intelligence Units.............................................................................215 The Wolfsberg Group.................................................................................................................................. 218 The World Bank and the International Monetary Fund.........................................................222 Key US Legislative and Regulatory Initiatives............................................ 226 USA PATRIOT Act........................................................................................................................................... 226 Anti-Money Laundering Act (AMLA) of 2020..............................................................................234 The Reach of the US Criminal Money Laundering and Civil Forfeiture Laws....... 239 US criminal money laundering and civil forfeiture laws (Case example).............. 240 Office of Foreign Assets Control.........................................................................................................242 Office of Foreign Assets Control (Case example: US sanctions).................................243 Anti-Money Laundering/Countering the Financing of Terrorism Compliance Programs........................................................................................... 245 Assessing AML/CFT Risk.................................................................................. 245 Introduction........................................................................................................................................................247 Maintaining an AML/CFT Risk Model................................................................................................. 248 Understanding AML/CFT Risk............................................................................................................... 250 AML/CFT Risk Scoring..................................................................................................................................251 Assessing the Dynamic Risk of Customers..................................................................................253 AML/CFT Risk Identification.....................................................................................................................254 AML/CFT risk identification (Case example: Failure to identify high-risk activity)..................................................................................................................................................................................... 259 Certified Anti-Money Laundering Specialist Page iv Version 6.5 AML/CFT Program..............................................................................................261 The Elements of an AML/CFT Program.......................................................................................... 261 A System of Internal Policies, Procedures, and Controls.................................................. 262 A system of internal policies, procedures, and controls (Case example: Lack of overall policy control and oversight)................................................................................................ 266 A system of internal policies, procedures, and controls (Case example: PEP risks)........................................................................................................................................................................ 268 The Compliance Function....................................................................................................................... 269 The Designation and Responsibilities of a Compliance Officer.................................... 270 Compliance officer accountability (Case example: US bank)........................................ 273 Compliance officer accountability (Case example: Personal liability).....................275 AML/CFT Training........................................................................................................................................... 277 AML/CFT training (Case example).................................................................................................... 283 Independent Audit........................................................................................................................................ 284 Independent audit (Case example: Apical Asset Management Pte. Ltd.)............ 287 Establishing a Culture of Compliance............................................................................................. 288 Culture of compliance (Case example: Poor management oversight)................ 292 Know Your Customer........................................................................................ 295 Customer Due Diligence........................................................................................................................... 295 Main Elements of a Customer Due Diligence Program...................................................... 296 Enhanced Due Diligence.......................................................................................................................... 298 Enhanced Due Diligence for High-Risk Customers............................................................... 299 Account Opening, Customer Identification, and Verification........................................ 300 ID&V (Case example: Danske Bank)................................................................................................. 305 Consolidated Customer Due Diligence......................................................................................... 307 Monitoring and Screening............................................................................... 308 Economic Sanctions.................................................................................................................................... 308 Sanctions List Screening........................................................................................................................... 310 Politically Exposed Persons Screening.............................................................................................312 Know Your Employee....................................................................................................................................313 KYE (Case example: Citigroup Global Markets Inc.)...............................................................315 Suspicious and Unusual Transaction Monitoring and Reporting................................... 316 Automated AML/CFT Solutions............................................................................................................ 319 Money Laundering and Terrorist Financing Red Flags............................ 323 Unusual Customer Behavior....................................................................................................................323 Unusual Customer Identification Circumstances....................................................................324 Unusual Cash Transactions......................................................................................................................325 Unusual Noncash Deposits...................................................................................................................... 326 Unusual Wire Transfer Transactions.................................................................................................. 327 Unusual Safe Deposit Box Activity...................................................................................................... 328 Certified Anti-Money Laundering Specialist Page v Version 6.5 Unusual Activity in Credit Transactions.......................................................................................... 328 Unusual Commercial Account Activity........................................................................................... 328 Unusual Trade Financing Transactions........................................................................................... 329 Unusual Investment Activity................................................................................................................... 330 Other Unusual Customer Activity.........................................................................................................331 Unusual Employee Activity........................................................................................................................331 Unusual Activity in a Money Remitter or Currency Exchange House Setting...... 332 Unusual Activity for Virtual Currency................................................................................................. 332 Unusual Activity in an Insurance Company Setting................................................................ 333 Unusual Activity in a Broker-Dealer Setting.................................................................................. 334 Unusual Real Estate Activity.....................................................................................................................335 Unusual Activity for Dealers of Precious Metals and Other High-Value Items.....336 Unusual Activity Indicative of Trade-Based Money Laundering.................................... 337 Unusual Activity Indicative of Human Smuggling.....................................................................338 Unusual Activity Indicative of Human Trafficking.................................................................... 340 Unusual Activity Indicative of Potential Terrorist Financing..............................................342 Unusual Activity Indicative of Cyber Criminal Activity........................................................... 343 Conducting and Responding to Investigations.............................................. 345 Investigations Initiated by the Financial Organization............................ 345 Sources of Investigations..........................................................................................................................345 Sources of investigations (Case example: Preserving subpoenaed audio recordings)..........................................................................................................................................................352 Sources of investigations (Case example: Acting on seizure warrants)................. 354 Conducting the Investigation.................................................................................................................355 Conducting the investigation (Case example: Utilizing the internet when conducting financial investigations)................................................................................................. 362 SAR Decision-Making Process.............................................................................................................. 364 Failing to report SARs (Case example: Money laundering reporting officer)..... 366 Failing to report SARs (Case example: Deutsche Bank).................................................... 368 Closing the Account.................................................................................................................................... 369 Communicating with Law Enforcement on SARs.................................................................. 370 Investigations Initiated by Law Enforcement............................................. 371 Decision to Prosecute a Financial Organization for Money Laundering Violations......................................................................................................................................................................................372 Responding to a Law Enforcement Investigation against a Financial Organization....................................................................................................................................................... 373 Monitoring a Law Enforcement Investigation against a Financial Organization 374 Cooperating with Law Enforcement During an Investigation against a Financial Organization....................................................................................................................................................... 375 Obtaining Counsel for an Investigation against a Financial Organization...............376 Certified Anti-Money Laundering Specialist Page vi Version 6.5 Notices to Employees as a Result of an Investigation against a Financial Organization....................................................................................................................................................... 377 Interviewing Employees as a Result of a Law Enforcement Investigation against a Financial Organization.............................................................................................................................378 Media Relations.................................................................................................................................................379 Media relations (Case example: Cooperation with regulatory authorities to reduce fine)........................................................................................................................................................379 AML/CFT Cooperation between Countries................................................ 381 FATF Recommendations on Cooperation between Countries.................................... 381 International Money Laundering Information Network........................................................ 381 Mutual Legal Assistance Treaties........................................................................................................ 382 Financial Intelligence Units.......................................................................................................................383 Appendix................................................................................................................... 389 Additional Study Resources............................................................................ 389 Guidance documents and reference materials...................................................................... 390 Other websites with helpful AML material................................................................................... 394 AML-related periodicals............................................................................................................................ 395 Glossary.................................................................................................................... 396 Certified Anti-Money Laundering Specialist Page vii Version 6.5 Introduction About ACAMS The mission of ACAMS is to advance the professional knowledge, skills and experience of those dedicated to the detection and prevention of money laundering around the world, and to promote the development and implementation of sound anti-money laundering policies and procedures. ACAMS achieves its mission through promoting international standards for the detection and prevention of money laundering and terrorist financing; educating professionals in private and government organizations about these standards and the strategies and practices required to meet them; certifying the achievements of its members; and providing networking platforms through which AML/CFT professionals can collaborate with their peers throughout the world. ACAMS sets professional standards for anti-financial crime practitioners worldwide and offers them career development and networking opportunities. In particular, ACAMS seeks to help AML professionals with career enhancement through cutting-edge education, certification and training. ACAMS acts as a forum where professionals can exchange strategies and ideas; assist practitioners in developing, implementing and upholding proven, sound AML practices and procedures; and help financial and non-financial institutions identify and locate individuals with the Certified Anti-Money Laundering (CAMS) designation in the rapidly expanding AML field. Certified Anti-Money Laundering Specialist Page 1 Version 6.5 About the CAMS Designation As money laundering and terrorist financing threaten financial and nonfinancial institutions and societies as a whole, the challenge and the need to develop experts in preventing and detecting financial crime intensifies. ACAMS is the global leader in responding to that need, having helped standardize AML expertise by creating the CAMS designation. Internationally recognized, the CAMS credential identifies those who earn it as possessing specialized AML knowledge. AML professionals who earn the CAMS designation position themselves to be leaders in the industry and valuable assets to their organizations. Congratulations on your decision to pursue the most respected and widely recognized international credential in the AML field. We welcome and invite you to embark on a journey that may lead you to career advancement, international recognition and respect among peers and superiors. Read on, study hard and good luck! Certified Anti-Money Laundering Specialist Page 2 Version 6.5 Risks and Methods of Money Laundering and Terrorist Financing Overview What Is Money Laundering? Money laundering involves taking criminal proceeds and disguising their illegal sources in order to use the funds to perform legal or illegal activities. Simply put, money laundering is the process of making dirty money look clean. When a criminal activity generates substantial profits, the individual or group involved must find a way to use the funds without drawing attention to the underlying activity or persons involved in generating such profits. Criminals achieve this goal by disguising the source of funds, changing the form of the currency, or moving the money to a place where it is less likely to attract attention. Criminal activities that lead to money laundering (i.e., predicate crimes) can include illegal arms sales, narcotics trafficking, contraband smuggling, and other activities related to organized crime, embezzlement, insider trading, bribery, and computer fraud schemes. Formed in 1989, the Financial Action Task Force (FATF) is an intergovernmental body created by the Group of Seven industrialized nations to set standards and foster international action against money laundering. One of FATF’s early accomplishments was to dispel the notion that money laundering only involves cash transactions. Through several money laundering typologies exercises, FATF demonstrated that money laundering can be achieved through virtually every medium, financial organization, and business. Certified Anti-Money Laundering Specialist Page 3 Version 6.5 The United Nations 2000 Convention against Transnational Organized Crime, also known as the Palermo Convention, defines money laundering as: The conversion or transfer 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 the legal consequences of his or her actions The concealment or disguise of the true nature, source, location, disposition, movement, or rights with respect to or ownership of property, knowing that 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 in a crime An important prerequisite in the definition of money laundering is knowledge. In all three of the definitions above is the phrase "knowing that it is derived from a criminal offense,” and a broad interpretation of knowing is generally applied. In fact, FATF’s 40 Recommendations on Money Laundering and Terrorist Financing and the Sixth European Union Directive on the Prevention of the Use of the Financial System for the Purpose of Money Laundering and Terrorist 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.” Several jurisdictions also use the legal principle of willful blindness in money laundering cases to prove knowledge. Courts define willful blindness as the “deliberate avoidance of knowledge of the facts” or “purposeful indifference” and have held that willful blindness is the equivalent of actual knowledge of the illegal source of funds or of the intentions of a customer in a money laundering transaction. After the events on September 11, 2001, in October 2001, FATF expanded its mandate to address countering the financing of terrorism (CFT). Both terrorists and money launderers can use the same methods to move their money in ways to avoid detection, such as structuring payments to avoid reporting and use of underground banking or value transfer systems (e.g., hawala, hundi, and fei ch’ien). However, while funds destined for money laundering are derived from criminal activities, such as drug trafficking and fraud, terrorist financing can include funds from perfectly legitimate sources. Certified Anti-Money Laundering Specialist Page 4 Version 6.5 Concealment of funds used for terrorism is primarily designed to hide the purpose for which these funds are used, rather than their source. Terrorist funds might be used for operating expenses, including paying for food, transportation, and rent, as well as for the actual material support of terrorist acts. Terrorists, similar to criminal enterprises, value the secrecy of transactions regarding their destination and purpose. In February 2012 (and amended periodically since), FATF published a revised list of its 40 recommendations, which includes a new recommendation addressing ways to prevent, suppress, and disrupt the proliferation of weapons of mass destruction (WMD). Three Stages of the Money Laundering Cycle Money laundering often involves a complex series of transactions that are difficult to separate. However, it is common to think of money laundering as occurring in three stages. Stage One: Placement—The physical disposal of cash or other assets derived from criminal activity. During this phase, the money launderer introduces the illicit proceeds into the financial system. Often, this is accomplished by placing the funds into circulation through formal financial institutions, casinos, and other legitimate businesses, both domestic and international. Examples of placement transactions include the following: Blending of funds: Commingling illegitimate funds with legitimate funds, such as placing the cash from illegal narcotics sales into a cash-intensive locally owned restaurant Purchasing significant stored value cards with currency Foreign exchange: Purchasing foreign exchange with illegal funds Breaking up amounts: Dividing cash into small amounts and depositing it into numerous bank accounts in an attempt to evade reporting requirements Certified Anti-Money Laundering Specialist Page 5 Version 6.5 Currency smuggling: Cross-border, physical movement of cash or monetary instruments Loans: Repayment of legitimate loans using laundered cash Stage Two: Layering—The separation of illicit proceeds from their source by layers of financial transactions intended to conceal the origin of the proceeds. The second stage involves converting the proceeds of the crime into another form and creating complex layers of financial transactions to obscure the source and ownership of funds. Examples of layering transactions include: 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 Stage Three: 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. The third stage entails using laundered proceeds in seemingly normal transactions to create the perception of legitimacy. The launderer, for example, might choose to invest the funds in real estate, financial ventures, or luxury assets. By the integration stage, it is exceedingly difficult to distinguish between legal and illegal funds. This stage gives a launderer the opportunity to increase his wealth with the proceeds of crime. 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. Certified Anti-Money Laundering Specialist Page 6 Version 6.5 Examples of integration transactions include: 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 is a result of any crime that generates profits for the criminals involved. It knows no boundaries, and jurisdictions in which there are weak, ineffective, or inadequate anti-money laundering (AML) and CFT legislation and regulations are most vulnerable. However, large, well- developed financial centers are also vulnerable to laundering due to the large volumes of transactions that allow the launderer to blend in, as well as the wide range of services that enable the launderer to conduct transactions in a way that is convenient. Because most launderers want to eventually use the proceeds of their crimes, their ultimate intent is to move funds through stable financial systems. Money laundering has significant negative economic and social consequences, especially for developing countries and emerging markets. The easy passage of funds from one organization to another, or relatively facile systems that allow money to be placed without raising any questions, is fertile territory for money launderers. The upholding of legal, professional, and ethical standards is critical to the integrity of financial markets. The potential macroeconomic consequences of unchecked money laundering include: Increased exposure to organized crime and corruption Undermining the legitimate private sector Weakening financial organizations Dampening effect on foreign investments Loss of control of, or mistakes in, decisions regarding economic policy Economic distortion and instability Certified Anti-Money Laundering Specialist Page 7 Version 6.5 Loss of tax revenue Risks to privatization efforts Reputation risk for the country Risk of international sanctions Social costs Reputational risk Operational risk Legal risk Concentration risk Increased Exposure to Organized Crime and Corruption Successful money laundering enhances the profitable aspects of criminal activity. 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 If money laundering is prevalent, there is more likely to be corruption. Typically, the penetration of organized crime groups in a jurisdiction is directly linked to public and private sector corruption. Criminals might try to bribe government officials, lawyers, and employees of financial and nonfinancial organizations so they can continue to run their criminal businesses. Certified Anti-Money Laundering Specialist Page 8 Version 6.5 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 One of the most serious microeconomic effects of money laundering is felt in the 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 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. Certified Anti-Money Laundering Specialist Page 9 Version 6.5 Weakening Financial Organizations Money laundering and terrorist financing can harm the soundness of a country’s financial sector. They can negatively affect the stability of individual banks and other financial organizations, such as securities firms and insurance companies. Criminal activity has been associated with several bank failures around the globe, including the closures of the first Internet bank, European Union Bank, and Riggs Bank. The establishment and maintenance of an effective AML/CFT program is usually part of a financial organization’s charter to operate; noncompliance can result not only in significant civil money penalties but also in the loss of its charter. Dampening Effect on Foreign Investments Although developing economies cannot afford to be overly selective about the sources of capital they attract, there is a dampening effect on foreign direct investment when a country’s commercial and financial sectors are perceived to be compromised and subject to the influence of organized crime. To maintain a business-friendly environment, these impedances need to be eliminated. Loss of Control of, or Mistakes in, Decisions Regarding Economic Policy Due to the significant amounts of money involved in the money laundering process, in some emerging market countries, these illicit proceeds might dwarf government budgets. This can result in the loss of control of economic policy by governments or in policy mistakes due to measurement errors in macroeconomic statistics. Money laundering can adversely affect currencies and interest rates, as launderers reinvest funds where their schemes are less likely to be detected, rather than where rates of return are higher. Volatility in exchange and interest rates due to unanticipated cross-border transfers of funds can also occur. To the extent that money demand appears to shift from one country to another because of money laundering—resulting in misleading monetary data—it can have adverse consequences for interest and exchange rate volatility. This is particularly true in economies based on the US dollar, as the tracking of monetary aggregates becomes more uncertain. Last, money laundering can Certified Anti-Money Laundering Specialist Page 10 Version 6.5 increase the threat of monetary instability due to the misallocation of resources from artificial distortions in asset and commodity prices. Economic Distortion and Instability Money launderers are not primarily interested in profit generation from their investments, but rather in protecting their proceeds and hiding the illegal origin of the funds. Thus, they invest their money in activities that are not necessarily economically beneficial to the country where the funds are located. Furthermore, when money laundering and financial crime redirect funds from sound investments to low-quality investments that hide their origin, economic growth can suffer. Loss of Tax Revenue Of the many underlying forms of illegal activity, tax evasion is perhaps the one with the most obvious macroeconomic impact. Money laundering diminishes government tax revenue and therefore indirectly harms honest taxpayers. It also makes government tax collection more difficult. This loss of revenue generally means higher tax rates than would normally be the case. A government revenue deficit is at the center of economic difficulties in many countries, and correcting it is the primary focus of most economic stabilization programs. The International Monetary Fund (IMF) has been involved in efforts to improve the tax collection capabilities of its member countries, and the Organisation for Economic Co-operation and Development (OECD) has been instrumental in moving many jurisdictions toward tax transparency. Risks to Privatization Efforts Money laundering threatens the efforts of many states trying to introduce reforms into their economies through the privatization of state-owned properties, such as land, resources, and enterprises. Sometimes linked with corruption or inside deals, a government might award a state privatization tender to a criminal organization potentially at an economic loss to the public. Moreover, while privatization initiatives are often economically beneficial, they can also serve as a vehicle to launder funds. In the past, criminals have been able to purchase ports, resorts, casinos, and other state properties to hide their illicit proceeds and facilitate their criminal activities. Certified Anti-Money Laundering Specialist Page 11 Version 6.5 Reputation Risk for the Country A reputation as a money laundering or terrorist financing haven can harm development and economic growth in a country. It diminishes legitimate global opportunities because foreign financial organizations find that the extra scrutiny involved in working with organizations in money laundering havens is too expensive. Legitimate businesses located in money laundering havens can also suffer from reduced access to markets (or might have to pay more to have access) due to the extra scrutiny of ownership and control systems. Once a country’s financial reputation is damaged, rebuilding it is very difficult. It requires significant resources to rectify a problem that could have been prevented with proper AML controls. Other effects include specific countermeasures that can be taken by international organizations and other countries and reduced eligibility for governmental assistance. Risk of International Sanctions In order to protect the financial system from money laundering and terrorist financing, the United States, United Nations, European Union, and other governing bodies may impose sanctions against foreign countries, entities, individuals, terrorists and terrorist groups, drug traffickers, and other security threats. In the United States, the Office of Foreign Assets Control (OFAC) of the US Department of the Treasury administers and enforces economic and trade sanctions. Countries can be subject to comprehensive or targeted sanctions. Comprehensive sanctions prohibit virtually all transactions with a specific country. Targeted sanctions prohibit transactions with specified industries, entities, or individuals listed on OFAC’s Specially Designated Nationals and Blocked Persons (SDN) list. Failure to comply can result in criminal and civil penalties. FATF also maintains a list of jurisdictions identified as high risk and noncooperative, where AML/CFT regimes have strategic deficiencies and do not meet international standards. As a result, FATF calls on its members to implement countermeasures against these jurisdictions, such as financial organizations applying enhanced due diligence (EDD) to business relationships and transactions with natural and legal persons from an Certified Anti-Money Laundering Specialist Page 12 Version 6.5 identified jurisdiction in an attempt to persuade it to improve its AML/CFT regime. Social Costs Significant social costs and risks are associated with money laundering. Money laundering is integral to maintaining the profitability of crime. It also enables drug traffickers, smugglers, and other criminals to expand their operations. This drives up the cost of government expenses and budgets to combat the serious consequences that result, due to the need for increased law enforcement and other expenditures (e.g., increased healthcare costs for treating drug addicts). Financial organizations that rely on the proceeds of crime face great challenges in adequately managing their assets, liabilities, and operations, as well as in attracting legitimate clients. They also risk being excluded from the international financial system. The adverse consequences of money laundering are reputational, operational, legal, and concentration risks, and they include: Loss of profitable business Liquidity problems through withdrawal of funds Termination of correspondent banking facilities Investigation costs and fines Asset seizures Loan losses Reduced stock value of financial organizations Certified Anti-Money Laundering Specialist Page 13 Version 6.5 Reputational Risk Adverse publicity regarding an organization’s business practices and associations, whether accurate or not, will cause a loss of public confidence in the integrity of the organization. As an example, reputational risk for a bank represents the potential that borrowers, depositors, and investors might stop doing business with the bank because of a money laundering scandal. The loss of high-quality borrowers reduces profitable loans and increases the risk of the overall loan portfolio. Depositors might withdraw their funds. Moreover, funds placed on deposit with a bank could be unreliable as a source of funding once depositors learn that the bank might not be stable. Depositors could be more willing to incur large penalties rather than leave their funds in a questionable bank, resulting in unanticipated withdrawals and causing potential liquidity problems. Operational Risk The potential for loss results from inadequate internal processes, personnel, or systems, or from external events. Such losses can occur when organizations incur reduced or terminated inter-bank or correspondent banking services or an increased cost for these services. Increased borrowing or funding costs are also a component of operational risk. Legal Risk There is potential for lawsuits, adverse judgments, unenforceable contracts, fines and penalties that generate losses, increased expenses for an organization, and even the closure of the organization. For example, legitimate customers could become victims of a financial crime, lose money, and sue the financial organization for reimbursement. There could be investigations conducted by regulators and/or law enforcement authorities, resulting in increased costs, as well as fines and other penalties. Also, certain contracts could be unenforceable due to fraud on the part of the criminal customer. Certified Anti-Money Laundering Specialist Page 14 Version 6.5 Concentration Risk The potential for loss results from too much credit or loan exposure to one borrower or group of borrowers. Regulations usually restrict a financial organization’s exposure to a single borrower or group of related borrowers. Lack of knowledge about a specific customer, who controls the customer, or the customer’s relationships to other borrowers can place an organization at risk in this regard. This is particularly a concern when there are related counterparties, connected borrowers, and a common source of income or assets for repayment. Loan losses can also result from unenforceable contracts and contracts made with fictitious persons. 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. Economic and social consequences of money laundering (Case example) In 2017, in Minneapolis, Minnesota, US, 21 people were indicted on sex trafficking and money laundering charges. The organized crime group (OCG) allegedly trafficked women from Thailand to cities across the US for sexual exploitation. The OCG dealt primarily in cash and conducted a sophisticated international money laundering ring to promote, redistribute, and conceal illegal profits. Funnel accounts were used to launder and route cash from cities across the US to money launderers in Los Angeles. 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 this case, funds were withdrawn in Los Angeles and then wired, transported as bulk cash, or mailed to Thailand. Through the coordinated efforts of various government and enforcement agencies, the human trafficking ring was taken down. The investigation resulted in 20 arrests, recovery of victims from active houses of prostitution, and seizures of Certified Anti-Money Laundering Specialist Page 15 Version 6.5 hundreds of thousands of dollars in cash and numerous weapons. The indictment consisted of predicate crimes including sex trafficking, fraud, human trafficking, threats of force, and money laundering. The victims in this case were primarily poor women with limited ability to speak English. They were promised a better standard of living in exchange for US$40,000 to $60,000 in bondage debt. Criminals gained information about their families and used it to threaten the women and prevent them from fleeing and becoming noncompliant. The operatives of the money laundering ring helped their victims attain fraudulent visas and travel documents by forging bank statements and creating fictitious backgrounds and employment information. In the US, victims were escorted by a member of the OCG organization to a bank and instructed to open accounts in their own names. OCG members then took control of the accounts and provided the account information to co-conspirators to coordinate deposits throughout the US. The OCG recruited money mules to carry large volumes of cash on trips to Thailand and used a hawala system to transfer money to Thailand. The OCG moved tens of millions of dollars in illegal proceeds from the US to Thailand and elsewhere using this system. Collaboration between law enforcement and the private sector is essential to identify money laundering red flags. In addition, organizations must have mechanisms in place to report suspicious activities to regulators and law enforcement in the continuous fight against financial crime. Organizations need to sufficiently train frontline officers to identify fraudulent documents and red flags associated with human trafficking. Money laundering undermines the legitimacy of the private sector and weakens the financial sector, both of which are critical for a nation’s economic growth. Criminals often exploit loopholes within various institutions to facilitate financial crimes. This method undermines the legitimate financial system and exploits various markets, such as the labor market. Money laundering also promotes crime and corruption, which slow economic growth and cause significant reputational risk. In addition, money laundering perpetuates other crimes, such as human trafficking and smuggling, fraud, and corruption. These predicate crimes exploit and victimize vulnerable individuals. Certified Anti-Money Laundering Specialist Page 16 Version 6.5 Key takeaways Money laundering promotes crime and corruption and slows economic growth. Money laundering exploits institutional loopholes and undermines the legitimate financial system and markets. Money laundering perpetuates other crimes, such as smuggling, fraud, and corruption. Collaboration among various agencies and the private and public sector is necessary to fight financial crime. AML/CFT Compliance Programs and Individual Accountability Regulatory guidance and legislation place individual accountability at the senior levels of regulated entities when they have contributed to deficiencies in AML/CFT and sanctions compliance programs. 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. Although the Yates Memo does not specifically address AML/CFT compliance, enforcement actions issued by US regulators against financial organizations demonstrate a continued focus on AML/CFT compliance deficiencies. In the United Kingdom, the Financial Conduct Authority (FCA) published final rules for the Senior Managers and Certification Regime (SM&CR), which are Certified Anti-Money Laundering Specialist Page 17 Version 6.5 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 organizations’ boards of directors or senior officers to annually certify to the DFS that they have taken all steps necessary to comply with transaction monitoring and filtering program requirements. Although the law may seem New York-specific on its face, numerous foreign banks are subject to the law because they operate in New York. Specifically, the law covers banks, trust companies, private bankers, savings banks, and savings and loan associations chartered pursuant to the New York Banking Law, as well as all branches and agencies of foreign banking corporations Certified Anti-Money Laundering Specialist Page 18 Version 6.5 licensed pursuant to the Banking Law to conduct banking operations in New York. Moreover, the law also applies to nonbank financial organizations with a banking law license, such as check cashers and money transmitters. Individual accountability and consequences (Case example) In August of 2020, the UK’s Solicitors Disciplinary Tribunal suspended and fined lawyer Steven David Kinch for repeatedly breaching his professional anti-money laundering obligations. It is well-known that several legal options exist globally to impose corporate liability. For example, in vicarious liability, an organization could be found criminally liable for the acts of its employees. There is, however, increasing focus on individual liability for professionals when their behaviors and actions encourage, tolerate, or lead to regulatory violations or criminal activity. Individuals are now expected to conduct business responsibly and prevent AML/CFT violations. Individual professionals are increasingly being held accountable for sector- specific crimes, through prosecution 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. On August 12, 2020, the UK Solicitors Disciplinary Tribunal suspended lawyer Steven David Kinch for repeatedly breaching his professional anti-money laundering obligations. Kinch failed to check source of funds and perform customer and third-party due diligence when establishing new business relationships. He did not review transactions while doing business with a company incorporated in Sinaloa, Mexico. In fact, he stated that transactions involving foreign nationals and overseas residents, in a location where he had no connection or profile himself, did not raise red flags for him. He admitted that the nature of the transactions being conducted was out of his expertise. Kinch’s actions amounted to serious misconduct with high culpability and harm involving significant monies over a three-year period. Kinch was suspended from practice as a lawyer for 15 months and fined £5,000, after which he would be banned from practicing as a sole practitioner, manager, or owner of an authorized or recognized body. He was also forbidden from acting as a compliance officer for legal practice or finance and administration for three years. Certified Anti-Money Laundering Specialist Page 19 Version 6.5 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. Key takeaways Regulators use powers to sanction professionals who commit crimes from their sectors. Criminal courts can impose a range of sanctions against guilty professionals, including prosecution and imprisonment. Accountability for money laundering offenses in a professional capacity can have devastating financial, personal, and reputational consequences for individuals. Methods of Money Laundering Money laundering is a constantly evolving activity; it must be continuously monitored in all its various forms for countermeasures to be timely and effective. Illicit money can move through numerous commercial channels, including products such as checking, savings, and brokerage accounts; loans; wires and transfers; and financial intermediaries, such as trusts and company service providers, securities dealers, banks, and money services businesses. Money launderers operate in and around the financial system in a manner that best fits the execution of the scheme to launder funds. Since many governments around the world have implemented AML/CFT obligations for the banking sector, a shift in laundering activity into the nonbank financial sector and nonfinancial businesses and professions has risen. 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 Page 20 Version 6.5 effective and relevant. This Study Guide refers often to these typologies because they serve as clear examples of how money can be laundered through different methods and in different settings. Certified Anti-Money Laundering Specialist Page 21 Version 6.5 Banks and Other Depository Institutions Electronic Transfer of Funds Banks have historically been and continue to be important mechanisms in all three stages of money laundering. This section outlines some specific areas of interest and concern for money laundering through banks and other depository institutions. 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. Trillions of dollars are transferred in millions of transactions each day, because it is one of the fastest ways to move money. 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. Money launderers also use electronic transfers of funds in the layering stage of the laundering process. The goal is to move the funds from one account to another, from one bank to another, and from one jurisdiction to another with each layer of transactions—making it more difficult for law enforcement and investigative agencies to trace the origin of the funds. To avoid detection at any stage, money launderers can take basic precautions, such as varying the amounts sent, keeping the transfers relatively Certified Anti-Money Laundering Specialist Page 22 Version 6.5 small and under reporting thresholds, and, when possible, using reputable organizations. The processes in place to verify electronic transfers of funds have been tightened. 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. However, no system is foolproof. 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. Certified Anti-Money Laundering Specialist Page 23 Version 6.5 Remote Deposit Capture 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. This product offers increased convenience for customers because they no longer need to make a trip to the bank or an ATM to deposit checks. It is common for banks to allow individuals to deposit photos of checks taken with mobile phones. RDC decreases the cost to process checks for banks and is part of a gradual transition away from paper-based transactions. RDC is also increasingly used in correspondent banking, because it streamlines the deposit and clearing process. Correspondent banking is the provision of banking services by one bank to another bank. The convenience provided by RDC can be abused by money launderers because they no longer need to go into the bank and risk detection. Money launderers who have RDC capabilities can move checks with ease through an account and possibly set up multiple imaging devices (e.g., multiple scanners and permitted mobile phones), enabling them to allow other criminals to process checks through the system. A money launderer might even arrange for someone else to set up an account and provide him with the ability to deposit checks. Without proper controls, RDC can also be misused to facilitate violations of sanctions requirements, for example, by processing transactions in a sanctioned country. Although RDC can be used for money laundering, the more prominent risk relates to fraud. 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. To control the risks associated with RDC, efforts must be made to integrate RDC processing into other controls, such as monitoring and fraud-prevention systems. In fact, this integration should occur with any new product offered by an organization. This includes ensuring that items submitted via RDC are reviewed for sequentially numbered checks and money orders without payees, that the total volume of activity processed for an account via RDC is incorporated into the overall transaction monitoring system, that appropriate limits are placed on a customer’s ability to deposit checks via RDC, that the Certified Anti-Money Laundering Specialist Page 24 Version 6.5 product is offered to customers to whom it is appropriate, and that appropriate action is taken quickly when fraud is detected via RDC items. Correspondent Banking 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. The amount of money that flows through correspondent accounts can pose a significant threat, because the correspondent processes large volumes of transactions for the respondent's customers. 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. Before establishing correspondent accounts, a bank should identify the respondent bank’s owners and understand the nature of its regulatory oversight. According to the Wolfsberg Group, a bank’s due diligence on a respondent bank should be based on the respondent’s risk profile and the nature of the business relationship with that respondent bank. Due diligence should address specific risk indicators, such as the respondent bank’s geographic risk, ownership and management structures, customer base, and products and services offered. Furthermore, the determination of the level and scope of due diligence that is required on a respondent bank should be made after considering the relationship between the respondent bank and its ultimate parent (if any). If the parent does not exercise substantial and effective control, due diligence should be conducted on both the respondent Certified Anti-Money Laundering Specialist Page 25 Version 6.5 and the parent. The Wolfsberg Group has a Correspondent Banking Due Diligence Questionnaire that provides a standardized set of questions that can be used to perform due diligence. Low-risk respondent banks might be offered a broad range of services, such as cash management—for example, interest-bearing accounts in a variety of currencies, international funds transfers, check clearing, payable-through accounts, and foreign exchange. High-risk respondent banks might be restricted to noncredit cash-management services. The risks of correspondent banking include: The correspondent does not or cannot conduct typical due diligence to know the customers of the respondent (Know Your Customer’s Customer). The correspondent does not have data on respondent transactions that typically enable transaction monitoring controls to identify unusual patterns. The correspondent can identify the respondent’s regulators, but not always the degree of supervision to which the respondent is subject. The correspondent might have limited information on the respondent’s anti-financial crime controls—perhaps through a questionnaire—yet still needs to rely on the respondent to have and use sufficient, effective controls on its customers. Some respondents are, themselves, correspondents to third banks, a practice called “nesting.” Nested accounts further shield correspondent banks from knowing the parties involved. Certified Anti-Money Laundering Specialist Page 26 Version 6.5 Correspondent banking (Case example: Methods of money laundering) In July 2020, the New York State Department of Financial Services (DFS) issued Deutsche Bank AG, its New York branch, and Deutsche Bank Trust Company Americas (collectively Deutsche Bank) a US$150 million penalty. DFS cited significant compliance failures in connection with the bank’s relationship with disgraced American financier Jeffrey Epstein and its correspondent banking relationships, including those with Danske Bank Estonia (Danske) and FBME Bank. In the case of Danske Bank Estonia and FBME bank, Deutsche Bank was found to have failed to monitor these banking clients, despite rating its correspondent banking relationships with them both as high risk. Billions of dollars in suspicious transactions passed through Deutsche Bank’s accounts and, in the case of Danske, significant flows were linked to money laundering by Russian oligarchs. Deutsche Bank’s internal compliance controls had flagged concerns with FBME as early as 2005 and with Danske Bank Estonia from the start of the relationship in 2007. However, these concerns did not result in timely actions to address the identified risks. In 2005 Deutsche Bank rated FBME bank as high risk, yet Deutsche Bank identified 826 suspicious transactions associated with FBME Bank after that rating. FBME Bank declined to respond to Deutsche Bank’s queries regarding the ultimate beneficial owners (UBOs) of FBME Bank’s corporate clients. In one instance, the US authorities determined that the UBO was a Russian businessman associated with a Syrian military research and development organization. Deutsche Bank exited the relationship in 2014 after the Financial Crimes Enforcement Network (FinCEN) mandated all banks in the US to cease relationships with the bank. Deutsche Bank was repeatedly warned of AML issues linked to nonresident accounts at Danske Estonia, including those with links to Russia. In 2010 Deutsche Bank increased the risk score for the relationship with Danske Estonia to the highest level because it continued to see no improvements in the bank’s nonresident portfolio. In 2013 and 2014, Deutsche Bank compliance staff recommended that the relationship be exited, but no action was taken until 2015. Certified Anti-Money Laundering Specialist Page 27 Version 6.5 Over US$150 billion was routed from Danske Bank Estonia through Deutsche Bank. Deutsche Bank identified 340 suspicious transactions linked to Danske Bank Estonia’s US correspondent accounts with Deutsche Bank. The DFS determined that Deutsche Bank’s failures were caused by inadequate AML/CTF policies and procedures for its correspondent banking accounts. The correspondents failed to establish sufficiently specific criteria to trigger termination of relationships, provide practical guidance to staff on how to implement verification of respondents’ UBOs, and act on identified red flags. Key takeaways 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. o 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. Certified Anti-Money Laundering Specialist Page 28 Version 6.5 Payable-Through Accounts 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). In a traditional correspondent relationship, the respondent bank takes orders from its customers and passes them on to the correspondent bank. In these cases, the respondent bank has the ability to perform some level of oversight prior to executing the transaction. PTAs differ from typical correspondent accounts in that the foreign bank’s customers have the ability to directly control funds at the correspondent bank. PTAs can have a virtually unlimited number of subaccount holders, including individuals; commercial businesses; finance companies; exchange houses, or casas de cambio; and even other foreign banks. The services offered to subaccount holders and the terms of the PTAs are specified in the agreement signed by the correspondent and respondent banks. PTAs held in the names of respondent banks often involve checks encoded with the bank’s account number and a numeric code to identify the subaccount, which is the account of the respondent bank’s customer. Sometimes, however, the identification of the subaccount holders is not given to the correspondent bank. 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 Certified Anti-Money Laundering Specialist Page 29 Version 6.5 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 Use of payable-through accounts (Case example: Methods of money laundering) Payable-through accounts (PTA) are considered high risk because they can be used to facilitate money laundering, terrorist financing, and sanctions evasion. The misuse of PTAs significantly declined after many financial institutions implemented strict controls regarding their use by correspondent banking customers, based on individual and country risk. Organizations also established stringent processes and procedures concerning the scope and nature of permitted PTA activities, due diligence requirements, and associated disclosures. Recent cases of PTA misuse are rare, but an historical case provides a clear example. Lombard Bank Ltd, a bank licensed by the South Pacific island of Vanuatu, opened a correspondent PTA at American Express Bank International (AEBI) in Miami, Florida. AEBI permitted the bank to have multiple authorized signatures on the account. Lombard customers had no relationship with AEBI. However, Lombard offered its Central American customers nearly full banking services through its PTA at AEBI. The customers were even given checkbooks that allowed them to deposit and withdraw funds from Lombard’s PTA. This is how the misuse of PTAs worked: Lombard’s PTA subaccount holders brought cash deposits to Lombard representatives in four Central American countries. Lombard couriers would then transport the cash to the bank’s Miami affiliate, Lombard Credit Corporation, for deposit in the PTA at AEBI. Lombard customers also brought cash to the Lombard office in Miami, which was located in the same building as AEBI. That cash was also deposited in AEBI’s PTA. For two years, ending in June 1993, as much as US$200,000 in cash was received by Lombard’s Miami affiliate on 104 occasions. AEBI did not know the source of the cash being deposited by Lombard’s customers into the PTA. Certified Anti-Money Laundering Specialist Page 30 Version 6.5 This fact raised significant AML/CFT compliance concerns related to KYC, due diligence, recordkeeping, and regulatory filing requirements. In 1994, AEBI paid a multi-million-dollar fine for its connection to money laundering by a Mexican drug cartel. The organized crime group imported significant volumes of Colombian-origin drugs into the US and used AEBI's PTAs to launder the money. Key takeaways PTAs often do not know the source of funds and customers’ identities. Because PTAs can be offered to an unlimited number of subaccount holders, the exposure of correspondent banks to financial crime is very high. When correspondent banks offer PTAs, they should set clear limits on their use, depending on internal policies and the risk profile of the respondent. Concentration Accounts 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. Certified Anti-Money Laundering Specialist Page 31 Version 6.5 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 Private banking is an extrem
