Financial Crimes and Individual Accountability PDF

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 fo...

In 2014, the Financial Crimes Enforcement Network (FinCEN) of the US Department of the Treasury and the US financial intelligence unit (FIU) issued an advisory to financial organizations, reminding them to maintain a strong culture of compliance and specifying that the entire staff is responsible for AML/CFT compliance. This advisory was followed in 2015 by a memorandum on "Individual Accountability for Corporate Wrongdoing" from the US Department of Justice's Deputy Attorney General, Sally Quillian Yates. The Yates Memo, as it is often referred to, reminds prosecutors that criminal and civil investigations into corporate misconduct should also focus on individuals who perpetrated the wrongdoing. Further, it notes that the resolution of a corporate case does not provide protection to individuals from criminal or civil liability. In the United Kingdom, the Financial Conduct Authority (FCA) published final rules for the Senior Managers and Certification Regime (SM&CR), which are designed to improve individual accountability within the banking sector. In relation to financial crime, the SM&CR requires a financial organization to give explicit responsibility to a senior manager, such as an executive-level money laundering reporting officer (MLRO), for ensuring that its efforts to combat financial crime are effectively designed and implemented. The senior manager is personally accountable for any misconduct within the organization's AML/CFT regime. The New York State Department of Financial Services (DFS) issued a Final Rule requiring regulated organizations to maintain "transaction monitoring and filtering programs" reasonably designed to monitor transactions after their execution for compliance with the Bank Secrecy Act (BSA) and AML laws and regulations, including suspicious activity reporting requirements, and prevent unlawful transactions with targets of economic sanctions administered by OFAC. This Final Rule, which went into effect on January 1, 2017, includes very specific requirements concerning the implementation of transaction monitoring systems, including: Risk-Based Models: Models should be risk-based and commensurate with the organization's own risk assessment and profile. Model Performance Calibration: Organizations must perform ongoing analysis and testing of the AML/CFT models to assess the scenario logic, performance, model technology, assumptions, and model parameter settings. End-to-End, Pre- and Post-Model Implementation Testing: End-to-end testing is required to ensure rules are validated and data are complete and accurate. This Final Rule also requires regulated Individual professionals are increasingly being held accountable for sector specific crimes, through prosecution (accusing and bringing to trial) of linked financial crime offenses such as fraud. They may also be held accountable for their organizations' AML/CFT failures. When prosecuted, individuals have been imprisoned, fined, suspended, or debarred from professional activities in regulated sectors. Compliance professionals must recognize the risks and specific accountability that they personally face in their work environments. They should ensure that they are fully up-to-date with legislative and regulatory requirements specific to their role and sector. If they have any concerns regarding integrity or behavior within their firm or business, they should escalate issues through the appropriate formal reporting or whistleblowing channels and document the fact. Methods of Money Laundering Illicit money can move through numerous commercial channels, including products such as checking, savings, and brokerage accounts; loans; wires (Electronic transmission of funds among financial institutions on behalf of themselves or their customers. Wire transfers are financial vehicles covered by the regulatory requirements of many countries in the anti-money laundering effort) and transfers (paypal); and financial intermediaries, such as trusts and company service providers, securities dealers, banks, and money services businesses. FATF and FATF-style regional bodies (FSRBs) publish periodic typology reports to monitor changes and better understand the underlying mechanisms of money laundering and terrorist financing. The objective of these reports is to provide information on the key methods and trends in these areas and to ensure that the FATF 40 Recommendations remain effective and relevant. 1. Money Laundering methods in Banks Electronic transfer of funds An electronic transfer of funds is any transfer of funds that is initiated by electronic means, such as internet-based transfers, an automated clearing house (ACH), an automated teller machine (ATM), mobile telephones, and other devices. Electronic funds transfers can happen within a country and across borders. Systems such as the US Federal Reserve wire network, or Fedwire, the Society for Worldwide Interbank Financial Telecommunication (SWIFT), and the Clearing House Interbank Payments System (CHIPS) move millions of wires and transfer messages daily. As such, illicit fund transfers can be easily hidden among the millions of legitimate transfers that occur each day. For example, money launderers might initiate unauthorized domestic or international electronic transfers of funds---such as ACH debits or cash advances on a stolen credit card---and place the funds into an account established to receive the transfers. Another example is stealing credit cards and using the funds to purchase merchandise that can be resold to provide the criminal with cash. To avoid detection at any stage, money launderers can take basic precautions, such as varying the amounts sent, keeping the transfers relatively small and under reporting thresholds, and, when possible, using reputable organizations. Transaction monitoring software providers have developed sophisticated algorithms to help detect and trigger alerts that might indicate money laundering or other suspicious activity using electronic transfers of funds. Following are some indicators of money laundering using electronic transfers of funds: Funds transfers occur to or from a financial secrecy haven or high-risk geographic location without an apparent business reason or when the activity is inconsistent with the customer's business or history. Large incoming funds transfers are received on behalf of a foreign client, with little or no explanation or apparent reason. Checks and money orders are used to receive many small, incoming transfers of funds or to make deposits. Upon credit to the account, all or most of the transfers or deposits are wired to another account in a different geographic location in a manner inconsistent with the customer's business or history. Funds activity is unexplained, repetitive, or reveals unusual patterns. Payments or receipts are received that have no apparent link to legitimate contracts, goods, or services. Funds transfers are sent or received from the same person to or from different accounts. Remote deposit capture (RDC) is a product offered by banks that allows customers to scan a check and transmit an electronic image to the bank for deposit. The convenience provided by RDC can be abused by money launderers because they no longer need to go into the bank and risk detection. Because RDC minimizes human intervention in reviewing cleared items, it decreases the ability to identify potential fraud indicators, such as an altered check and multiple deposits of the same item. Often, the resulting fraud is not prevented but rather detected after it has already occurred. To mitigate risk: Integrate RDC in monitoring systems and fraud prevention systems Ensure items submitted through RDC are reviewed for sequentially numbered checks and money orders without payees Total volume of activity processed for an account via RDC is incorporated into the overall transaction monitoring Appropriate limits are placed on a customer's ability to deposit checks via RDC. Product is offered to customers' to whom it is appropriate Action is taken quickly when fraud is detected Correspondent banking is an arrangement whereby one bank acts as the agent of another bank in a foreign country. A local, or respondent, bank has customers who want banking services in a foreign country, so it contracts with a foreign correspondent bank to provide those services. By establishing multiple correspondent relationships, a local bank can undertake international financial transactions for itself and its customers in jurisdictions where it has no physical presence. Large international banks often act as correspondents for thousands of other banks. The indirect nature of correspondent banking relationships means that the correspondent bank provides services for individuals and entities for which it has neither verified the identities nor obtained any firsthand knowledge. Correspondent banking is vulnerable to financial crime, especially because correspondent banks do not know the customers of the respondent directly and rely on the respondent bank's internal controls. In addition, less information is available to help the correspondent recognize suspicious activity. Some respondents are, themselves, correspondents to third banks, a practice called **"nesting."** Nested accounts further shield correspondent banks from knowing the parties involved. Senior management support is essential for compliance officers to effectively execute their duties. Organizations that ignore red flags associated with a customer relationship can suffer significant reputational, regulatory, and financial consequences. Nested accounts are high-risk because Correspondent banks should include periodic reviews of their respondent bank's AML/CFT framework as part of their larger AML/CFT framework. Correspondent banks need to undertake risk assessments and ensure that their policies and procedures regarding respondent bank relationships and their transactions are adequate to mitigate against identified risks, especially in high-risk relationships. In some correspondent relationships, the respondent bank's customers are permitted to conduct their own transactions---including sending wire transfers, making and withdrawing deposits, and maintaining checking accounts--- through the respondent bank's correspondent account without first clearing the transactions through the respondent bank. Those arrangements are called payable-through accounts (PTAs). Elements of a PTA relationship that can threaten a correspondent bank's AML/CFT defenses include the following: PTAs with foreign institutions licensed in offshore financial service centers with weak or under-developed bank supervision and licensing laws PTA arrangements in which the correspondent bank regards the respondent bank as its sole customer and fails to apply its customer due diligence (CDD) policies and procedures to the customers of the respondent bank - PTA arrangements in which subaccount holders have currency deposit and withdrawal privileges PTAs used in conjunction with a subsidiary, representative, or other office of the respondent bank, which might enable the respondent bank to offer the same services as a branch without being subject to supervision Risk mitigation: PTA's are not prohibited Only offer PTA's after developing and maintaining policies and procedures designed to guard against the possible improper or illegal use of PTA's facilities by foreign banks and their customers' Identify the ultimate users, review the foreign banks procedures, review local requirements of the foreign bank on transaction monitoring and monitor together the account activities reporting suspicious or unusual activity. Concentration accounts are internal accounts established to facilitate the processing and settlement of multiple or individual customer transactions within the bank, usually on the same day. They do this by aggregating funds from several locations into one centralized account (i.e., the concentration account). Concentration accounts are also known as special-use, omnibus, settlement, suspense, intraday, sweep, and collection accounts. They are frequently used to facilitate transactions for private banking, trust and custody accounts, funds transfers, and international affiliates. Money laundering risks can arise in concentration accounts when the customer-identifying information, such as name, transaction amount, and account number, is separated from the financial transaction. When separation occurs, the audit trail is lost, and accounts can be misused or administered improperly. Banks that use concentration accounts should implement adequate policies, procedures, and processes covering operation and recordkeeping for these accounts, including: Requiring dual signatures on general ledger tickets Prohibiting direct customer access to concentration accounts Capturing customer transactions in the customers' account statements Prohibiting customers' knowledge of concentration accounts and their ability to direct employees to conduct transactions through these accounts Retaining appropriate transaction and customer identification information Frequently reconciling accounts by an individual who is independent of the transactions Establishing a timely discrepancy-resolution process Identifying and monitoring recurring customer names