Chapter 1 (Introduction) & Chapter 2 (Risk And Methods) Flashcards Preview

1. There is usually little currency involved.
2. It's an industry run by computer transfers and paper. 
3. Acquiring additional profit from related securities fraud.
4. Accounts can be used to hold funds and not trade, avoiding banking channels with stricter controls.

1. Its international nature
2. The speed of transactions
3. Ease of conversion of holdings to cash without significant loss to principal
4. The routine use of wire transfers from, to, and through multiple jurisdictions.
5. The competitive, commission-driven environment makes it easy to disregard source of client funds
6. Ability to conceal identities of true beneficaries through accounts as nominees or as trustees.

By using securities for layering.

Concealing or obscuring the  source of funds.

• Embezzlement
• Insider trading
• Securities fraud (misrepresenting information investors use to make decisions)
• Market manipulation (artificial inflation/ deflation of stock prices).

 The entry of matching buys and sells in particular securities through different companies, which creates the illusion of trading. 

Because they are proficient cash generating businesses and can provide a ready made excuse for recently acquired wealth with no apparent legitimate source.

Placement stage -- converting from cash to cheques.

• Launderer buys chips with illicit cash.
• Requests repayment by cheque drawn on the casino's account.
• Oftens says he'll be traveling to another country where they have an establishment and asks that credit be made available there.
• Cheque would be drawn on a different jurisdiction.

The launderer gambles illicit money in a way that's reasonably sure to recover his stake. Takes payment in cheques.

This makes it hard to prove Money Laundering as the funds are actually proceeds from gambling.

Although the US patriot act requires certain dealers (like precious metals, stones and jewels) to establish an AML program, many jurisdictions still do not regulate the industry.

1. Has a high intrinsic value
2. It's in compact form which makes it easy to transport
3. Can be bought and sold easily, often with anonymity
4. More accepted than precious stones because it can be melted down into many forms
5. Holds its value regardless of form
6. Religious & cultural significance adds to demand.

Invoices are created for transactions that never took place, and the aperwork is used to justify transferring funds to pay for fake shipments.

Variations include over-billing or under-billing.

• One person asserts ownership of precious metals and delivers them for refining by a dealer.
• He directs payment to be made to another person.
• This converts the form of illicit funds.
• And it transfers ownership of the illicit funds.

• These are accounts maintained by world-scope precious metals dealers to hold precious metals for customers.
• They are vulnerable because a customer in one country can deliver gold scrap for refining, establish a gold credit in the pool account and then instruct payment to a third party based on the credit.

• Anonymous agents at art auction bid millions on art.
• Payment is wired to auction house from the agent's principals account in offshore havens.
• Art can later be resold.

1. Require vendors to provide names/addresses, sign form that says art was not stolen and can be resold.
2. Verify the identities/addresses of new vendor & be suspicious of items with non-market prices.
3. Check www.artloss.com if item is believed stolen.
4. Look critically at customers paying in cash. Avoid cash transactions.
5. Be aware of Money Laundering regulations.
6. Appoint a senior staff member to whom employees can report suspicious activities.

• Provides a reason to purchase high priced airline tickets, hotels and other vacation related expenses.
• Launderer can transfer ownership of illicit funds by purchasing high priced airline ticket for third party who later asks for a refund.
• Provides a structuring platform by wiring small amounts to avoid record keeping requirements, especially from foreign countries.

1. Structuring cash deposits below reporting thresholds, purchasing vehicles with sequentially numbered checks/ money orders.
2. Successive trading in vehicles to produce complex layers of transactions.
3. Accepting third party payments especially from jurisdictions with weak ML controls.

Launderer trades in expensive cars for cheaper models and pays the difference in cheques, not cash.

These professionals can either block
or facilitate the entry of illegitimate money
into the financial system.

• identify clients
• conduct due diligence on their clients
• maintain records
• prohibit tipping off clients who are subjects of suspicious transaction reports

1. Creating corporate vehicles or other complex legal arrangements, such as trusts to confuse the link between proceeds of crime and the perp.

2. Buying or selling property for layering or for the final investment (integration).

3. Performing financial transactions or operations on behalf of the client.

4. Financial and tax advice to reduce tax & other liabilities.

5. Provide introductions to financial institutions.

Because they maintain confidential relationships with their clients.

• Deferring regulation until adequate education is conducted.
• Require due controls & due diligence on non-priveleged communications.
• Using a joint government-private sector body to regulate & register lawyers who engage in financial activities
• Devising a hybrid approach like "guidance notes" or best practice standards.

Advisors regarding the value of trading futures contracts or commodity options, or who issue reports about them. 

This gives them the ability to see activity that suggests money laundering. 

1. Commodity Trading Adviser (advises on buying/selling futures & options)
2. Futures Commission Merchant (accepts orders for contracts & funds to execute them).
3. Introducing broker-dealers in commodities (accepts orders but not funds)
4. Guaranteed introducing broker (has exclusive agreement with a futures commision merchant obligating them to assume responsibility for the introducing broker's performance).
5. Investment Adviser (advice on securities & investments, manages client assets).

1. Commodities (foods, metals, etc) traded in large quantities as futures contracts.
2. Commodity pools which combines funds from various members to trade in futures or options contracts.
3. Futures/ futures contracts: to buy or sell a quantity of a commodity at a future date & set price.
4. Options/options contracts: the right, not the obligation, to buy or sell a set amount of something like a commodity at a set price after a set date.
5. Omnibus accounts: accounts held by one futures commission merchant for another, combining transactions and disguising identities.

1. Withdrawal of assets thru transfers to unrelated accts or high risk counties.
2. Frequent additions to or withdrawals from accounts.
3. Cheques/wires from unrelated third parties.
4. Custodial arrangement allowing clients to remain anonymous.
5. Layering by transfers to advisers to accounts at other financial institutions.
6. Investing illegal proceeds for a client.
7. Movement of funds to disguise origin.

Persons & entities that participate in the creation, administration, or management of corporate vehicles.

1. Acting as formation agent of legal persons.

2. Acting as or arranging a director or secretary of a company, partner of a partnership, or a similar.

3. Providing a registered office, business address, or correspondence for a company, partnership, etc.

4. Acting or arranging a trustee of an express trust.

5. Acting or arranging a nominee shareholder for another person.

Because they are the tools through which launderers operate. With diligence they can reduce the risk of abuse of corporate vehicles.

Regulations should stipulate how the service provider conducts its business, including how directors selected by the provider are to meet their obligations.

• Investing illicit capital in real estate is a classic method, particularly in stable countries
• Real property can provide housing for criminals, and rural areas ideal for growing drugs
• Proceeds of crime can be funneled through property using deposits, down payments, mortgages, lawyer trust accts, etc.
• Nominees hide beneficial owners

• Buying/ selling real estate during the layering phase
• Investment in things like tourist/ holiday complexes during the integration phase

• They hold large amounts of funds in trust.
• Contain many diverse transactions making it easy to hide & use to complicate paper trails.
• Multiple deposits of cash under the threshold for fake closings don't look suspicious.
• Disbursement of funds can look legitimate
• FI's usually treat like any business account but with sometimes less strictly.

• Launderer finds a cooperative property seller
• Purchases below the actual value of the property
• Seller takes difference under the table
• After holding property for a time, they can resell it at actual price

• Criminal provides associate with specific amount of illegitimate money.
• Associate provides loan or mortgage back to criminal in the same amount with full documentation.
• Scheduled payments are made on the loan.
• Creates an illusion funds are legitimate.

Manipulated trade prices represent ML, tax evasion, or terrorist financing.

• Under valuing exports is the most popular because the government watches imports closely due revenues generated.
• Little attention is paid paid to export pricing and so can be exploited

• Disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimize their illicit origins.
• Achieved by misrepresentation of the price, quantity, or quality of imports/ exports

• Use illicit funds to purchase high valued products.
• Export them at very low prices to a colluding foreign partner.
• The partner sells in the open market for their true value.
• To increase appearance of legitimacy, often uses FIs for Letters of Credit, etc.

• Illicit money is purchased by foreign country peso brokers.
• Gets deposited in the brokers' western bank accounts in the country it was derived in.
• Brokers sell checks and wire transfers drawn on these accts to legitimate businesses to purchase goods/ services.
• Avoids cost of buying that country's currency, taxes, and duties.
• Reduces the risk of money seizures, and is fast 

• Watch for multiple chequing accounts opened at US banks by foreign nationals.
• Be aware of increases in the movement of dollars through correspondent accounts at foreign banks.

1. Columbian Cartel sells drugs to US for dollars.
2. Contacts peso broker as an intermediary.
3. Broker takes drug dollars in exchange for pesos.
4. Broker's US employees deposit into banking system.
5. Broker offers dollars to Columbia importer in exchange for pesos.
6. Importer uses drug dollars to buy US goods which are shipped to Columbia.

1.  Greater difficulty matching customer with the provided identification documents.
2. Elimination of face-to-face contact makes it more difficult to know who is actually controlling the account.
3. Ease of access enables cross border movements of funds from any physical location.
4. Enables execution of multiple complex transactions in a short time frame.

1. Establish ISP log files with traffic data that produces internet protocol numbers & phone numbers used for server connections.
2. Info collected through servers shared with law enforcement.
3. Info collected should be maintained for a year.
4. ISPs should record identification info on those who transit through their servers.

Platforms for holding, reconciling, and transferring rights to assets in different forms around the world can be used by criminal organizations to create shadow systems to accept "deposits" as warehouses for cash or bulk commodities.

Transfers of assets can take place around the world many times a day. 

1. Person-to-person electronic transfers bypass currency reporting regulations.
2. ATM withdrawal transactions can effectively move cash around the world.

• Transactions are primarily performed through credit cards.
• The offshore location of many internet gambling sites make locating & prosecuting difficult.
• Offshore governments profit from licensing & sharing in profits.
• Internet casinos use reputable correspondent banks which makes tracing money difficult.

1. Offers a potential cross-border transfer method.
2. Portable
3. Valuable
4. Exchangeable
5. Anonymous
6. Can be purchased/loaded by one person and used by another person anywhere.
7. Cards may utilize a pooled account by the issuer.

1. Anonymous card holders
2. Anonymous funding
3. Anonymous access to funds
4. High value limits or no limits on number of cards that can be acquired
5. Global access to cash through ATMs
6. Offshore card issuers may not observe laws in all jurisdictions
7. Substitute for bulk- cash smuggling

They actually store funds on integrated circuit chips, whereas payment cards store account information.

1. Limit the capacity and functions of smart cards  like maximum value, turnover limits, and number of cards.
2. Link new payment technology to banks and bank accounts.
3. Require standard documentation and record keeping procedures to facilitate examination.
4. Allow examination & seizure of records by authorities
5. Establish international standards for these measures.

• A Shelf Company is a corporation that has no activity, but was created and put on the shelf.
• It's later used and sold to someone who would prefer to have a previously registered corporation than a new one

A Shell Company has no significant assets or operations at the time of incorporation.

• Legitimate purposes would include business finance, mergers and acquisitions, estate and tax planning).
• Illegitimate purpose is to conceal source of funds and ownership of the corporate vehicle.

1. Convert illicit cash to alternative assets.
2. Create perception that illicit funds were generated from a legitimate source.
3. Create an illusion of respectability from legitimate employment.-
4. Conceal ownership with nominee owners & directors, or as a subsidiary of a corporate from a tax haven.

Those with a high volume of cash transactions like:

• retail stores
• restaurants
• bars
• video arcades
• gas stations
• food markets

• Lending money between criminally controlled firms.
• Paying fictitious expenses or salaries.
• Paying for fictitious goods & services.
• Purchasing real estate with proceeds of crime
• Disguising payments as a mortgage issued by shell company.

1. Nominees as owners/directors.
2. Layering ownership & funds between multiple companies.
3. Loans between related companies.
4. False expenses/invoicing
5. Sale of business to create legitimate capital.
6. Buying/Selling related companies, especially in tax havens to repatriate money secreted out of country.
7. Paying fictitious salaries for legitimacy of both money and people.

• Offshore corporation orders goods from subsidiary in another country.
• Payment sent in full to bank acct of subsidiary
• Payment is actually repatriation of illicit money hidden out of country.
• A high purchase price also shows a low level of profits for taxation purposes.

A legal relationship set up by one person (the settlor) where assets have been placed under control of another (the trustee) for benefit of one or more persons (beneficiaries) or for a specific purpose.

• Can be first step in converting illicit cash to less suspicious assets.
• Can hide criminal ownership of funds & assets.
• Links vehicles & techniques like real estate, shell & active companies, nominees, deposit & transfer of criminal funds.
• Hide assets from legitimate creditors or judicial seizure.
• Payments to beneficiaries to bypass justification.

• They serve as trustees holding money or assets for clients & administering affairs of a client
• Sometimes placed in lawyer's general trust account in name of client, nominee, or company.
• Used in the normal course of collecting and disbursing payments for real property on behalf of clients

They belong to the bearer, there is no registry of ownership. Transfer done by physically handing over bonds. This disguises legitimate ownership including in tax optimization purposes. 

Ask questions about the identity of beneficial owners before issuing, accepting or creating bearer shares and trusts, and keep registries with this info and share it with law enforecement when appropriate.

Unconditional negotiable items that an institution must pay out to the holder rather than a payee on the order itself.  FI's are not obligated to verify identity of presenter unless it exceeds a threshold.

A non bearer cheque may become a bearer instrument to an individual who presents it when original payee has endorsed it.

The origin of funds. In Terrorist Financing money is used for illegal political purposes but not necessarily derived from illicit proceeds.

Money Laundering always involves proceeds from illegal activity and attempts to enable funds to be used legally.

Terrorists need to disguise its link between it and it's legitimate funding sources. Accomplished by similar methods:

• cash smuggling
• structuring
• purchase of money instruments
• wire transfers
• debit/ credit cards - funds also used for mundane expenses

1. Accounts opened with cash or equivalents ($3-$5k)
2. Identification to open accts were from visas issued by foreign governments.
3. Accounts were opened within 30 days of entering US.
4. All normal accounts with debit cards.
5. Some were joint accounts.
6. Addresses were not permanent, but mail boxeses & changed frequently.
7. Often used the same addresses & phone numbers. 
8. No savings or SDBs were opened.
9. Opened accounts at branches of large well-known banks.
10. Twelve hijackers opened accounts at the same bank.

1. Small wires sent & received from/to foreign countries  (UAE, Saudi Arabia, Germany).
2. Numerous attempts to withdraw cash in excess of debit card limit.
3. High percentage of withdrawals were from debit cards.
4. A low percentage of cheques were written.
5. Numerous balance inquiries made.
6. After a deposit withdrawals were made immediately.
7. No pattern of timing deposits/disbursements.
8. Transactions were below reporting thresholds.
9. Funding of accounts was cash & overseas wire transfers.
10. ATM transactions made with multiple hijackers at the same ATM.
11. Debit cards used by hijackers who didn't own accounts.

1. Three supplemented financing with accounts and credit cards from UAE bank.
2. Two accounts had deposits made by unknown individuals.
3. All had travelers cheques purchased overseas & brought into US.
4. Three maintained bank accounts in Germany.
5. Two maintained credit cards from German banks.
6. One received substantial incoming wire transfers to his German account from an individual.
7. Same person opened UAE account and gave POA to the person who wired money.
8. >$100,000 wired from hijacker's UAE account to his German account in 15 months.

1. Use of an account as a front for a person with suspected terrorist links.
2. Account holder's name on list of suspected terrorists.
3. Frequent large cash deposits in accounts of non-profit organizations.
4. High volume of transactions in the account
5. Lack of a clear relationship between banking activity and the nature of the account holder's business

• Dormant, low sum accounts that suddenly receive wires followed by daily cash withdrawals that continue until the sum is removed.
• Lack of cooperation by the client providing required information

• Underground banking alternative remittance systems.
• Involve international transfer of value outside the legitimate banking system (based on trust).
• Works by depositing funds with a Hawala "banker" who for a small fee moves funds internationally and settles accounts through normal process of trade.

• People in various parts of the world use their accounts to move money internationally for third parties.
• It's used to avoid bank fees.
• Often operated by immigrants or temporary workers. 
• Operates without government supervision.
• No paper trail exists and shorthand is used on faxes sent between representatives.
• Can be used at any phase of ML cycle.

1. They enjoy the public trust
2. Have access to considerable source of funds
3. They are cash intensive
4. They have a global presence, often near an area exposed to terrorist activity.
5. They have little or no regulation with few obstacles to their creation.

1. Maintain and be able to present full program budgets that account for all expenses.
2. Conduct independent internal audits and external field audits to ensure funds are being used for intended purposes.
3. Use formal bank accounts.