Chapter 1: Risks and Methods of Money Laundering and Terrorist Financing

Question 1

What is money laundering?

Answer 1

Money laundering involves taking criminal proceeds and disguising their illegal sources in order to use the funds to perform legal or illegal activities. Money laundering is the process of making dirty money look clean.

Question 2

Give an example of the second stage of money laundering.

Answer 2

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 the system 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; and

using shell companies to obscure the ultimate beneficial owner and assets.

Question 3

Give an example of the third stage of money laundering.

Answer 3

Purchasing luxury assets such as property, artwork, jewelry, or high-end automobiles; and entering into financial arrangements and other ventures in which investments can be made in business enterprises.

Question 4

Give an example of the first stage of money laundering.

Answer 4

Blending of funds,

purchasing significant stored value cards with currency,

foreign exchange,

breaking up amounts,

currency smuggling, and

loans.

Question 5

What does the Yates Memo say?

Answer 5

The Yates memo reminds prosecutors that criminal and civil investigations into corporate misconduct should also focus on individuals who perpetrated the wrongdoing.

It notes that the resolution of a corporate case does not provide protection to individuals from criminal or civil liability.

Question 6

What are some indicators of money laundering using electronic transfers of funds?

Answer 6

Funds transfers 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 on behalf of a foreign client with little or no explanation or apparent reason;

checks and money orders used to receive many small, incoming transfers of funds or to make deposits;

funds activity that is unexplained, repetitive, or reveals unusual patterns;

payments or receipts that have no apparent link to legitimate contracts, goods, or services; and

funds transfers sent or received from the same person to or from different accounts.

Question 7

What is remote deposit capture and what risk is associated with it?

Answer 7

Remote deposit capture (RDC) is a bank product that allows customers to scan a check and transmit an electronic image to the bank for deposit. Because RDC minimizes human intervention, it decreases the ability to identify potential fraud indicators, such as an altered check and multiple deposits of the same item.

Question 8

What are some of the money laundering risks pertaining to the use of payable through accounts (PTAs)?

Answer 8

PTAs with foreign institutions licensed in offshore centers with weak bank supervision and licensing laws;

PTAs arrangements in which the correspondent bank fails to apply CDD to the respondent’s customers;

PTA arrangements in which subaccount holders have currency deposit and withdrawal privileges; and

PTAs used in conjunction with a subsidiary, representative, or other office of the respondent bank.

Question 9

What is a money laundering risk pertaining to the use of concentration accounts?

Answer 9

Money laundering risks can arise in concentration accounts when the customer-identifying information is separated from the financial transaction. When separation occurs, the audit trail is lost, and accounts can be misused or administered improperly.

Question 10

Define a politically exposed person (PEP).

Answer 10

A PEP is a person who is or has been entrusted with a prominent public function domestically or by a foreign country or international organization. Relatives and close associates of PEPs are also considered to be PEPs.

Question 11

What is structuring?

Answer 11

Structuring is designing a transaction to evade triggering a reporting or recordkeeping requirement, e.g., breaking a large cash deposit into smaller amounts to be deposited into separate banks, separate accounts, or on separate days to avoid currency transaction reports.

Question 12

Which money laundering stage(s) are credit cards most likely to be used, and what is an example of money laundering through the use of credit cards?

Answer 12

Credit cards are more likely to be used in the second (layering) and third (integration) stages of money laundering.

Examples include

overpaying a credit card balance and then asking for a refund and

placing illegal funds in accounts at offshore banks and then accessing the funds using credit and debit cards associated with the offshore account.

Question 13

What are some of the risks posed by third-party payment processors (TPPPs)?

Answer 13

Multiple financial organization relationships, whereby the TPPP’s suspicious activity cannot be seen in its entirety;

money laundering by sending funds directly to a financial organization from a foreign jurisdiction through an international ACH payment; and

high return rates from unauthorized transactions.

Question 14

What are some ways money services businesses (MSBs) can be used for money laundering?

Answer 14

Money launderers can use money remitters and currency exchanges to make funds available to criminal organizations at a destination country in the local currency.

The launderer or broker then sells the criminal dollars to foreign businesspeople wishing to make legitimate purchases of goods for export.

The cash-intensive and transactional nature of MSBs can facilitate money laundering.

Question 15

What are some of the aspects associated with the securities industry that increase its exposure to money laundering?

Answer 15

Its international nature;

speed of transactions;

ability to conduct free-of-payment transfers;

ease of converting holdings to cash without significant loss of principal;

routine use of wire transfers to, from, and through multiple jurisdictions;

competitive, commission-driven environment;

practice of maintaining securities accounts as nominees or trustees;

and weak AML programs.

Question 16

What are some red flags of money laundering associated with casinos and gambling?

Answer 16

Converting the funds to be laundered from cash to checks and using casino credit to layer transactions before transferring out the funds;

buying chips with illicit funds and requesting repayment via a check drawn on the casino’s account;

using illegal funds to repay casino lines of credit;

junket operators moving funds across borders and through multiple casinos;

paying gambling debts in cash just under the reporting requirements;

engaging in minimal gambling without a reasonable explanation;

using casinos for banking-like financial services; and

unusual gaming and transaction patterns.

Question 17

Why is gold vulnerable to money laundering and terrorist financing risks?

Answer 17

Gold has high intrinsic value in a compact and easy-to-transport form.

It can be bought and sold simply and often anonymously for currency in most areas of the world, allowing criminals to convert their illicit cash into anonymous, transferable assets.

The gold market is a target for criminal activity because it is lucrative and holds its value regardless of the form it takes

Question 18

List ways in which travel agencies can be used to launder money.

Answer 18

Purchasing an expensive airline ticket for another person, who then asks for a refund;

structuring wire transfers in small amounts to avoid recordkeeping requirements;

and establishing tour operator networks with false bookings and documentation to justify significant payments from foreign travel groups.

Question 19

List various functions of gatekeepers—attorneys, notaries, accountants, and auditors—that can be useful to money launderers.

Answer 19

Creating and managing corporate vehicles and other complex legal arrangements;

and setting up and managing charities.

buying or selling property as a cover for illegal fund transfers;

performing financial transactions;

providing financial and tax advice;

providing introductions to financial organizations;

undertaking certain litigation;

Question 20

Why is the issue of requiring attorneys to be gatekeepers in the AML/CFT area controversial?

Answer 20

Attorneys have confidential relationships with their clients.

Question 21

What makes real estate an attractive channel for laundering illicit funds?

Answer 21

It can be purchased with cash;

the ultimate beneficial owner can be disguised;

it is a relatively stable and reliable investment; and

the value can be increased through renovations and improvements

Question 22

What are some common money laundering techniques involved with trade-based money laundering?

Answer 22

Overinvoicing and underinvoicing; overshipping and short-shipping; ghost-shipping; shell companies; multiple invoicing; and black market trades.

Question 23

What is the Black Market Peso Exchange (BMPE)?

Answer 23

A form of trade-based money laundering, the BMPE is a process by which

money in the United States derived from illegal activity is purchased by peso brokers and

deposited in US bank accounts established by the brokers.

The brokers sell checks and wire transfers drawn on those accounts to legitimate businesses,

which use them to purchase goods and services in the US.

(Although the US is prominently figured in BMPE, the process is not limited exclusively to that country.)

Question 24

What are the potential risk factors commonly associated with prepaid bank cards?

Answer 24

Anonymous cardholders, anonymous funding, anonymous access to funds,

high value limits and no limits on the number of cards individuals can acquire;

global access to cash through ATMs;

offshore card issuers that might not observe laws in all jurisdictions; and

use as a substitute for bulk-cash smuggling.

Question 25

What are some specific controls that e-money institutions can implement to mitigate the money launderings risks of prepaid cards, mobile payments, and internet-based payment services?

Answer 25

Robust oversight of outsourced functions;

limits on storage values, transactions, and turnover;

transaction monitoring systems capable of detecting money laundering patterns and deviations;

systems for identifying customers with multiple purses, accounts, and cards;

geolocation, device-related information, and IP addresses to identify discrepancies in customer activity from the information provided at onboarding;

cooperation with merchants that accept e-money;

geographic restrictions on the use and function of e-money products.

Question 26

Explain the roles of the following participants in the virtual currency (VC) ecosystem: User, Exchanger, and Administrator

Answer 26

A User is a person who obtains VC to purchase goods or services. An Exchanger is a person engaged as a business in the exchange of VC for real currency, funds, or other virtual currency. An Administrator is a person engaged as a business in issuing VC and who has the authority to redeem the virtual currency.

Question 27

What are some emerging risks for terrorist financing?

Answer 27

Self-funding by foreign terrorist fighters; raising funds through social media; new payment products and services; and exploitation of natural resources.

Question 28

Explain the legal concept of willful blindness in the context of money laundering.

Answer 28

Willful blindness is the “deliberate avoidance of knowledge of the facts” or “purposeful indifference.” Courts 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.

Question 29

In what ways is correspondent banking vulnerable to financial crime?

Answer 29

Correspondent banks do not know the customers of the respondent directly and rely on the respondent bank’s internal controls;

less information is available to help the correspondent bank recognize unusual activity;

the correspondent does not know the degree of supervision to which the respondent is subject, and might have limited information on the respondent’s AML/CFT controls;

and some respondents are correspondents to third banks, which further shields the parties involved.

Question 30

What is a concentration account?

Answer 30

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 are frequently used to facilitate transactions for private banking, trust and custody accounts, funds transfers, and international affiliates.

Question 31

Describe microstructuring.

Answer 31

Microstructuring is a method of placing large amounts of illicit cash into the financial system. It is essentially the same as structuring (i.e., designing a transaction to evade reporting requirements), but at a smaller level. A microstructurer might take an $18,000 deposit and break it into 20 deposits of approximately $900 each.

Question 32

What are the typical features of high-risk insurance products?

Answer 32

High-risk insurance products typically offer the ability to fold funds and assets into the policy;

full or partial underlying investments under the control of the customer;

the option of asset transfers; and

a high upper limit for the amount of funds held.

Question 33

How can art and antiques dealers and auctioneers mitigate their money laundering risks?

Answer 33

Require all art vendors to provide identifying information and confirm that they are authorized to sell the item;

verify the identities and addresses of new vendors and customers;

report suspicious items to the Art Loss Register;

avoid cash payments;

be aware of money laundering regulations; and

appoint a senior staff member to whom employees can report suspicious activities.

Question 34

Describe several ways in which the investment and commodity advising industry is susceptible to money laundering.

Answer 34

Withdrawal of assets through transfers to unrelated accounts or high-risk jurisdictions;

frequent additions to or withdrawals from accounts;

checks drawn on, or wire transfers from, accounts of third parties with no relation to the client;

clients who request custodial arrangements that allow for anonymity;

transfers of funds to the adviser for management followed by transfers to accounts at other institutions in a layering scheme;

investing illegal proceeds for a client;

and movement of funds to disguise their origin.

Question 35

Describe the types of services that trust and company service providers (TCSPs) offer to third parties.

Answer 35

TCPSs can act as a formation agent of legal persons;

act as (or arrange for another person to act as) a director or secretary of a company, a partner of a partnership, or a similar position in relation to other legal persons;

provide a registered office, business address, or correspondence for a company, partnership, or another legal person or arrangement;

act as (or arrange for another person to act as) a trustee of an express trust;

and act as (or arrange for another person to act as) a nominee shareholder for another person.

Question 36

What are four related purposes for establishing or controlling a shell company for money laundering?

Answer 36

Shell companies convert the cash proceeds of crime into alternative assets;

create the perception that illicit funds were generated from a legitimate source;

facilitate a wide range of legitimate and/or fake business transactions that can be used to further the laundering process; and

conceal criminal ownership.

Question 37

How can trust accounts be used to launder money, whether offshore or onshore, in the context of money laundering?

Answer 37

A trust can be used to convert illicit cash into less suspicious assets;

help disguise criminal ownership of funds and other assets;

form an essential link between different money laundering vehicles and techniques, such as real estate, nominees, and the deposit and transfer of criminal proceeds;

and hide assets from legitimate creditors and protect property from seizure.

Payments to the trust beneficiaries can be used to launder money.

Question 38

What makes bearer bonds, bearer stock certificates, and bearer shares prime vehicles for money laundering?

Answer 38

Bearer bonds, bearer stock certificates, and bearer shares belong, on the surface, to the “bearer.” When bearer securities are transferred, because there is no registry of owners, the transfer takes place by physically handing over the bonds or share certificates. Bearer shares offer many opportunities to disguise their legitimate ownership.

Question 39

What is the basic difference between the crimes of terrorist financing and money laundering?

Answer 39

Terrorist financing uses funds for an illegal political purpose, but the money is not necessarily derived from illicit proceeds. On the other hand, money laundering always involves the proceeds of illegal activity. The purpose of laundering is to enable the money to be used legally.

Question 40

Describe factors that indicate a financial organization is at risk for being used as a conduit for terrorist financing?

Answer 40

Use of an account as a front for a person with suspected terrorist links;

appearance of an account holder’s name on a list of suspected terrorists;

frequent, large cash deposits in accounts of nonprofit organizations;

high volumes of transactions in accounts; and

lack of a clear relationship between the banking activity and the nature of the account holder’s business.

Question 41

What makes hawalas attractive to terrorist financiers?

Answer 41

Unlike formal financial institutions, hawalas are not subject to formal government oversight and are not required to keep detailed records in a standard form.

Although some hawaladars do keep ledgers, their records are often written in idiosyncratic shorthand and are maintained only briefly.

Question 42

What characteristics of charities and nonprofit organizations make them particularly vulnerable to misuse for terrorist financing?

Answer 42

Enjoying the public trust;

having access to considerable sources of funds;

being cash-intensive;

frequently having a global presence, often in or near areas exposed to terrorist activity; and

often being subject to little or no regulation and/or having few obstacles to their creation.

Question 43

Describe the four types of risk associated with money laundering that are faced by financial organizations.

Answer 43

Reputational risk (the potential that adverse publicity regarding an organization’s business practices and associations will cause a loss of public confidence in the integrity of the organization),

operational risk (the potential for loss resulting from inadequate internal processes, personnel, or systems),

legal risk (the potential for lawsuits, adverse judgments, unenforceable contracts, fines and penalties), and

concentration risk (the potential for loss resulting from too much credit or loan exposure to one borrower or group of borrowers).

Question 44

Describe the three stages of money laundering.

Answer 44

Stage one: placement is the physical disposal of cash or other assets derived from criminal activity. Stage two: layering is the separation of illicit proceeds from their source by layers of financial transactions intended to conceal the origin of the proceeds. Stage three: integration is 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.

Question 45

What motivated passage of the USA PATRIOT Act, and to whom does it apply?

Answer 45

The USA PATRIOT Act was motivated by the terrorist attacks of September 11, 2001, and the urgent need to decipher and disable mechanisms that finance terrorism, including strengthening money laundering laws and the Bank Secrecy Act. The USA PATRIOT Act has implications for US organizations and non-US organizations that do business in the US.

Question 46

What factors contribute to the vulnerabilities of private banking to money laundering?

Answer 46

Perceived high profitability;
intense competition;

commission-based compensation for relationship managers;
culture of secrecy and discretion; and

powerful clientele;
high level of confidentiality;
close trust developed between relationship managers and their clients;

role of relationship managers as client advocates to protect their clients.

Question 47

What is one of the most important aspects of due diligence for a bank when establishing a relationship with a money services business (MSB)?

Answer 47

Confirm that the MSB has implemented a sufficient AML/CFT program (e.g., procedures, training, and suspicious activity monitoring) and is properly licensed and/or registered in the jurisdictions in which it operates.

Question 48

How can the free-look period in the insurance industry be used to launder money?

Answer 48

A free-look period is a feature that allows investors, for a short period of time after the policy is signed and the premium paid, to back out of a policy without penalty. This process allows the money launderer to get an insurance check, which represents cleaned funds.

Question 49

How can having a lawyer as a trustee on a client’s account create vulnerabilities to money laundering at a financial organization?

Answer 49

When lawyers serve as trustees by holding money or assets “in trust” for clients, it enables the lawyers to conduct transactions and administer the client’s affairs. Sometimes, illicit money is placed in a law firm’s general trust account in a file set up in the name of the client, nominee, or a company controlled by the client.

Question 50

What are some money laundering risks, methods, and red flags in the vehicle sales industry?

Answer 50

Structuring cash deposits below the reporting threshold;
purchasing vehicles with sequentially numbered checks or money orders;

trading in vehicles and conducting successive transactions of buying and selling new and used vehicles to produce complex layers of transactions; and

accepting third-party payments, particularly from jurisdictions with ineffective money laundering controls.

Question 51

What are some of the potential macroeconomic consequences of unchecked money laundering?

Answer 51

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;

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; and concentration risk.

Question 52

What are bearer checks?

Answer 52

Bearer checks are unconditional orders (i.e., negotiable instruments) that, when presented to a financial organization, must be paid to the holder of the instrument rather than to a payee specified on the order itself. The financial organization is usually not obligated to verify the identity of the presenter of a bearer check unless the transaction exceeds a specific threshold.

Question 53

What are financial intelligence units (FIUs)?

Answer 53

FIUs are mandatory national agencies that handle financial intelligence. They receive reports of suspicious transactions from financial organizations, other people, and entities, analyze them, and disseminate the resulting intelligence to local law enforcement agencies and foreign FIUs to combat money laundering.