Chapter 1 Risks of ML and TF-Overview Flashcards

Question

Securities Industry-ML Indicators

Answer 1

1.A customer with a significant history with the securities firm who abruptly liquidates all of her assets in order to remove wealth from the jurisdiction 2. A customer who opens an account or purchases a product without regard to loss, commissions, or other costs

Answer 2

3. A securities account that is used for payments or outgoing wires with little or no securities activity (e.g., account appears to be used as a depository account or a conduit for transfers) 4.A customer’s transactions that include a pattern of sustained losses, which might indicate the transfer of value from one party to another

Answer 3

5.Transactions in which one party purchases securities at a high price and then sells them at a considerable loss to another party, which might indicate the transfer of value from one party to another 6. A customer who is unfamiliar with a financial product’s performance and specifications but wants to invest in it nonetheless

Answer 4

7.A customer who is known to have friends or family who work for the securities issuer, or a trading pattern that suggests he might have nonpublic information 8. Two or more unrelated accounts at a securities firm that trade an illiquid or low-priced security, or “penny stock,” suddenly and simultaneously 9. A customer who deposits physical securities that (1) are in large quantities; (2) are titled differently from the name of the account; (3) do not bear a restrictive legend, even though the history suggests that they should; or (4) lack sense in terms of the method by which they were acquired

Answer 5

Retail broker-dealers are the industry’s frontline defense—and its most vulnerable access point. pressure to expand their client base and manage more assets. The more assets in a client’s account, the more commission will be generated. Money launderers can promise a large or steady commission stream. Therefore, it is important for broker-dealers to understand their customers and monitor transactions.

Answer 6

Requirements established by the SEC, FINRA (Financial Industry Regulatory Authority) which compel brokers to have AML programs. These include appointed BSA officer,CDD,SARs monitoring ,training, transaction monitoring, and independent audits. Oversight also done by SEC and/or FINRA

Answer 7

Financial Conduct Authority fined Duestche Bank 163m GBP for inadequate ML controls between 2012-2015 The infractions and resulting loopholes allowed the front office of Deutsche Bank’s Russia-based subsidiary, DB Moscow, to execute more than 2,400 pairs of mirror trades between April 2012 and October 2015, these trades were used to transfer USD 6 Billion from Russia , funds went through various locations including Cyprus,Estonia and Latvia. DB Moscow executed the mirror trades. Investigations found connections between DB Moscow and DB London customers.Rubles were changed into USD and withdrawn.

Answer 8

The deficiencies included: * Inadequate KYC and customer due diligence (CDD) * Failure to ensure that the CB&S front office took responsibility for its KYC obligations * Flawed customer and country risk-rating methodologies * Deficient AML policies and procedures * Inadequate AML information technology infrastructure * Lack of automated AML systems for detecting suspicious trades * Failure to provide adequate oversight of trades booked in the UK by traders in non-UK jurisdictions

Answer 9

* Inadequate AML/CFT frameworks allow abuse of the financial system by criminals. * Real-time mirror trades involve the rapid transfer of significant sums of money around the world. * It is critical to have adequate KYC and CDD procedures in place to identify suspicious activity. * Organizations need to undertake continuous risk assessment and ensure controls are in place to mitigate against existing, new, and emerging risks.

Answer 10

In June 2020 SFC (Hong Kong Securities and Futures Commission) fined Guotai Junan Securities HK 25M From 2014-15 GJS failed to account for 15,600 3rd party deposits and withdrawals totalling HK 37.5 Billion Failure to respond to several red flags , more than 5000 deposits made into accounts with knowing the depositor identities HK 28.8M used by 5 clients to purchase shares of a HK listed company were deposited by the same 3rd party that exceeded their self declared net worth.

Answer 11

* Ongoing transaction monitoring is a key component of an effective AML/CFT compliance program. * Share offerings have associated risks for money laundering, insider trading, and wash trades. * Both potential and confirmed breaches should be promptly disclosed to the relevant regulator.

Answer 12

Casinos and other businesses associated with gambling, such as bookmaking, lotteries, and horse racing, are associated with money laundering because they provide an excuse for recently acquired wealth with no apparent legitimate source.

Answer 13

ML in casinos generally occures in the layering and placement stages Buying chips with illegal cash, request repayment by check drawn on casino's account or can request a casino to provide credit. One laundering technique involves the person actually gambling the money to be laundered, but in such a way that he is reasonably sure of ultimately recovering his stake in theform of checks issued or funds transferred by the gambling or betting agency and reflecting verifiable winnings

Answer 14

Junkets, a form of casino-based tourism, also present significant money laundering risk, because junket participants largely rely on third parties, or junket operators, to move the funds across borders and through multiple casinos creating a layer of obscurity. In some countries Junkets can rent private gaming rooms, monitor player activity,collect credit, operate pool funds. In certain regions, licensed junket operators act as fronts for junket operators in another country. The front operators supply players to a casino through the casino’s licensed junket companies, which might not qualify for a license in the country where the players will be gambling several jurisdictions do not require licensing of junket operators and their agents, further increasing the risks of money laundering. FATF emphasizes the need to ensure that junket operators are not under criminal influence and that financial transactions are transparent and subject to relevant AML/CFT measures.

Answer 15

FinCEN and FATF have identified specific behaviors to watch for, including: * Attempts to evade AML reporting and recordkeeping requirements, such as 1.Paying of large debt without triggering threshold 2. Two or more customers combining funds after minimal gambling to request for a casino check 3.Customer receives payout in excess of USD 10k but requests less and takes the remaining in cash 4.Structuring transactions to avoid tax filings or CTR 5. Reducing the presented chips when asked for ID

Answer 16

Using the cashier's cage solely for its banking-like financial services, such as: 1.Wiring of funds originated from nongaming proceeds to another country 2.Using the casino as a temporary repository of funds by depositing money and requesting transfers.

Answer 17

Minimal gaming activity without a reasonable explanation, such as: 1. Purchasing many chips, doing a bit of gambling then redeeming chips 2.Using credit to purchase chips, doing minimal gambling, pay off credit in currency and redeems chips for a casino check 3. Large deposit using small denomination bills, withdraws at the chips table--> minimal gambling-->exchanges chips for large denominations 4.Inserting a high # of small bills into slot machine engaging in minimal play and exchanges the voucher for large denom bills or casino check 5. Purchasing chips under a reporting threshold, engages in minimal play, leaves casino without cashing out 6.Customer transfers funds to a casino into a front account, withdraws it as chips in a table then asks chips to be exchange for casino check

Answer 18

* Unusual gaming and transaction patterns, such as: 1. 2 customers both sides of a bet to cover each other 2.Customer requests casino check issued to 3rd parties 3.Using multiple fin instruments to pay off large markers 4. Requesting casino checks under reporting threshold 5.Establish high value deposit then remain dormant.

Answer 19

It is a serious mistake for casinos to allow play and accept the revenue without reasonably determining the source of a customer’s gaming funds. FinCEN expects US casinos to know the source of high rollers’ funds.

Answer 20

Tinian Dynasty Hotel & Casino fined US$75 million (2015)-Failed to file CTRs,assisted in structuring transactions Caesars Palace fined US$9.5 million (2015): Promoted private salons without proper monitoring transactions Sparks Nugget fined US$1 million (2016): Failed to file STRs and instructed it's compliance manager to avoid interacting with regulatory auditors Artichoke Joe’s Casino (AJC) fined US$8million (2017). Failed to file STRs despite knowing that loan sharks were using chips for money laundering

Answer 21

Casinos can use AML tools specifically designed for casinos for their AML needs. Online gambling provides an effective method of money laundering for cybercriminals, because transactions are conducted principally through credit and debit cards. Site operators are typically unregulated offshore organizations Site operators also may have accounts in reputable banks

Answer 22

Due to the regulatory environment and framework some credit card issuers do not allow online gambling, banks screen the types of org the accepting the card and thus can block it from conducting a transaction However other methods such as prepaid cards, wire transfers, peer to peer , virtual currencies can fund online gambling

Answer 23

1. A ML colludes with a site operator to deposit illicit funds into an account and then withdraws them as winnings, the launderer declares the winnings with the tax authorities and uses funds for a legit purpose 2.ML deposits funds into an account using stolen identity 3. ML logs into the account from multiple countries 4.Player is a PEP

Answer 24

ILGA (Australian Independent Liquor and Gaming Authority) investigated Crown Melbourne Crown accepted large deposits by Chinese nationals at a VIP room operated by a Junkey agency, they also used shell companies to facilitate transactions with China that were not reported to the regulator, the Australian Transaction Reports and Analysis Center Vids showed bricks of cash being exchanged for chips which happened regulary in the VIP rooms. Crown used two shell companies to enable VIP gamblers and Junket agents and circumvent

Answer 25

Casino cashiers can be exploited for placement. * Intermediaries, such as junket agents and shell companies, can be used to place, layer, and integrate funds through casino operations. * A VIP customer’s commercial value must not protect them from suspicion, scrutiny, or AML controls.

Answer 26

The USA PATRIOT Act requires certain dealers including precious metals, stones, and jewels, to establish AML programs. However, in many other jurisdictions, these are not required. Gold has high value and can be bought and sold easily.

Answer 27

1. Gold is an extremely attractive vehicle for laundering money. 2. The gold market is a target for criminal activity because it is lucrative. Understanding and knowing the various stages of the gold market and types of predicate offenses is critical in identifying money laundering

Answer 28

1.Payments or returns to persons other than the owner-owner of the metal directs payments to a third party 2.Precious Metal Pool Accounts-Group of companies that hold precious metal credits for a company which can be used by a customer.(Monetary/delivery etc)

Answer 29

Diamonds are commonly used for TF/ML Direct purchase of gems with illegal money Common type of activities: FX Transactions Fraudulent Invoicing Commingling proceeds International fund transfers

Answer 30

Anonymous agents at art auction houses bid millions of dollars for priceless works. Payment is later wired to the auction house by the agents’ principals from accounts in offshore havens.

Answer 31

1. Require all art vendors to provide names and addresses and sign on a form stating the art is not stolen 2.Verify addresses of new vendors and customers 3.Contact the Art loss register if the art is believed to be stolen 4. Be wary of customers wanting to deal in cash 5.Appoint a staff to which people can report STRs

Answer 32

12 people arrested in relation to the Wu Gang , engaged in criminal activities Established a shark finning business, legal in Florida not in California using fake ID, fake invoices and paperwork used Proceeds from shark finning and drug trafficking put into 3rd party accounts around the world

Answer 33

Converting illicit proceeds into precious metals and gems is attractive to financial criminals because: * They have high value in a compact form, and their value tends to hold for long periods of time. * They are easy to transport, so value can be transferred across borders without customs declarations. * Their origins are difficult to trace. * They can be easily exchanged for cash or used as currency in most areas of the world.

Answer 34

Firm did not undertake basic KYC procedures Refined billions of dollars worth of gold Forfeited USD $ 15 Million US Federal law requires precious metal dealers to have an AML program Firm did not have confirmation on supplier identities and accepted gold which was most likely smuggled 3 employees pled guilty to importing illicit gold, Elemetal removed from London Bullion and COMEX-gold futures market

Answer 35

1.AML risks inherent in the gold trade include heavy reliance on cash, anonymity, and difficulty tracing the source and origin of gold 2.The BSA requires precious metals dealers to perform KYC on suppliers and identify the source and origin of metals 3.In addition to KYC, AML programs must also implement Know Your Employee controls

Answer 36

In 2016, US biodiesel businessman Philip Rivkin pled guilty in Houston, Texas, to laundering US$78 million through many avenues, including purchasing over 2,000 pieces of art 10 years imprisonment and $138m fine Investigators determined that Rivkin’s company Green Diesel was not in fact producing biodiesel, but merely selling certificates and defrauding its customers He bought a collection of Photos worth $15M to legitimize his income within months of the US imposing sanctions on the Russian brothers Arkady and Boris Rotenberg, they illegally spent more than US$18 million on art in the US using shell companies linked to Russian oligarchs to evade sanctions

Answer 37

1.Art markets are high risk 2. Shell companies are used to enhance secrecy 3. Following legislation in place for art markets The responsible art market initiative/the AML act of 2020/the EU fifth directive 4.Art participants should understand AML law and are liabile

Answer 38

ML can occur in the following ways 1.Purchasing an expensive ticket for another person who then asks for a refund 2.Paying for services in installments that are actually structured wire transfers in amounts small enough to avoid recordkeeping requirements, a method used especially by criminals from foreign countries 3.Establishing tour operator networks with false bookings and documentation to justify significant payments from foreign travel groups

Answer 39

In 2015, Indonesian militant suspect Gigih Rahmat Dewe opened a travel agency on Bintan Island, Indonesia, as a cover for the terrorist organization the Islamic State of Iraq and Syria (ISIS). Cash intensive business can allow for comingling of funds, such transfer of funds raise minimal suspicion.

Answer 40

* Travel agencies are cash-intensive businesses. * Travel agencies solve logistics problems for terrorists. * Travel agencies can allow the use of false identities. * Travel agencies can be used to commingle legitimate and illegitimate fund. * Travel agencies can be used in all three stages of money laundering.

Answer 41

1.Structuring cash deposits below the threshold 2.Purchasing vehicles with sequentially # cheques or pay orders 3.Trading in vehicles and conducting successive transactions in buying/selling 4.Accepting 3rd party payments from jurisdictions with low controls Cases have also occurred in which car dealers laundered money by allowing drug dealers to trade in cars for less expensive models and to be paid in checks, not cash, for the difference

Answer 42

Leontaritis was the owner and operator of Vanderhall Exotics of Houston LLC, which specialized in exotic luxury automobiles. He used his car dealership to launder drug money for a large Houston-based drug trafficking organization that smuggled drugs from Mexico into the US Accepted cash from drug dealers for high luxury vehicles, used fraudulent dealer invoices to hide IDs and did not report cash payments.

Answer 43

* Cash-intensive businesses, such as car dealerships, are particularly vulnerable to money laundering. * Fraudulent invoices can be used to hide buyers’ identities. * The purchase of luxury vehicles and other assets can be used to place large amounts of illicit money into the financial system seemingly legitimately

Answer 44

FATF identified the following functions provided by lawyers, notaries, accountants, and other professionals as the most useful to potential money launderers * Creating and managing corporate vehicles and other complex legal arrangements, such as trusts * Buying or selling property: Property transfers can serve as the cover for illegal fund transfers * Performing financial transactions: These professionals might carry out various financial operations on behalf of a client * Providing introductions to financial organizations * Undertaking certain litigation * Setting up and managing charities

Answer 45

The FATF report also describes five categories of red flag indicators of money laundering or terrorism financing: 1.Characteristics of a client: Overly secretive * Uses an agent or an intermediary or avoids personal contact without a logical reason * Reluctant to provide or refuses to provide information or documents usually required to enable the execution of a transaction * Holds or has previously held a senior public position or has professional or family ties to such individuals * Known to have been the subject of investigation for an acquisitive crime (i.e., one in which the offender derives material gain from the crime, such as theft or embezzlement) * Known to have ties to criminals * Shows unusual interest and asks repeated questions on the procedures for applying ordinary standards

Answer 46

2. Characteristics of the involved parties: * Native to, residents in, or incorporated in a high-risk country * Connected without an apparent business reason; that is, tied in a way that generates doubts as to the real nature of the transaction * Appear in multiple transactions over a short period of time * Incapacitated or under legal age, with no logical explanation for their involvement * Attempt to disguise the real owner or parties to the transaction * Not directing the transaction, (i.e., the person directing the operation is not one of the formal parties to the transaction) * Do not appear to be suitable representatives

Answer 47

3. Characteristics of the source of funds: * Provided using unusual payment arrangements * Collateral located in a high-risk jurisdiction * Represents a significant increase in capital for a recently incorporated company, including foreign capital, without a logical explanation * Represents unusually high capital in comparison with similar businesses * Stems from a security transferred with an excessively high or low price attached * Stems from large financial transactions that cannot be justified by the corporate purpose

Answer 48

4. Characteristics of the lawyer: * Located at a significant distance from the client or transaction without a legitimate or economic reason * Little or no experience in providing the specific services needed * Being paid substantially higher than usual fees without a legitimate reason * Frequently changed by the client, or the client has multiple legal advisors without legitimate reason * Provides services previous refused by another professional

Answer 49

5. Characteristics of the retainer: * Transactions that are unusual with regard to the type of operation and the transaction’s typical size, frequency, or execution * Transactions that do not correspond to the client’s normal business activities and show that he does not have a suitable knowledge of the nature, object, or purpose of the professional performance requested * Creation of complicated ownership structures or structures with involvement of multiple jurisdictions without a legitimate or economic reason * Client transaction history with no documentation to support company activities * Inconsistencies and unexplained last-minute changes to instructions * No sensible commercial, financial, or tax reason for the transactions or increased complexity that unnecessarily results in higher taxes or fees * Exclusively keeping documents or other goods, or holding large deposits or otherwise using the client account without provision of legal services * Abandoned transactions without concern for fee level or after the receipt of funds * Power of attorney sought for the administration or disposal of assets under unusual circumstances without logical reason * Litigation that is settled too easily or quickly with little or no involvement of legal professional retained * Requests for payments to third parties without substantiating reason or corresponding transaction

Answer 50

* Deferring regulation until adequate education is conducted * Imposing internal controls and due diligence duties on lawyers regarding unprivileged communications * Using a joint government-private sector body to regulate lawyers who engage in financial activities, requiring registration with and regulation by an agency * Devising a new hybrid approach, such as through guidance notes and best practices standards from FATF Many regulators within the United States want the scope to coincide with the European Union Directive, which requires EU members to ensure that obligations are imposed on a wide range of professionals, including auditors, attorneys, tax advisors, real estate agents, and notaries.

Answer 51

Jan 2019,Ross Mckay,7 years prison, 1450 GBP McKay was a “go-to,” or preferred, lawyer for criminals because he did not conduct basic KYC checks, including understanding the nature of the client’s business, inquiring about the source of funds, or understanding connections between the parties and transactions McKay conducted more than 80 criminal transactions that helped a buy-tolease landlord use illicit money to fraudulently build a £10.8 million property empire. McKay committed mortgage fraud by disguising the source of funds for property deposits and used nominee names instead of the names of the legitimate purchasers on mortgage applications

Answer 52

* Lawyers, accountants, financiers, and other "professional enablers” can abuse their positions to facilitate financial crimes via seemingly legitimate means. * Professional service providers need to be aware of their responsibilities to identify, report, and avoid money laundering risks. * Professional service providers need to ensure that they understand all the laws and regulations that apply to them, particularly when involved in multijurisdictional business. * Professional enablers who commit crimes can be imprisoned and will likely be unable to operate again within their chosen profession

Answer 53

The attorney had helped to invest his client’s drug proceeds by forming a corporation in the name of the client’s wife and arranging a loan from the corporation to another (noncriminal) client He then drafted a fake construction work contract, making the repayment of the loan appear to be payment for construction work performed by the company

Answer 54

Key takeaways * Gatekeepers can help disguise the source of illicit funds so they appear to originate from a legitimate business activity, such as a sale or loan. * Money laundering schemes facilitated by gatekeepers can involve multiple parties, some of whom might not be aware of their own involvement. * The special skills of gatekeepers enable them to help their clients evade detection using sophisticated money laundering schemes

Answer 55

* Commodities: Goods such as food, grains, and metals through futures contracts * Futures/futures contracts: * Options/options contracts: * Commodity pool: A combination of funds from various investors to trade in futures or options contracts * Omnibus accounts: Accounts held by one futures commission merchant (FCM) for another, in which case transactions of multiple account holders are combined, and their identities are unknown to the holding FCM

Answer 56

* Commodity pool operator: Operator or solicitor of funds for a commodity pool, which combines funds from members and trades futures or options contracts * Futures commission merchant (FCM): * Introducing broker-dealer in commodities (IB-C): A firm or person that solicits and accepts orders for commodity futures from customers but does not accept funds. IB-Cs can be guaranteed or independent: o Guaranteed introducing broker-dealer: An IB-C with an exclusive written agreement with a futures commission merchant, which obligates the FCM to assume responsibility for the IB-C’s performance o Independent introducing broker-dealer: An IB-C who is subject to minimum capital and financial reporting requirements, and who may introduce accounts to any FCM * Investment advisor: Provides advice on securities and investments and manages client assets

Answer 57

* Withdrawal of assets through transfers to unrelated accounts or high-risk jurisdictions * Frequent additions to or withdrawals from accounts * Clients invest via checks drawn on, or wire transfers from, accounts of third parties with no relation to them * Clients request custodial arrangements that allow them to remain anonymous * Transfers of funds to the investment advisor, followed by transfers to accounts at other institutions that suggest a layering scheme * CTAs or other professionals invest illegal proceeds for a client * Movement of funds to disguise their origin

Answer 58

Trust and company service providers (TCSPs) are gatekeepers who set up trusts between parties and provide certain legal and administrative functions for corporations TCSPs include any person or business that provides any of the following services to third parties: 1.Acting as agent on behalf of third parties 2.Acting as a director or sec of a company,partners etc 3.Providing registered office,correspondence for a company 4.Acting as a trustee of an express trust 5.Acting as nominee shareholder FATF report mentions that trust companies must obtain detailed info on customers and source of funds and identify UBOs Some countries regulate TCSPs like Lawyers in which clients can request confidentiality

Answer 59

* Unknown or inconsistent application of regulatory guidelines regarding identification and reporting requirements * Limited market restriction on practitioners to ensure adequate skills, competence, and integrity * Inconsistent recordkeeping across the industry * Potential for TCSPs to operate in an unlicensed environment * Potential for a TCSP’s CDD to be performed by other financial organizations, depending on the jurisdictional requirements

Answer 60

1.Complex Transactions 2.Payments to shell companies 3. Use of TCSP in countries that have lax UBO laws 4.Legal arrangements in jurisdictions with weak AML laws and/or strict secrecy laws 5.Intercompany loan transactions and multijurisdictional wire transfers that serve no legal purpose. According to Transparency International, a global coalition working to end the injustice of corruption, it is important to focus on service providers, rather than the company or trust, because the latter is merely the tool through which money launderers operate

Answer 61

Investing illegal proceeds into real estate is very common Escrow accounts, generally maintained by real estate agents, brokers, and other fiduciaries, are designed to hold funds entrusted to someone for protection and proper disbursement escrow accounts can facilitate the movement of funds by cashier’s checks, wire transfers, and company checks to seemingly legitimate individuals and companies Cash is common but large checks are also used,

Answer 62

A money laundering title insurance agent can make multiple deposits of cash on a given day at several banks in amounts under the currency reporting threshold, credited to different, nonexistent closings Each closing also entails numerous routine disbursements for payment of the proceeds to the seller, payoff of the mortgage, real estate commissions, taxes, satisfaction of liens, and other payments Property seller may accept lower money than valuation and take the rest in cash Loan back method, criminal provides fund to an associate who then provides a loan in the same amount

Answer 63

The report makes a distinction between fraudsters and money launderers Lenders are likely to file a SAR when they are the target of failed or successful mortgage fraud schemes that threaten their organization’s revenues However it can be tough to detect Mortgage loan fraud Only 20% of SARs pertained to ML

Answer 64

The Australian Transaction Reports and Analysis Centre (AUSTRAC) real estate is an attractive channel for laundering illicit funds because: * It can be purchased with cash. * The ultimate beneficial ownership can be disguised. * It is a relatively stable and reliable investment. * Value can be increased through renovations and improvements. Money laundering through real estate can be relatively uncomplicated compared with other methods and requires little planning or expertise

Answer 65

In Australia, common money laundering methods involving real estate include: * Using third-party straw buyers described as "cleanskins" * Using loans and mortgages as a cover for laundering * Manipulating property values to disguise undisclosed cash payments through overvaluing, undervaluing, or flipping * Generating rental income to legitimize illicit funds * Conducting criminal activity, such as the production of cannabis or synthetic drugs, at the purchased property * Using illicit cash to make property improvements to increase the value and profits at sale * Using front companies, shell companies, trusts, and other company structures to hide beneficial ownership and obvious links to criminals * Using gatekeepers, such as real estate agents, conveyancers, and solicitors, to conceal criminal involvement, complicate the money laundering process, and provide a veneer of legitimacy to the transaction * Investing by overseas-based criminals to conceal assets and avoid confiscation from authorities in their home jurisdiction

Answer 66

* Various uses of cash to aggregate funds for property purchase, down payment, and loan repayment * Multiple purchases and sales in a short period of time, possibly involving property overvaluation, undervaluation, or straw buyers * Use of offshore lenders * Unknown sources of funds for purchase, such as incoming foreign wires in which the originator and beneficiary customer are the same * Ownership being the customer’s only link to the country in which the real estate is being purchased

Answer 67

Half of the most expensive properties are bought via shell companies in the US 37% Non American owners in the Time Warner Center at least 16 have been investigated Property docs were not properly singned There was no requirement for Real Estate firms to identify UBOs Subsequently in 2016 , FinCEN began issuing a series of geographic targeting orders (GTOs) to help law enforcement identify individuals acquiring luxury residential properties Now Natural persons are required to be identified behind shell companies within 180 days(Geographic Targeting Orders)

Answer 68

Trade-based money laundering and the Black-Market Peso Exchange (BMPE) are two significant money laundering techniques that have proven successful in illicit finance

Answer 69

According to FATF, systemic weaknesses for FTZs include: * Inadequate AML/CFT safeguards * Minimal oversight by local authorities * Weak procedures to inspect goods and legal entities, including inadequate recordkeeping and information technology systems * Lack of cooperation between FTZs and local customs authorities Some FTZs are as large as cities

Answer 70

FATF defines trade-based money laundering (TBML) as the process of disguising the proceeds of crime and moving value by using trade transactions to legitimize their illicit origins TBML techniques vary in complexity and are frequently used in combination with other money laundering techniques to further obscure the money trail Money launderers can move money out of one country by using their illicit funds to purchase high-value products and then exporting them at low prices to a colluding foreign partner, who then sells them in the open market at their true value

Answer 71

According to the Guidance Paper on Combating Trade-based Money Laundering, developed by the Hong Kong Association of Banks, understanding the commercial purpose of any trade transaction is a key requirement in determining its money laundering risk 1.Over and under invoicing 2.Over shipping/Short shipping quantities 3. Ghost Shipping-ficticious buy and sell 4.Shell Companies 5.Multiple invoices for shipment 6.Black Market Trades Letters of credit are also used

Answer 72

transferring money from a country with lax exchange controls, thus creating the appearance that an import transaction is involved Manipulation of prices LCs can be used with wire transfers to bolster appearance of real transaction

Answer 73

The Asia/Pacific Group on Money Laundering (APG) cited the lack of reliable statistics relating to TBML as a major obstacle in devising strategies to tackle it. Strategies should be based on dismantling TBML Interagency cooperation, training and further research

Answer 74

The advisory was the result of the possible impact of the 2010 Mexican law that restricted cash deposits of US dollars in Mexican banks then in exchange houses and brokerages FinCEN defines a funnel account as “an individual or business account in one geographic area that receives multiple cash deposits, often in amounts below the cash reporting threshold, and from which the funds are withdrawn in a different geographic area with little time elapsing between the deposits and withdrawals.

Answer 75

1. An account opened in one US state receives numerous cash deposits of less than $10,000 outside of the geographic region 2. Business account deposits take place in a different geographic region from where the business operates 3.Individuals opening or making deposits to funnel accounts lack information about the stated activity of the account, the account owner, or the source of the cash 4.Business account receives deposits out of state and debits not related to business purpose 5.Differences in amount and signatures on checks issued from an account receving out of state deposits 6.Wire transfers or checks issued from a funnel account deposited/cleared via US correspondent bank in Mexico

Answer 76

-Sophisticated Organized Crime Groups-OCG -They had created a network of companies to launder the proceeds of drug trafficking via TBML activity and legitimize the illegal proceeds -Faked invoicing and used tax fraud scheme -Scheme began by buying luxury cars in Germany and then faking paper trails for sales and purchases -Convinced a legitimate supplier to supply vehicles to bolster image -Import/Export companies owned by OCG used to import various other items to supply to drug traffickers -Used TBML to launder criminal proceeds

Answer 77

* Criminals use international trade to disguise illegal activities. * Shell companies and fake invoicing are common techniques. * Joint investigations mitigate cross-border and jurisdictional challenges. * Criminals add complexity to cross border trade by commingling with legitimate activity

Answer 78

the BMPE is a process by which money in the United States derived from illegal activity is purchased by Colombian peso brokers and deposited in US bank accounts established by the brokers Colombian importers created the BMPE in the 1950s as a mechanism for buying US dollars on the black market to avoid domestic taxes and duties on the official purchase of US dollars and imported goods purchased with dollars. FinCEN reported that black market currency exchange systems have evolved beyond the Colombian BMPE method, mainly because of increased diligence by US banks.

Answer 79

A common method of placement is structured deposits in the form of cash and other instruments , ML use account holders to smuggle cash in bulk from the US which is then placed in foreign instituitions.

Answer 80

A BMPE employee is in contact with a drug trafficker who wants to bring over his USD to Mexico and convert to pesos. Peso broker finds businesses in Mexico willing to buy goods from the US and needs USD. Peso broker arranges for the illegal USD to be given to US vendors to pay for the goods purchased. Once goods are shipped and sold by the Mexico based business , the pesos are given to the broker who then pays the trafficker in Mexico.

Answer 81

The DEA found that the network ran operations in the US and Columbia that enabled drug traffickers to move funds into the banking system. They then laundered the funds and moved them across the border, using a blackmarket peso exchange (BMPE) scheme. Among the charges was operating an MSB without a license In January 2020, an investigation by the Offices of the United States Attorneys and the DEA discovered that drug dealers in the US were connected to Columbian drug cartels. These dealers generated US dollars by selling Columbian drugs in the US The US based Agarwal Electronics Business exported consumer electronics globally, including to Columbia. Its CEO knowingly participated in the scheme and worked with the money broker by offering use of his bank account to receive the funds in the US This account was then used to transfer the proceeds of drug sales to accounts in Middle and South America. Upon receiving the funds into his bank account, the CEO arranged for the export of the roughly equivalent value of electronics products to certain Colombian suppliers. They in turn arranged to pay for the products by delivering pesos to an individual in Colombia

Answer 82

Key takeaways * The BMPE scheme enabled the cartels to place the money into the banking system and move it across borders. * A TBML scheme was used to pay the money brokers in Columbian pesos. * Cash intensive business and cross border activity are at higher risk of being used to facilitate money laundering

Answer 83

In April 2015, FinCEN issued a GTO that lowered cash-reporting thresholds and implemented additional recordkeeping requirements for certain financial transactions for approximately 700 Miami-based electronics exporters drug proceeds in the United States are converted into goods that are shipped to South America, sold for local currency, and ultimately transferred to drug cartels Key takeaways * DTOs (Drug Trafficking Organisations) take advantage of complex BMPE schemes involving the export of goods across the US/Mexico border to help move funds from the US back to the country where the DTO is based. * Lower cash-reporting requirements can help enforcement agencies detect BMPE schemes and alert regulated organizations to potentially suspicious activity. * Robust recordkeeping can help to detecting BMPE schemes, so that enforcement officers can access a regulated organization’s transaction records.

Answer 84

Wildlife trafficking is defined as the illegal trade, smuggling, poaching, capture, and collection of endangered species and protected wildlife. It also includes wildlife derivatives and byproducts, such as leather, food, medicines, and exotic pets

Answer 85

1.Source-Location where poaching takes place, lowest profit generation 2.Transit-Movement of wildlife these can clear customs 3.Destination-Arriving at final destination

Answer 86

* Joining the United for Wildlife Financial Taskforce and signing the Mansion House Declaration * Using current suspicious activity reporting mechanisms to report potential wildlife trafficking * Reviewing United for Wildlife Financial Taskforce intelligence alerts and implementing policies and procedures to support the detection and reporting of wildlife trafficking * Reviewing FATF’s Money Laundering and the Illegal Wildlife Trade report for valuable insights and red flags

Answer 87

In October 2006, FATF first published a report that examined the ways in which money can be laundered through the exploitation of new payment methods, such as prepaid cards, internet payment systems, mobile payments, and digital precious metals. The report found that, although there is a legitimate market demand for these payment methods, money laundering and terrorist financing vulnerabilities exist Since 2006, FATF has published additional guidance on new payment methods, typologies, and the risk-based approach

Answer 88

They are portable, valuable, exchangeable, and anonymous. Typically, prepaid products require the consumer to pay in advance for future purchases of goods and services Open or close loop. Openloop prepaid cards, many of which are network branded by American Express, Visa, or MasterCard, can be purchased and loaded with money by one person and used like regular debit cards by the same person or another person to make purchases or ATM withdrawals anywhere in the world Closed-loop prepaid products are of limited use for a specific purpose or service, such as with a certain merchant or retailer There might be an account for each card that is issued or, alternatively, a pooled account that holds the prepaid funds for all cards issued.

Answer 89

* Anonymous cardholders * Anonymous funding * Anonymous access to funds * High value limits and no limits on the number of cards individuals can acquire * Global access to cash through ATMs * Offshore card issuers that might not observe laws in all jurisdictions * Use as substitute for bulk-cash smuggling 5th AML directive 2020: EU the monthly transaction limit and maximum amount that can be stored on prepaid cards not subject to due diligence is €150. Online transactions associated with such cards have similarly been limited to €50. Geographic restrictions also used.

Answer 90

JMLSG’s sectoral guidance E-money products can be card-based, app-based, or online account-based All UK e-money institutions are regulated by the FCA and governed under the Electronic Money Regulations (2011), which require compliance with all AML/CFT and sanctions requirements. In the UK, this means all e-money institutions are subject to the Money Laundering Regulations 2017

Answer 91

* High transaction or purse limits * The ability of a customer to hold numerous purses or cards * E-money issuers using complex business models (e.g., “white-label” products and outsourcing, particularly to overseas jurisdictions), resulting in a complex AML/CFT control environment * Certain merchant activity with high-risk businesses, such as gambling, which allows for the movement of higher amounts of funds * Funding with unverified persons, whether customers or third parties * Funding with cash that leaves no electronic trail to the source of funds, as well as the ability for cash withdrawal * Funding with other e-money that lacks verified persons and/or source of funds * Non-face-to-face transactional activity * Features that increase the functionality of the card in terms of how to execute transactions, such as person-to-person, business-to-person, business-to-business, and person-to-business transactions

Answer 92

* Conducting robust oversight of outsourced functions * Placing limits on storage values, transactions, and turnover * Implementing transaction monitoring systems * Implementing systems to detect individuals holding multiple purses, accounts, and cards, including across multiple e-money issuers * Utilizing geolocation, device-related information, and IP addresses to identify discrepancies in customer activity * Cooperating with merchants that accept e-money to better detect suspicious activity * Instituting geographic restrictions on the use and function of e-money products FATF guidance paper Digital Identity, non-face-to-face onboarding can be just as robust, if not more so, as face-to-face onboarding when the appropriate systems and controls are in place to verify identities using reliable, independent sources

Answer 93

Although a simplification, VCs often fall into two categories: centralized and decentralized the Bahamian Sand Dollar, the first fully launched central bank digital currency) or a non-government administrator (e.g., Facebook’s Diem). Decentralized VCs (e.g., Bitcoin) have no repositories or administrators, but they work as a peer-to-peer media of exchange without the need for an intermediary VCs can be convertible or non convertible VCs allow value to be transmitted anywhere in the world without the requirement of a centralized bank or institutional authority. For most coins, there is a value that is expressed in fiat currency that is based upon economic and market forces it can be difficult to identify who is behind a specific wallet address, where the funds originated, and the destination of the funds in the “fiat” space

Answer 94

FinCEN was one of the first FIUs to offer interpretative guidance on VCs and to clarify their regulatory status. FinCEN categorized participants in the ecosystem into three segments: * 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 such virtual currency Admins/Exchangers are considered MSB and must comply with AML laws VC kiosks use distributed ledger technology not controlled by a single administrator FATF Recommendation 15- VASPs to be regulated

Answer 95

International business corporations (IBCs) are entities formed outside a person’s or business’s country of residence, typically in offshore jurisdictions IBCs permit the person to reduce transparency between the owner in her home country and the offshore entity where the company is registered IBC typically require registration via agent in jurisdiction which may reduce transparency Private investment companies are established and used in a similar manner; however, they are typically limited to holding investment assets in tax-neutral offshore financial jurisdictions

Answer 96

Operation DisrupTor’s actions in the US and Europe resulted in the arrest of 179 darknet drug traffickers and other criminals seizure of over US$6.5 million in cash and virtual currency, mainly Bitcoin, 500 kilograms of drugs worldwide, and 63 firearms. conducted by the US Joint Criminal Opioid and Darknet Enforcement (JCODE) and Europol One criminal group operating in the US city of Los Angeles completed more than 18,000 individual drug sales on several darknet sites Key takeaways * Cryptocurrency is the preferred payment method for darknet. * Law enforcement is increasingly capable of countering encryption and identifying anonymous data sources and transactions. * Criminals will always search for new avenues of communication to avoid detection

Answer 97

2017 Investigation BTC-e, users were allowed to * Operate with high levels of anonymity, limited ID requirements * Obscure and anonymize transactions * Openly discuss criminality on the BTC-e user chat * Obtain advice from BTC-e on how to access illegally obtained money from drug sales Alexander Vinnik charged by Paris for ML BTC-e was seized with 38% of user funds , ML worth USD 4 Billion Vinnik linked to corruption and organized crime

Answer 98

The Second 12-Month Review of the Revised FATF Standards, released in July 2021, noted that significant progress had been made globally in implementing the revised Recommendations, but that more work was still needed. Of 128 jurisdictions assessed in 2021, 70 (55%) had yet to implement the revised Recommendations into national law The report noted that the most common misuse of VCs was connected to sales of illicit substances, particularly through activity on the “dark web.” FATF updated guidance to include risk indicators which include, peer to peer VC exchanges and the travel rule Guidance addresses how FATF applied to specific Fiat currency or commodity this followed a report to te G 20, guidance also takes about Decentralized Finance-DeFi

Answer 99

1.Crypto exchanges offer anonymity 2.VCs tough to track as only done via user exchange account or wallet address 3.Crypto transactions conducted within seconds 4.VC Risk assessments should be done

Answer 100

LLCs are an attractive vehicle because they can be owned or managed anonymously FinCEN has undertaken a number of activities to better monitor LLCs

Answer 101

FATF offers the following definitions: * Shelf company: A corporation that has had no activity; it has been created and “put on the shelf.” This corporation is then later sold to someone who prefers a previously registered corporation over a new one. * Shell company or corporation: A company that at the time of incorporation has no significant assets or operations

Answer 102

it states that the ease with which corporate vehicles can be created and dissolved in some jurisdictions is of particular concern. This allows the vehicles to be used not only for legitimate purposes (e.g., business finance, mergers and acquisitions, and estate and tax planning), but also by financial criminals to conceal the sources of funds, while keeping their ownership concealed

Answer 103

Shell companies can be set up in onshore as well as offshore locations, and their ownership structures can take several forms Shell companies are often legally incorporated and registered by the criminal organization, but they have no legitimate business Sometimes, the stock of these shell corporations is issued in bearer shares, which means that whoever carries them is the purported owner

Answer 104

offered four related purposes for establishing or controlling a shell company for money laundering: 1.Convert cash proceeds of crime into alternative assets 2.Create illusion that illicit funds generated from legal source, the shell company can then create commercial accounts with other businesses to further layer and place the illicit funds 3.Can be used to hire criminals, lend money to criminals buy real estate etc 4.Effective in concealing ownership, Nominees can be used as directors,officers and shareholders. Can be established as an offshore subsidiary of another company.Can register assets in their own name.

Answer 105

The Canadian report identifies the following money laundering techniques used in conjunction with criminally controlled companies: 1.Using nominees as owners or directors:Nominees will often, but not always, have no criminal record. Further, companies established by lawyers are often registered in the lawyers’ names 2.Layering: Several companies are established to create a complex structure 3.Loans: Lending money between criminal organizations to avoid detection 4.Fake invoicing/business: Use of double invoicing , an org owns both companies and uses a purchase/sale fake transaction to make the transaction appear legitimate. 5. Sale of business: Becomes a legitimate source of capital 6.Buying a company already owned by the enterprise: Used to repatriate illicit money sent to tax havens , criminal proceeds from offhsore are used to buy a company already owned by the enterprise. 7.Paying out fake salaries

Answer 106

Trusts are private fiduciary arrangements that allow a grantor, or settlor, to place assets for future distribution to beneficiaries The grantor/settlor will usually appoint a third party, a trustee, to administer the assets in accordance with the instructions provided in the trust document Revocable and Irrevocable Trust assets can flow to the beneficiaries in a variety of ways Trusts also name “remaindermen,” who are designated to receive any residual assets after the conclusion of the trust’s term Trusts can be used to conceal ownership via secrecy rules in some jurisdictions , can hide assets from creditors ,protect property from seizure

Answer 107

an asset protection trust (APT) is a form of irrevocable trust that is usually created (i.e., settled) offshore for the principal purposes of preserving and protecting part of one’s wealth from creditors APTs are generally used for asset protection and are usually tax neutral. Their ultimate function is to provide for beneficiaries. Some proponents advertise APTs as allowing foreign trustees to ignore US court orders and simply transfer the trust to another jurisdiction in response to legal action threatening the trust’s assets. Lawyers often serve as trustees by holding money or assets “in trust” for clients. This enables lawyers to conduct transactions and administer the client’s affairs.

Answer 108

FATF issued the first eight of its Special Recommendations, which have since been incorporated into the current FATF Recommendations. (See the chapter "International AML/CFT Standards" for more detail.) Recommendation 5 encourages countries to criminalize terrorist financing and the financing of terrorist organizations and individual terrorists with or without a link to a specific terrorist act, as well as ensuring these crimes are designated as money laundering predicate offenses

Answer 109

The most basic difference between the two crimes involves the origin of the funds. Terrorist financing uses funds for an illegal political purpose, but the money is not necessarily derived from illicit proceeds Although it would seem logical that funding from legitimate sources does not need to be laundered, terrorist groups do need to disguise the link between them and their legitimate funding sources

Answer 110

The hawala system is an informal value-transfer system involving the international transfer of value outside the legitimate banking system. Based on a trusted network of individuals, this system has also played a role in moving terrorist-related funds. money raised for terrorist groups can be used for mundane expenses

Answer 111

To avoid becoming conduits for terrorist financing, organizations must consider, among other things, the following factors: * 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 * Lack of a clear relationship between the banking activity and the nature of the account holder’s business

Answer 112

The 2018 Analyst Exchange Program (AEP) was a multinational project involving financial intelligence analysts from Australia, the Philippines, Malaysia, and Indonesia The Maute terrorists were trained by the Islamic State of Iraq and Syria (ISIS) and gained experience in Syria and Iraq, or they were trained locally by a wealthy Muslim family, the Maute family. They were funded by: * The Maute family * ISIS * The sale of shabu, a slang term for methamphetamine * Anonymous mobile payments

Answer 113

Key takeaways * Terrorists need to raise, move, store, and use funds in order to sustain their operations. * Countries must identify, assess, and understand terrorist financing risk as an essential part of dismantling and disrupting terrorist networks. * Engaging with foreign counterparts is important in detecting and assessing cross-border terrorist financing risks. * It’s important to establish procedures and mechanisms to handle the exchange of sensitive information at an early stage in collaboration.

Answer 114

They have forged destructive and very profitable links with drug and criminal syndicates—among others. And they abuse charitable causes to trick individuals to contribute oil trade, extortion, undetected cash couriers, kidnapping for ransom, trafficking of humans and arms, and racketeering

Answer 115

Alternative remittance systems, or informal value transfer systems (IVTSs), are often associated with ethnic groups from Africa, Asia, and the Middle East. Hawala was created centuries ago in India and China for the movement of funds Merchant traders would deposit funds with a hawala broker or hawaladar, who typically owned a trading business. The hawaldar for a fee would make sure the funds are available for withdrawal from another hawaldar. Nowadays, deposits and withdrawals are made through hawala bankers rather than traditional financial institutions. The third parties are typically immigrants or visiting workers who send small sums to their homelands to avoid bank fees for wire transfers

Answer 116

Reasons for legitimate use of hawala and other IVTS include less expensive and faster money transmission, lack of banking access in the remittance-receiving country, cultural preference, and lack of trust in the formal banking system No physical movement of currency and poor controls regarding verification and recordkeeping. The money transfer takes place by coded information that is passed through chits, couriers, letters, faxes, emails, text messages, and online chat systems, followed by some form of telecommunications confirmation FATF has said that regulation and supervision of hawalas and other similar service providers remains a key challenge to authorities Because hawala is a remittance system, it can be used at any phase of the money laundering cycle

Answer 117

Placement: Broker receives cash and deposits in the banks Layering: Account to account transfer using several brokers to make the money trail more difficult Intergration: The money can be reinvested in a legitimate (or legitimate-appearing) business. A hawaladar could, for example, very easily arrange for the transfer of money from the United States to Pakistan and then back to the United States, apparently as part of an investment in a business there Hawalas are not subject to formal goverment oversight, Al Qaeda used 12 trusted brokers before 9/11

Answer 118

Mohammad Younis pled guilty in Manhattan federal court to operating an unlicensed money transfer business between the United States and Pakistan January to May 2010, Younis provided money transmitting services to individuals in the New York City area by assisting in the operation of a hawala Younis provided thousands of dollars in cash to the individuals at the direction of a coconspirator in Pakistan, but without knowledge of how the customers were planning to use the funds. At no time did Younis have the license to operate a money transmitting business from either state or federal authorities

Answer 119

1. Hawalas can be used to transfer funds out of some countries 2. Hawalas are useful for moving funds for illicit purposes 3. Limited scrutiny makes Hawaldars attractive

Answer 120

the US government initiated the Terrorist Finance Tracking Program (TFTP) to identify, track, and pursue the funding sources of terrorist groups. FATF acknowledges the importance of the nonprofit organization (NPO) sector to the global community. However, FATF found that more than a decade after the abuse of NPOs by terrorists and terrorist organizations was formally recognized as a concern, the terrorism threat to the sector remains.

Answer 121

* Enjoying the public trust * Having access to considerable sources of funds * Being cash-intensive * Frequently having a global presence, often in or next to areas exposed to terrorist activity * Often being subject to little or no regulation and/or having few obstacles to their creation FATF issued guidelines on best practices for charities in combating the abuse of NPOs,recommendation 8 says to use a risk based approach when providing service to NPOs to ensure NPOs not abused by Terrorist groups and cannot be exploited

Answer 122

1.NPOs to maintain a full budget accounting for everything 2.Use formal bank accounts to store and transfer funds The Charity Commission is an independent regulator of charities in England and Wales which states a 4 pronged approach 1. Cooperation with regulators national and international 2. Raising awareness in the sector of the risks charities face from terrorism 3. Proactive monitoring of the sector in areas identified as being at higher risk 4. Intervention when abuse, or the risk of abuse, related to terrorist activity is apparent

Answer 123

NPO collecting funds for humanitarian purposes outside religious instituitions , funds held in bank account NPO was assisting Terrorists NPOs can also collect in one country and transfer to another in another country to aid Terrorists there

Answer 124

* NPOs are at high risk for exploitation by terrorists. * The diversion of funds occurs when funds raised for charitable purposes are redirected to support terrorist activity. * The diversion of funds can be perpetrated internal or external individuals to the org. * Diverted funds are used to support terrorist activities both domestically and abroad

Answer 125

One method exploitation of NPOs to support terrorism is to form an operational affiliation between an NPO and a terrorist entity. These affiliations can range from informal personal connections involving NPO directors and terrorist entities to more formalized relationships The Islamic Defenders Front (FPI), conducted vigilante operations. FPI gained support by appearing to be an NPO that provided voluntary-based welfare services in disaster-struck and poverty-ridden regions and neighborhoods On Dec 30, 2020 the FPI was banned , 29 convicted of terrorism.

Answer 126

* A key risk that NPOs face is that they operate in the same vulnerable environments in which terrorists operate. * Affiliations between NPOs and terrorists can range from informal personal connections to more formalized relationships. * In NPOs that are exploited by internal actors affiliated with terrorist entities, these individuals are able to exercise influence over the NPO’s operations to ultimately support terrorist activities. * Organizations must know their NPO customers, their staff members, and the individuals and entities with whom the NPO affiliates.

Answer 127

FATF warns of several rising threats and vulnerabilities, including: * Self-funding by foreign terrorist fighters (FTFs) * Raising funds through social media * New payment products and services * Exploitation of natural resources

Answer 128

FTFs and terrorist sympathizers can self-radicalize and communicate with terrorist organizations more efficiently than ever before Self funding can be family, employment, social assistance, bank loans. Terrorists have leveraged social media through methods such as crowdfunding and sharing of virtual and prepaid account information

Answer 129

Gas, oil, timber, diamonds, gold and other precious metals, wildlife (e.g., ivory trading), and historical artifacts, or extort companies that extract those resources to both fund terrorist acts and support day-to-day activities. Regulators must be aware in which terrotories terrorists operate Red flags include the association of a customer with PEPs, complex legal entities structures with multiple internal transactions, and the rapid shipment of resources to distant jurisdictions

Answer 130

Chaudhary received money from supporters and transferred over £50,000 abroad using Bitcoin These funds paid smugglers to help captured ISIS militants escape from Kurdish-controlled prison camps in northern Syria Chaudhary immersed himself online on encrypted chat and video platforms, from which he spread terrorist propaganda and solicited funds

Answer 131

* Terrorists are adapting to technology and increasingly conducting transactions digitally, including through cryptocurrency. * Terrorists also use cyber-enabled tools to communicate. * Law enforcement employs tools and investigative techniques to identify terrorist funding through misuse of cryptocurrency. * Criminals often attempt to disguise terrorist funding as humanitarian activity. * The first line of defense (LOD) is responsible for identifying and reporting suspicious cryptocurrency activity.

Answer 132

According to the "Social Media & Terrorist Financing Report,” by the Asia/Pacific Group on Money Laundering (APG) and the Middle East & North Africa Financial Action Task Force (MENAFATF), multiple platforms have been exploited by organized networks to collect donations for extremist organizations One case was detected through suspicious matter reports (SMRs) received by the Kuwait financial intelligence unit (FIU) Social media services, including Facebook, YouTube, Telegram, Twitter, and Instagram, were used to collect donations for extremist organizations Cash, ATM deposits, bank transfers, bank websites, and exchange companies were used for funding Monitoring and surveillance of social media platforms by law enforcement can greatly enhance the detection of social media abuse by terrorists

Answer 133

* Social media can serve as a tool to facilitate and enable terrorist funding, recruitment, and propaganda. * Social media services are commonly used as communication channels by terrorists and their financiers to solicit funding. * Multiple social media platforms are exploited by organized networks. * Monitoring and surveillance of social media platforms by law enforcement can greatly enhance the detection of social media abuse by terrorists.

Answer 134

* 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

Answer 135

efforts must be made to integrate RDC processing into other controls, such as monitoring and fraud-prevention systems. sequentially numbered checks and money orders total volume of activity processed for an account via RDC is incorporated into the overall transaction monitoring system limits are placed on a customer’s ability to deposit checks via RDC

Answer 136

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 Before establishing correspondent accounts, a bank should identify the respondent bank’s owners and understand the nature of its regulatory oversight 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 If the parent does not exercise substantial and effective control, due diligence should be conducted on both the respondent

Answer 137

* The correspondent does not or cannot conduct typical due diligence to know the customers of the respondent * The correspondent does not have data on respondent transactions that typically enable transaction monitoring controls * The correspondent can identify the respondent’s regulators, but not always the degree of supervision * 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 * Some respondents are, themselves, correspondents to third banks, a practice called “nesting.” Nested accounts further shield correspondent banks from knowing the parties involved

Answer 138

July 2020,New York State Department of Financial Services (DFS) ,US$150 million, 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 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 nternal compliance controls had flagged concerns with FBME as early as 2005 and with Danske Bank Estonia from the start of the relationship in 2007,Deutsche Bank identified 826 suspicious transactions associated with FBME Bank after that rating FBME Bank declined to respond to Deutsche Bank’s queries regarding UBOs,UBO was a Russian businessman associated with a Syrian military research and development organization In 2013 and 2014, Deutsche Bank compliance staff recommended that the relationship be exited, but no action was taken until 2015.Over US$150 billion was routed from Danske Bank Estonia through Deutsche Bank. Deutsche Bank identified 340 suspicious transactions

Answer 139

* 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.

Answer 140

the respondent bank’s customers are permitted to conduct their own transactions 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 Sometimes, however, the identification of the subaccount holders is not given to the correspondent bank.

Answer 141

* 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 * 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

Answer 142

Lombard Bank Ltd, a bank licensed by the South Pacific island of Vanuatu, opened a correspondent PTA at American Express Bank International (AEBI) Lombard offered its Central American customers nearly full banking services through its PTA at AEBI 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 June 1993, as much as US$200,000 in cash was received by Lombard’s Miami affiliate on 104 occasions

Answer 143

* 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

Answer 144

The following factors can contribute to the vulnerabilities of private banking to money laundering: * Perceived high profitability * Intense competition * Powerful clientele * High level of confidentiality * Close trust developed between relationship managers and their clients * Commission-based compensation for relationship managers * Culture of secrecy and discretion developed by the relationship managers for their clients * Role of relationship managers as client advocates to protect their clients * Use of private investment companies by clients to reduce transparency of their beneficial owners * Clients maintaining personal and business wealth in numerous jurisdictions, including offshore jurisdictions * Clients’ ability to utilize and control numerous legal entities for personal and family estate planning purposes

Answer 145

FCA,2015,These regulatory breaches related to a £1.88 billion transaction that Barclays arranged customers involved were politically exposed persons (PEPs) The FCA fined Barclays more than £72 million it assessed the transaction as high risk due to the involvement of private banking, ultra-high net-worth customers, and PEPs, among other factors Barclays did not obtain the necessary information from the customers to comply with financial crime requirements. Barclays agreed to keep details of the transactions strictly confidential, even within the firm, and to compensate the customers up to £37.7 million if it failed to comply with these confidentiality restrictions

Answer 146

* Business interests should never take precedence over compliance with laws and regulations. * The close relationships established in private banking often require a higher degree of confidentiality, but this should not reduce or minimize the required compliance checks. * Strong AML/CFT compliance programs need organizations to follow the policies and procedures that support them. * Failure to follow a robust compliance plan can lead to fines, even if no actual financial crime event occurred.

Answer 147

PICs are corporations established by individual bank customers and others in offshore jurisdictions to hold assets They are shell companies formed to maintain clients’ confidentiality and serve various tax- and trust-related purposes Secrecy laws of offshore havens can conceal UBOs some PICs are established by company formation agents with nominee directors who hold titles to companies for the benefit of individuals

Answer 148

In 2014, Israeli-based Bank Leumi admitted that it had assisted more than 1,500 US taxpayers in hiding their assets in Bank Leumi’s offshore affiliates in Switzerland and Luxembourg the bank assisted in organizing nominee corporate entities registered in Belize and other offshore jurisdictions to hide their clients’ private offshore accounts and maintained several US clients’ accounts under assumed names or numbered accounts Key takeaways Nominee corporate entities registered in high-risk offshore jurisdictions are an attractive vehicle for evading tax obligations. * Care should be taken when dealing with assets associated with nonnationals to reduce the risk of them being moved or placed to deliberately avoid tax. * Facilitating tax evasion is a serious offense that can lead to large fines and negatively impact a regulated firm’s ability to do business with certain customers and jurisdictions.

Answer 149

Relatives and close associates of PEPs are also considered to be PEPs. The definition of PEPs is not intended to cover middle ranking and more junior individuals in the above categories

Answer 150

It is a crime in many countries and must be reported by filing a suspicious activity report (SAR). The individuals engaged in structuring may be “runners” hired by the launderers, that is, individuals who travel from bank to bank depositing cash and purchasing monetary instruments in amounts under reporting thresholds “Smurfing” is a common structuring technique that involves multiple individuals making multiple cash deposits and/or buying multiple monetary instruments or bank drafts in amounts under the reporting threshold to evade detection.

Answer 151

In June 2018, Commonwealth Bank (CBA) agreed to pay a AUD700 million settlement plus legal costs In Australia, banks are required to file threshold transaction reports (TTRs) to AUSTRAC for transactions of AUD10,000 or more within 10 business days. CBA failed to report over 53,000 transactions Intelligent deposit machines (IDMs) AUSTRAC alleged that CBA did not limit the number of transactions a customer could make per day; its IDMs allowed up to 200 bills per transaction. A criminal who inserted AUD100 bills could deposit up to AUD20,000 in one transaction In May and June 2016, more than AUD1 billion in cash moved through CBA's IDMs

Answer 152

* Structuring can involve many channels, such as IDMs. * Adequate controls must be in place to ensure proper monitoring and reporting. * New technologies need to be critically assessed for AML/CFT risks. * Organizations need to limit the number of customers’ daily transactions and the number of bills per transaction

Answer 153

the cash proceeds of US drug sales were deposited into accounts in New York with linked ATM cards, which were provided to associates in Colombia. Deposits were made on a regular schedule, with the Colombian associates withdrawing the funds as they were deposited and giving them to the drug lords Microstructuring red flags include: * The use of counter deposit slips instead of preprinted deposit slips * Frequent activity in an account immediately following the opening of the account with only preliminary and incomplete documentation * Frequent visits to make cash deposits of nominal amounts that are inconsistent with typical business or personal banking activity * Cash deposits followed by ATM withdrawals, particularly in high-risk countries * Cash deposits made into business accounts by third parties with no apparent connection to the company

Answer 154

In general, they help to negotiate shared contracts for common services, allowing many smaller credit unions to leverage economies of scale that they would not otherwise be able to do credit unions operate very similarly to banks in most jurisdictions. They have capital, liquidity, riskmanagement, recordkeeping, and reporting obligations similar to banks, although there might be minor differences between institutions that are subject to the oversight of regional versus federal regulators and regulations. Joint Money Laundering Steering Group (JMLSG),credit unions potentially pose lower money laundering and terrorist financing risks, because they typically have a restricted or localized customer base and offer fewer products and services, with more limitations, than retail banks One risk factor highlighted is adult parents or guardians who use a child’s account to launder funds

Answer 155

* Credit card associations, such as American Express, MasterCard, and Visa, * Issuing banks, which solicit potential customers and issue the credit cards * Acquiring banks, which process transactions for merchants who accept credit cards Third-party payment processors (TPPP), which contract with issuing and acquiring banks to provide payment-processing services to merchants and other business entities

Answer 156

provide payment-processing services to merchants and other business entities Often, they are not subject to AML/CFT requirements. TPPPs traditionally contracted with US retailers (i.e., merchants) that had physical locations in the United States in order to help collect monies owed by customers also covered ACH debits and creating and depositing remotely created checks (RCCs)

Answer 157

* Multiple financial organization relationships: The TPPP might maintain relationships at multiple organizations, which hinders the organizations’ ability to know the entire customer relationship * Money laundering: TPPPs can be used by criminals to mask transactions and launder the proceeds of crime * High return rates from unauthorized transactions: TPPPs engaged in suspicious activity, and those being used by criminals might have higher than average return rates related to unauthorized transactions

Answer 158

(MSB) or money or value transfer service (MVTS), as defined by FATF, transmits or converts currencies * Dealer in foreign exchange * Check casher: * Issuer of traveler’s checks or money orders: * Money transmitter: * Provider and seller of prepaid access: * US Postal Service: Traditional MSBs typically provide services to the underserved or unbanked individuals In the United States, principal MSBs are required to have written AML policies, procedures, and internal controls; appoint a BSA officer; provide education and training; conduct independent reviews and audits; and monitor transactions for suspicious activity. Agents of a principal MSB are required to follow regulations as a principal MSB

Answer 159

Bangko Sentral ng Pilipinas (BSP), in its campaign to combat illegal money movement via MSBs, revoked the licenses of three MSB companies, due to "significant violations” in AML compliance Key takeaways * MSBs must comply with the same AML requirements as banks. * Small MSBs might lack resources and experience, leading to compliance issues. * The cash-intensive and transactional nature of MSBs can facilitate money laundering. * MSBs offer valuable services and are important for financial inclusion

Chapter 1 Risks of ML and TF-Overview Flashcards

(183 cards)