WCAML Forum. The Saga of an AML Compliance Officer. May 8, Dennis M. Lormel President & CEO DML Associates, LLC

Transcription

1 WCAML Forum May 8, 2014 Dennis M. Lormel President & CEO DML Associates, LLC

2 The Saga of an AML Compliance Officer Background Facilitation Tools Countermeasures Crime Problem Scheme to Defraud Lessons Learned Dennis M. Lormel June 14,

3 Background

4 Introduction Compelling and real life story of a BSA and Bank Compliance Officer performing her duties and trying to do the right thing Did everything right The ACAMS connection ACAMS Annual Conference 2010 The Unlawful Intent Gambling Enforcement Act: Evaluating the Impact on Financial Institutions ACAMS Annual Conference 2012 How to Succeed in AML with Really Trying Multiple story lines Will focus on SunFirst Bank 4

5 Back Story Case began as organized crime investigation Organized crime led to credit card fraud scheme involving internet poker companies Internet poker companies led to third party processors Most banks would not wittingly service internet poker companies Third party processors used shell / shelf companies, nominees and other mechanisms to create appearance poker companies were legitimate internet businesses Third party processors working with insider at SunFirst Bank used bank to wittingly process payments for internet poker companies Dennis M. Lormel June 14,

6 The Online Gambling Market In 2010, global revenue for online gambling nearly $30 billion Less than 15% came from the U.S. As of June 30, 2010, one survey found 2,679 internet gambling sites owned by 665 companies 865 online casinos 616 online poker rooms 516 sports betting sites 426 online bingo sites 187 lottery and other sites Between 2000 and 2010, an estimated 10 million Americans gambled on internet websites From 2003 to 2010, Americans spent approximately $30 billion to gamble online 6

7 UIGEA Unlawful Internet Gambling Enforcement Act According to The Economist in an April 23, 2011 article: Hastily tacked onto unrelated legislation Safe Port Act passed by U.S. Senate September 14, 2006 Focused on port security UIGEA added to Safe Port Act on September 30, 2006 Focused on internet gambling Signed into law by President Bush on October 13, 2006 Final regulations released November 12, 2008 Came into effect January 19, 2009 Compliance not required until December 1, 2009 Dennis M. Lormel June 14,

8 UIGEA Prohibits the transfer of funds from financial institutions to internet gambling sites Excludes fantasy sports, horse / harness racing and online lotteries Confusion surrounding UIGEA Does not prohibit online gambling Justification used by subjects of this investigation Prohibits transfer of funds from financial institutions to internet gambling sites Opposition to UIGEA Dennis M. Lormel June 14,

9 Cathy Scharf CAMS certified Over 25 years experience in financial services industry Joined SunFirst Bank, St. George, Utah as BSA and Bank Compliance Officer in 2010 left bank in 2011 Tried repeatedly to take action against illegal internet gambling account holders Continuously rebuffed by bank officials, including John Campos, vice chairman and part owner Personal / emotional toll Stress Concern for safety Intimidation Guilt Legal fees Wanted to exit relationships and file SARs Dennis M. Lormel June 14,

10 Law Enforcement Investigation Long term investigation Initiated based on wiretaps conducted by Rockland County Sheriff s Office Referred to the FBI (supported by NY HIFCA) Started as organized crime case Money going into illegal internet gambling Internet credit card scheme Three waves of indictments 1. Organized crime 2. Poker sites 3. Payment processors SunFirst Bank one of about a dozen banks involved in payment process SunFirst Bank processing activity blatant Subpoenas Great cooperation from U.S. banks Dennis M. Lormel June 14,

11 Facilitation Tools

12 Facilitation Tools Shell / shelf companies Used as mechanism to create phony non-gambling companies banks would accept as customers Third Party Processors Behind shell companies as bank customers processing illegal internet gambling transactions Nominees Used to deceive banks regarding ownership of shell companies and to hide assets Banks Used wittingly or unwittingly to facilitate illegal transactions 12

13 Shell Companies Non-publicly traded corporations, limited liability companies (LLCs), and trusts that typically have no physical presence Most shell companies are formed by individuals and businesses for legitimate purposes Shell companies have become common tools for money laundering and other financial crimes Dennis M. Lormel June 14,

14 Shelf Company A company that has had no activity Put on the shelf to age Common reasons to purchase shelf companies Saving the time involved in the process to create a new corporation Creating an appearance of corporate longevity Giving easier access to investment capital and credit Form of shell company Can provide anonymity Attractive to bad guys Dennis M. Lormel June 14,

15 Third Party Payment Processors Non-bank or third party payment processors are bank customers that provide payment processing services to merchants and other business entities Third party payment processors often use their commercial bank accounts to conduct payment processing for their merchant clients Processors generally not subject to BSA / AML regulatory requirements Vulnerable to money laundering, fraud and other illicit activity Dennis M. Lormel June 14,

16 Nominees A nominee owner is a person who allows their name to be used for the purpose of recording legal ownership A nominee enters into an agreement with the beneficial owner to confirm they will act on behalf of the beneficial owner The nominee is usually paid a fee for their service Nominees provide a layer of anonymity for beneficial owners Attractive feature for bad guys Dennis M. Lormel June 14,

17 Banks Three poker companies, through third party processors, used about a dozen banks to facilitate their illegal activities Unwitting banks Most of the banks were unwitting participants Unwilling to knowingly process payments for illegal internet gambling When illegal activity identified, banks closed these accounts Witting banks Poker companies wanted transparent processors Banks willing to knowingly transact poker transactions Processors identified certain small, local banks facing financial difficulties In exchange for processing gambling transactions, the banks received sizeable fee income, as well as the promise of multi-million dollar investments in the bank 17

18 Countermeasures

19 Beneficial Ownership The term beneficial ownership when used to refer to beneficial ownership of an account in AML context is conventionally understood as equating to ultimate control over funds in such account, whether through ownership or other means. Control in this sense is to be distinguished from mere signature authority or legal title. The ability to conceal beneficial ownership is extremely attractive to bad guys The ability to conceal beneficial ownership is a detriment to law enforcement Dennis M. Lormel June 14,

20 Importance of Due Diligence Know your customer program Sound process Verification Documentation Identify beneficial ownership FATF recommendations FinCEN guidance Both stress importance of identification and consequence of risk Address customer risk Recognition Mitigation Adaptability factor Living process Assess reasonableness of business activity Consider enhanced due diligence 20

21 Deconstructing Ownership & Risk Customer Due Diligence Process Verification Documentation Identify Beneficial Ownership Adequate Accurate Timely Conduct Ongoing Due Diligence Vigilance Assess Customer Risk Consider Enhanced Due Diligence Assess Reasonableness of Business Activity Consider Enhanced Due Diligence 21

22 Crime Problem

23 Understand the Landscape Knowledge of elements of the criminal activity What level of evidence needed to prove case or demonstrate suspicious activity Vigilance for related criminal activities Knowledge of institutional policies and procedures Understand tone at the top Importance of planning and preparation Importance of contingency planning Be aware of consequences Dennis M. Lormel June 14,

24 Criminal Activity Unlawful internet gambling Operation of an illegal gambling business Bank Fraud Wire Fraud Money Laundering Dennis M. Lormel June 14,

25 Scheme to Defraud

26 Principal Players With respect to SunFirst Bank aspect of investigation Jeremy Johnson: telemarketing fraudster and third party processor Todd & Jason Vowell: worked as associates of Johnson Chad Elie: third party processor John Campos: vice chairman and part owner of SunFirst Bank Other officials at SunFirst Bank who were willfully blind Online poker companies Many more bad guys Cathy Scharf and one other SunFirst Bank officer, who fought to do the right thing Dennis M. Lormel June 14,

27 Evolution of the Scheme Banks largely unwilling to process payments for illegal activity such as internet gambling PokerStars, Full Tilt Poker, and Absolute Poker used fraudulent methods to avoid restrictions and receive billions of dollars from U.S. residents Money received from U.S. gamblers disguised as payments to hundreds of non-existent online merchants and other non-gambling businesses Relied on highly compensated third party processors through creation of phony corporations and websites to disguise payments to poker companies Poker companies and third party processors conspired together to deceive banks Dennis M. Lormel June 14,

28 Scheme at Work Internet gambling illegal under U.S. law Banks not permitted to receive proceeds from U.S. gamblers Subjects operated through deceptive means designed to trick U.S. banks into processing gambling transactions on behalf of poker companies Fraudulent credit card processing Falsified transaction codes Prepaid credit cards Loaded with funds from credit cards Fraudulent e-check processing (ACH) Transactions would falsely appear as non-gambling transactions Created phony companies and websites Transparent processors Small local banks facing financial difficulties who agreed to transact 28

29 SunFirst Bank Trifecta Chad Elie Third party processor (poker processor) Processed for PokerStars, Full Tilt Poker and Absolute Poker Needed a bank he could work with ( transparent processing ) Jeremy Johnson Telemarketing fraudster (investigated by FTC) Met Elie at online marketing symposium and formed Elite Debit (processing company) Johnson had SunFirst Bank ( The bank of Jeremy Johnson ) John Campos Vice chairman and part owner of SunFirst Bank Johnson introduced Elie to Campos Campos agreed with trepidations about gambling processing 29

30 SunFirst Bank Aspect of Investigation SunFirst beneficiary of real estate boom in 2006 SunFirst victim of subprime mortgage crisis in 2008 Seriously undercapitalized In October 2009, FDIC ordered SunFIrst to increase capital reserves by at least 11% In December 2009, following investment in bank by Chad Elie and Jeremy Johnson, bank began processing internet poker transactions SunFirst processed more than $200 million in payments from two online poker sites from December 2009 to November 2010 John Campos received $20,000 bribe payment Regulators shut down SunFirst on November 4, 2011 Dennis M. Lormel June 14,

31 Poker World s Black Friday April 15, 2011 U.S. Government seized the domains of the three largest online poker sites servicing the U.S. market Absolute Poker Full Tilt Poker PokerStars A number of indictments handed down to founding members and executives responsible for these online poker rooms John Campos and Chad Elie indicted and subsequently convicted for their roles in using SunFirst Bank to facilitate the processing of illegal gambling activity Jeremy Johnson indicted for telemarketing fraud in Federal Trade Commission (FTC) investigation 31

32 Lessons Learned

33 Cathy s Dilemma By her own account being in the wrong place at the right time Repeatedly told bank president had to exit relationships with processors and file SARs President and other bank executives regularly made misrepresentations about addressing compliance issues Continued to conduct business as usual Poor tone at the top Cooperated with authorities Outsider Intimidation factor Extremely stressful situation 33

34 Lessons Learned Importance of BSA Compliance Officer / function Truly on front line Tone at the top Without proper tone from executive management, compliance function in serious trouble Doing the right thing can be a challenge under good circumstances Doing the right thing under bad circumstances can be a nightmare Doing the right thing is the proper course of action Cathy would do same thing but differently Courage in compliance 34

35 Dennis M. Lormel President & CEO DML Associates, LLC Winmeade Drive Lansdowne, VA Dennis M. Lormel June 14,