ANTI MONEY LAUNDERING LAWS IN THE UNITED STATES

Transcription

1 ANTI MONEY LAUNDERING LAWS IN THE UNITED STATES July 2013 Michael Wu, Research Assistant Shirley Yeung, Research Assistant Limited 801, Two Exchange Square, 8 Connaught Place, Central, Hong Kong Tel: (852)

2 Disclaimer The information in this presentation is CONFIDENTIAL. It is intended solely for use by the person to whom it is given and may not be reproduced or redistributed. This presentation is not for distribution to the general public but for intended recipients only and may not be published, circulated, reproduced or distributed in whole or part to any other person without the written consent of Limited. In addition, this presentation is for informational and illustrative purposes only and should not be construed as legal, tax, investment or other advice. This presentation does not constitute an offer to provide legal and accounting services and opinion by Limited. All Copyrights reserved. 2

3 AML Fundamentals AML Laws in the United States Overview of the US AML Regulatory Framework More on BSA More on PATRIOT Act The AML Compliance Programme Enforcement Actions & Case Study TABLE OF CONTENTS Know Your Customer, CDD & EDD 64 Hedge Funds & AML 69 HK vs. US in AML Laws 80 3

4 AML FUNDAMENTALS 4

5 AML Fundamentals What is Money Laundering? Hong Kong Anti- Money Laundering and Counter- Terrorist Financing (Financial Institutions) Ordinance (Cap.615) Schedule 1 AML FUNDAMENTALS an act intended to have the effect of making any property (a) that is the proceeds obtained from the commission of an indictable offence under the laws of Hong Kong, or of any conduct which if it had occurred in Hong Kong would constitute an indictable offence under the laws of Hong Kong; or (b) that in whole or in part, directly or indirectly, represents such proceeds not to appear to be or so represent such proceeds 5

6 AML Fundamentals What is Money Laundering? The United States Title 18 Part 1 Charter 9.5 U.S. Code of 1956 Whoever, knowing that the property involved in a financial transaction represents the proceeds of some Aml fundamentals form of unlawful activity, conducts or attempts to conduct such a financial transaction which in fact involves the proceeds of specified unlawful activity with the intent to promote the carrying on of specified unlawful activity AML FUNDAMENTALS 6

7 AML Fundamentals What is Money Laundering? Attempt to disguise the proceeds of illegal activity so that they appear to come from a legitimate source or activity AML FUNDAMENTALS 7

8 AML Fundamentals How does money laundering work? Placement Layering Integration AML FUNDAMENTALS 8

9 AML Fundamentals Placement Placing dirty money into a legitimate financial institution Often in the form of small cash bank deposits AML FUNDAMENTALS Since banks are required to report high-value transactions 9

10 AML Fundamentals Layering sending the money through various financial transactions to change its form and make it difficult to follow AML FUNDAMENTALS Could be done through bank-tobank transfers, wire transfers, deposits and withdrawals, changing the currency, or purchasing high valued items such as precious metals or real estate 10

11 AML Fundamentals Integration money re-enters the economy in a legitimate form of a legal transaction Could be purchasing goods or services that actually do not exist or in the form of a fictitious loan to yourself from a third-party or to a third-party from yourself AML FUNDAMENTALS 11

12 AML LAWS IN THE UNITED STATES 12

13 AML Laws in the United States Bank Secrecy Act (1970) (BSA) First major piece of money laundering legislation in the US Establishes requirements for recordkeeping and reporting by private individuals, banks and other financial institutions Helps identify the source, volume, and movement of currency Requires banks to report cash transactions over using the Currency Transaction Report (CTR) Details found in latter Parts AML LAWS IN THE UNITED STATES 13

14 AML Laws in the United States Money Laundering Control Act (1986) Establishes money laundering as a federal crime Prohibits structuring transactions to evade CTR filings Introduces civil and criminal forfeiture for BSA violations AML LAWS IN THE UNITED STATES 14

15 AML Laws in the United States Anti-Drug Abuse Act of 1988 Expands the definition of financial institution to include businesses such as car dealers and real estate closing personnel Requires the verification of identity of purchasers of monetary instruments over USD$3,000 AML LAWS IN THE UNITED STATES 15

16 AML Laws in the United States Annunzio-Wylie Anti-Money Laundering Act (1992) Strengthens the sanctions for BSA violations Requires Suspicious Activity Requires verification and recordkeeping for wire transfers Establishes the Bank Secrecy Act Advisory Group (BSAAG) Introduction of the Death Penalty AML LAWS IN THE UNITED STATES 16

17 AML Laws in the United States Money Laundering Suppression Act (1994) Requires banking agencies to review and enhance training, and develop anti-money laundering examination procedures Requires each Money Services Business (MSB) to be registered by an owner or controlling person of the MSB Requires every MSB to maintain a list of businesses authorized to act as agents in connection with the financial services offered by the MSB Makes operating an unregistered MSB a federal crime AML LAWS IN THE UNITED STATES 17

18 AML Laws in the United States Money Laundering and Financial Crimes Strategy Act (1998) Banking agencies to develop anti-money laundering training The Department of the Treasury and other agencies to develop a National Money Laundering Strategy Create the High Intensity Money Laundering and Related Financial Crime Area (HIFCA) Task Forces AML LAWS IN THE UNITED STATES 18

19 AML Laws in the United States USA PATRIOT Act (2001) Criminalizes the financing of terrorism and augmented the existing BSA framework by strengthening customer identification procedures Prohibits financial institutions from engaging in business with foreign shell banks Requires financial institutions to have due diligence procedures Expands the anti-money laundering program requirements to all financial institutions Increases civil and criminal penalties for money laundering AML LAWS IN THE UNITED STATES Details found in latter parts 19

20 OVERVIEW OF THE US AML REGULATORY FRAMEWORK 20

21 Overview of the US AML Regulatory Framework Who has the authority to assess penalties for violations of AML Laws? The Secretary of Treasury Financial Crimes Enforcement Network (FINCEN) Federal Regulators such as Financial Industry Regulatory Authority, US Securities and Exchange Commission (SEC) Department of Justice FRAMEWORK OVERVIEW OF THE US AML REGULATORY 21

22 Overview of the US AML Regulatory Framework FINCEN A bureau of the US Treasury Department Established in 1990 A Financial Intelligence Unit Relies on federal regulators to enforce AML compliance Provides guidance in implementation of BSA and PATRIOT Act FRAMEWORK OVERVIEW OF THE US AML REGULATORY 22

23 MORE ON BSA 23

24 More on BSA Financial Institutions (FIs) refers to Bank, Brokers & Dealers in Securities, MSB etc. Include US offices of foreign FIs, but non-us officers also indirectly affected if they maintain correspondent relationships in US or otherwise clear USD through US Scope Definition significantly expanded in PATRIOT Act MORE ON BSA Focus: the BSA Reports Useful in law enforcement in identification & tracing, investigation and prosecution of ML 24

25 More on BSA First time ever recognizing ML as a crime 18 USC 1956: Laundering of monetary instruments fine of not more than USD$500,000 or twice the value of the monetary instrument or funds involved, whichever is greater, OR imprisonment for not more than 20 years, or both Enhanced in PATRIOT Act MORE ON BSA 25

26 More on BSA 1) Currency Transaction Report (CTR) Activities Cash currency (coin or paper money circulated in any country) transactions of more than USD$10,000 in one business day (not including USD$10,000) Multiple transaction treated as one aggregated transaction if the FI has knowledge that they are by or on behalf of the same person E.g. Cash withdrawals/ deposits, Foreign currency exchange, Checks and Drafts MORE ON BSA To Whom By Whom FINCEN Bank, Credit Unions, Depository Institutions, Securities Brokers/ dealers, Mutual Funds, Futures Commission Merchants(FCMs) and Introducing brokers (IBs), MSBs, Casinos 26

27 More on BSA 1) Currency Transaction Report (CTR) Exemption s Time Anti- Money Laundering Suppression Act Phase I (automatic exemptions): banks, governmental departments or agencies, and listed public companies and their subsidiaries Phase II: non-listed Business or ineligible business or payroll customers (not including individuals) Filing manually: 15 calendar days Electronically: 25 calendar days Not counting the reportable transaction date Retained for a minimum of 5 years from filing date MORE ON BSA Informing Customer Failure Can notify the customers about the filing but not necessary Back-filing the transactions as soon as the failure discovered, otherwise sanction 27

28 More on BSA 1) Currency Transaction Report (CTR) CTR Form Evasions Identification (name, address, type and a/c no, taxpayer identification no., passport if non-resident) Reporting is mandatory even if the source of funds known to be legitimate Any type of evasions is a crime (18 USC 1956) Structuring Micro-structuring Smurfing MORE ON BSA 28

29 More on BSA 2) Suspicious Activity Report (SAR) Activities Insider Abuse involving any amount: known or suspected crimes committed by the institution or its affiliated party- directors, employees etc. Violations aggregating to USD$5,000 or more where a suspect can be identified: actual victim or potential victim of a federal crime Violations aggregating to USD$25,000 or more regardless of a potential suspect Transactions aggregating to USD$5,000 or more that involve potential ML or violations of BSA: involves illicit funds, activities having no business purpose or apparent lawful purpose Computer intrusion: access gained to a computer system of FIs either to remove, steal, procure or otherwise affect funds or inform of customers, or to damage the system MORE ON BSA 29

30 More on BSA 2) Suspicious Activity Report (SAR) To Whom By Whom FINCEN at the IRS Enterprise Computer Centre Bank, Credit Unions, Depository Institutions, Securities Brokers/ dealers, Mutual Funds, Futures Commission Merchants and Introducing brokers, MSBs, Insurance Companies, Casinos (USUALLY AML Compliance Officer) MORE ON BSA Exemptions Robberies, burglaries, lost or stole securities reported to local authorities Refuse Execution Not a must to stop processing the transaction where a SAR is warranted, but at their own risks ity No FIs may notify any person involved in the transaction that it has been reported 30

31 More on BSA 2) Suspicious Activity Report (SAR) Time If identity of suspect known on the date of initial detection of incident: 30 calendar days If identity unknown on that date: 60 calendar days Not counting the initial detection date MORE ON BSA Initial detection date: Automated software used: date concluding the activity is suspicious Review manually: date where transactions under review meet one or more of the definitions of suspicious activity Not date of alert or review 31

32 More on BSA 2) Suspicious Activity Report (SAR) Supporting Documentation All records that make the FIs determine certain activity as one requiring a SAR filing Amount and type depend on facts and circumstances of investigation FIs should outline how docs is collected and stored MORE ON BSA E.g. transaction records, tape recordings, s SAR Form Identification of the a/c holder as the subject information If a/c holder not the subject of investigation, but is involved, identification of the related parties in the narrative Dates of Suspicious Activity (not the date of review) Gross amount of transaction (without netting) 32

33 More on BSA 2) Suspicious Activity Report (SAR) Safe Harbor Annunzio-Wylie Anti- Money Laundering Act Protection from civil liabilities if SAR is filed in good faith PATRIOT Act clarities in Section 351 MORE ON BSA No protection if action against an FIs is brought by a gov t entity See Lee Bankers Trust Co (1999)- no defamation claim allowed 33

34 More on BSA 3) Form 8300: When person engaged in trade who receives more than USD $10,000 in single or multiple transactions in cash or covered monetary instruments (For retail sector) MORE ON BSA 4) Reports of Foreign Bank and Financial A/C: When a US person who, at any time during the calendar year, has a financial interest over USD$10,000 in foreign financial a/c (bank a/c, securities etc.) 5) Reports of International Transportation of Currency or Monetary Instruments: When person physically transports, mails or ships instruments in an aggregate amount exceeding USD$10,000 at one time to US AND person receives such amount in US 34

35 MORE ON PATRIOT ACT 35

36 More on PATRIOT Act The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of Title III, the International Money Laundering Abatement and Anti-Terrorist Financing Act Expanded coverage to Non-Bank Financial Institutions (NBFIs) Enhanced requirements of AML Program that include policies, procedures and controls, designation of a compliance officer, training and independent review Enhanced customer due diligence MORE ON PATRIOT ACT 36

37 More on PATRIOT Act Definition of FIs expanded to include NBFIs THAT IS, FIs under regulation also include Commodity Trade Advisers Commodity Pool Operators Trust Companies Operators of Credit Card systems Dealers in Precious metals, stones or jewels Persons involved in real estate settlements and closings Businesses engaged in vehicle sales Travel Agencies Postal Services Telegraph companies etc. MORE ON PATRIOT ACT 37

38 More on PATRIOT Act Foreign FIs Covered? Surely YES for foreign subsidiaries of US FIs Practically YES for foreign FIs operating exclusively outside US For the latter, AML Programs require Additional information requests about the FI itself and its customers if transaction processed through US FIs Seizures of FI s funds maintained in a/c in US Sanctions against either the FI itself or the country from which it operates MORE ON PATRIOT ACT 38

39 More on PATRIOT Act Section 311- one or more of the five Special Measures for Jurisdictions imposed on foreign jurisdiction, foreign FIs, classes of int l transactions or types of a/c if US Treasury Department determines them to be of primary ML concern (1) additional recordkeeping and reporting of certain financial transactions (2) collection of info. relating to beneficial ownership of a/c (3) collection of info. relating to certain payable through a/c (4) collection of info. relating to certain correspondent a/c (5) prohibition or imposition of conditions on opening or maintaining correspondent or payable through a/c MORE ON PATRIOT ACT 39

40 More on PATRIOT Act Section 312- Special Due Diligence for correspondent a/c (under offshore banking license, under license issued by a country where int l AML principles not applicable, or subject to Special Measure Order by s.311) and private banking a/c for non-us persons Section 313- Prohibition on US Correspondent a/c with Foreign Shell Bank (no physical presence in any country or jurisdictions) MORE ON PATRIOT ACT 40

41 More on PATRIOT Act Section 314- Info. Sharing to Deter ML (a) mechanism for law enforcement agencies to communicate names of suspected money launderers and terrorist to FIs (b) mechanism for FIs to share these info. among themselves Section 319- Possible forfeiture of funds in the US interbank a/c (a) no requirement of interbank a/c funds traceable to funds deposited in the foreign bank (b) FIs to reply request of info from US regulator relating to AML compliance within 120 hours; and to submit info. within 7 days (c) maintain info. of the owners of the foreign respondent and name and address of person in US who is authorized to accept services regarding the correspondent a/c MORE ON PATRIOT ACT 41

42 More on PATRIOT Act Section 325- Possible regulations concerning the maintenance of concentration a/c by US depository institution Section 326- Customer Identification Program: minimum standards of info acquired by banks, depository institutions, credit unions with, broker dealers, mutual funds and FCMs and IBs for (a) verifying the identity of any person opening an a/c (b) maintaining records of the info used to verify the person s identity (c) determining whether the person appears on any list of known or suspected terrorists MORE ON PATRIOT ACT 42

43 More on PATRIOT Act Section 351- Safe Harbor from civil liability for FI filing SARs not applicable to actions brought by gov t entity Section 352- AML Program Section 353- Possible disclosure of former employee s potentially unlawful activity upon request for an employment reference by a second insured depository institution MORE ON PATRIOT ACT Section 356- Broker dealers to file SARs 43

44 More on PATRIOT Act Section 363- Increased max civil and criminal penalties for violation from USD$100,000 to USD$1m Section Form Section 373- Prohibition of unlicensed Money transmitter MORE ON PATRIOT ACT Section 505- Expanded use of National Security Letters in scrutiny of US residents, visitors and citizens who are no suspect of any criminal investigation 44

45 THE AML COMPLIANCE PROGRAMME 45

46 The AML Compliance Program Development of Written Internal Policies, Procedures and Controls Definition of ML and TF Legislative and regulatory framework Standards of Knowledge AML related roles and responsibilities Principal products and servicing offerings and customer base Other key elements of the Program THE AML COMPLIANCE PROGRAMME 46

47 The AML Compliance Program Requires customized procedures to different departments and product areas Possible separation of policies from procedures, where policies require approval by the board of directors Mechanism in place to ensure the most recent and approved policies and procedures are available for both reference and submission to FINCEN THE AML COMPLIANCE PROGRAMME 47

48 The AML Compliance Program Designation of an AML Compliance Officer Designation by Board of Ds Generally responsible for Developing and maintaining the Program, Ensuring timely and accurate filing of required reports (NB no approval required from Board) Coordinating AML training Liaising with regulators Overseeing the transaction monitoring function THE AML COMPLIANCE PROGRAMME 48

49 The AML Compliance Program Pay special attention when there are plans to offer new products and services!! New lines have to be part of the AML Program too Commonly, a Customer Acceptance Committee is set up Compliance officers and members from each business line meet on a regular basis to discuss high-risk prospects wishing to enter into a relationship with the FIs THE AML COMPLIANCE PROGRAMME 49

50 The AML Compliance Program Ongoing AML Employee- Training Program Employees With direct or indirect contact with customers; Employees in compliance, accounting and internal audit departments; Management personnel Forms of Trainings Computer-based Face- to- Face Outsourcing THE AML COMPLIANCE PROGRAMME 50

51 The AML Compliance Program Content (1) Background on ML and TF (2) Summary of the key AML laws (3) Requirements of the AML policies and procedures of the FI (4) Summary of how AML laws impact the FI (5) Roles and Responsibilities of them (6) Suspicious activity red flags and case studies (7) Consequences of noncompliance THE AML COMPLIANCE PROGRAMME 51

52 The AML Compliance Program Program reviewed and updated to reflect current developments to laws, ML and TF trends, and internal policy Some FIs choose to provide employees quiz at the end of training session to measure the effectiveness of training THE AML COMPLIANCE PROGRAMME 52

53 The AML Compliance Program Independent Testing of the AML Program Conducted by individuals independent of the compliance functions, intending to test compliance with legal and regulatory requirements Similar to an Auditor Independent test to be risk-based Scope and approach of testing depending on organization s AML risks, as determined by its own RA and a RA performed by the independent reviewer THE AML COMPLIANCE PROGRAMME 53

54 The AML Compliance Program Tests on ALL Key Elements Can be tested one by one separately If so, summary prepared periodically for overall assessment Frequency of tests also based upon the AML risks, usually every 12 to 18 months THE AML COMPLIANCE PROGRAMME 54

55 The AML Compliance Program Risk Assessments Business Line RA- identify each business line s level of vulnerability to ML and TF Customer RA Office of Foreign Assets Control RA- identify an organization s level of vulnerability to noncompliance with economic sanctions administered by the Officer of Foreign Assets Control (OFAC) Know Your Customers (KYC) CTRs & SARs THE AML COMPLIANCE PROGRAMME Information Sharing- s

56 The AML Compliance Program Sanction Program by OFAC Independent from AML compliance, but also targets alleged money launderer and terrorists Economic and trade sanctions against certain individuals, entities and foreign gov t agencies and countries whose interests are considered to be at odds with US policies (mainly terrorists nations) Recordkeeping and Retention Program Funds Transfer Recordkeeping Requirement Purchase and Sale of Monetary Instruments Form 8300 Report of Foreign Bank and Financial Accounts THE AML COMPLIANCE PROGRAMME 56

57 The AML Compliance Program Common Issues AML compliance officer lacks sufficient experience and/ or knowledge Insufficient resources Lack of specific training of employees with critical functions (a/c opening, transaction processing, risk management) Failure to incorporate RA into transaction-monitoring process, customer acceptance stances, audits, testing etc. Poor documentation maintained (lack of timelines) Poor follow-up on SAR actions THE AML COMPLIANCE PROGRAMME 57

58 ENFORCEMENT ACTIONS & CASE STUDY 58

59 Enforcement Actions & Case Study Criminal Actions Civil Actions Involved Individuals Imprisonment, Fines: Standards of Knowledge - Reckless Disregard - Wilful Blindness - Collective Knowledge Seizure or Forfeiture of Funds Depositary Institutions Commitment Letter Memorandum of Understanding Formal Agreements Consent Order or Order to Cease and Desist Civil Monies Penalty Death Penalty- Charters/ Licenses Revoked ENFORCEMENT ACTIONS & CASE STUDY 59

60 Enforcement Actions & Case Study Notable Cases ABN Amro (2005) American Express (2007) Sigue Corporation (2008) E*Trade (2009) Wachovia (2010) ENFORCEMENT ACTIONS & CASE STUDY 60

61 Enforcement Actions & Case Study United States v. HSBC Bank USA, N.A. and HSBC Holdings plc As part of a wide-ranging restructuring of the bank, HSBC downsized its compliance department HSBC, Mexico branch was found providing money-laundering services to various drug cartels, including bulk movements of cash from the bank's Mexican unit to the US the Office of the Comptroller of the Currency (OCC) cited the bank for many AML deficiencies - including a huge backlog of unreviewed a/c and failure to file Suspicious Activity Reports (SARs) ENFORCEMENT ACTIONS & CASE STUDY 61

62 Enforcement Actions & Case Study United States v. HSBC Bank USA, N.A. and HSBC Holdings plc Justice Department s criminal division and the Manhattan DA wanted the bank to plead guilty to violations of the BSA BSA requires financial institutions to report any cash transaction of USD$10,000 or more and to bring any dubious activity to the attention of regulators in which HSBC failed to do so A guilty plea over such charges, would result in a death sentence, revoking HSBC s license in the US State and federal authorities decided against indicting HSBC in a money-laundering could jeopardize one of the world s largest banks and ultimately destabilize the whole sector ENFORCEMENT ACTIONS & CASE STUDY 62

63 Enforcement Actions & Case Study United States v. HSBC Bank USA, N.A. and HSBC Holdings plc HSBC struck a deal with federal authorities - a deferred prosecution agreement with the Manhattan DA and the Justice Department. HSBC to forfeit more than USD$1.2 billion and pay about USD$700 million in fines. HSBC must also strengthen its internal controls. If the bank again runs afoul of the federal rules in the next 5 years, the Justice Department can resume its case and file a criminal indictment. ENFORCEMENT ACTIONS & CASE STUDY 63

64 KNOW YOUR CUSTOMER, CDD & EDD 64

65 Know Your Customer, CDD & EDD What is Know Your Customer? KYC generally refers to the steps taken by financial institutions to establish the identity of a customer and be satisfied that the source of the customer funds is legitimate. This includes: Customer identification programme Customer due diligence Enhanced due diligence KNOW YOUR CUSTOMER, CDD & EDD 65

66 Know Your Customer, CDD & EDD What is Customer due diligence (CDD)? CDD is the information obtained for all customers which enable a financial institution to verify the identity of a customer and assess the risks associated. What is Enhanced due diligence? EDD refers to additional information that would be collected for customers deemed to be of high risk KNOW YOUR CUSTOMER, CDD & EDD 66

67 Know Your Customer, CDD & EDD What additional info might a financial institution request as part of an EDD? Nature of business Purpose of a/c Expected pattern of activity in a/c e.g. currency transaction types Business certificates and partnership agreements Annual financial statements Approximate annual sales Net worth Copies of any correspondence with clients KNOW YOUR CUSTOMER, CDD & EDD 67

68 Know Your Customer, CDD & EDD What is Know Your Customer? KYC generally refers to the steps taken by financial institutions to establish the identity of a customer and be satisfied that the source of the customer funds is legitimate. This includes: Customer identification programme Customer due diligence Enhanced due diligence KNOW YOUR CUSTOMER, CDD & EDD 68

69 HEDGE FUNDS & AML 69

70 Hedge Funds & AML Why Hedge Funds? As non-public offerings, they are exempted from compliance with the registration and prospectus delivery requirements. Offshore funds are subject to the securities laws and regulations imposed by the jurisdiction in which they are domiciled, not US laws Many of these jurisdictions have relatively lax anti-money laundering standards, HEDGE FUNDS & AML Hedge funds are more likely to be used in the layering or integration. 70

71 Hedge Funds & AML Various characteristics of hedge funds and how they are normally used: Hedge funds usually deal in large amounts of money. Hedge funds usually do not deal in large amounts of cash and cash equivalents. Hedge funds have restrictions on withdrawal of money Since much secrecy surrounds hedge funds and their returns, the growth in hedge funds provides a great plausible explanation for the origin of money. The launderer may not be interested in using the money right away; he may be interested in stashing the money away for use years later. HEDGE FUNDS & AML 71

72 Hedge Funds & AML Scenario: A cocaine distributor has USD$4 million in cash he needs to launder. He has 100 different checking a/c at various banks opened under false names. He and his associates deposit the USD$4 million into the a/c over the course of a couple weeks. All the deposits are about USD$5,000 and are spread out over time over various branches, no CTRs are filed The placement step is complete - money has been successfully placed into the financial system. HEDGE FUNDS & AML 72

73 Hedge Funds & AML Scenario: The money is then consolidated from the one hundred a/c into five central a/c using a combination of checks, journals, and wire transfers. The money is further consolidated into an offshore a/c in the Cayman Islands. It is then wired to another a/c in New Jersey and further wired to an a/c in the Philippines.. HEDGE FUNDS & AML 73

74 Hedge Funds & AML Scenario: Finally, the USD$4 million is used as an opening deposit at a new hedge fund. The money is channeled through an intermediary and supposedly comes from a wealthy Asian business executive who wants a higher rate of return than he believes he can get with traditional investments. The hedge fund bought the Asian business executive story and do not dig too deep to verify that the business really exists. The layering step is complete - the money has been distanced from its criminal origins. HEDGE FUNDS & AML 74

75 Hedge Funds & AML Scenario: The launderer leaves the money in the hedge fund, and after two years it has grown to USD$7 million. At this point the launderer withdraws USD$1 million and retires to live in style. If anyone questions the origin of his funds, he has paperwork to show that he s living off the large returns from a hedge fund. The layering and the passing of time are sufficient to cloud the origin of the original investment. The integration step is complete - The drug distributor is enjoying his illegal gains and has a plausible explanation for its origin. HEDGE FUNDS & AML 75

76 Hedge Funds & AML Hedge funds are very susceptible to money laundering because they combine all the following traits in a single financial institution: Secrecy Light regulation Rapid proliferation HEDGE FUNDS & AML 76

77 Hedge Funds & AML In Response: FINCEN planned on bringing AML compliance measures to hedge funds in The proposed rules required investment advisors of Hedge Funds to monitor their transactions and file suspicious activity reports (SARs) when necessary. Proposals was withdrawn in 2008, in part because of the difficulty in defining a hedge fund and enforcing the requirements. HEDGE FUNDS & AML 77

78 Hedge Funds & AML In Response: FINCEN indicated in 2011 that it was once again working on a regulatory proposal to require hedge funds to establish an AML compliance program and monitor/self-report suspicious activity. In early 2013, the SEC announced its priorities for the coming year The agency s goals for 2013 include a focus on AML. In particular on weak AML programs, giving particular attention to how broker-dealers assess the risks in their business practices and implement AML programs related to those risks. HEDGE FUNDS & AML 78

79 Hedge Funds & AML January 2013, FINCEN announced it is working on a rule that would require US hedge funds to file formal reports notifying US authorities of any suspicious trading by employees or outside parties This rule is expected to force funds to spend more money on building out their compliance and legal departments require hedge funds to do more due diligence on their employees and customers. HEDGE FUNDS & AML 79

80 HK VS. US IN AML LAWS 80

81 Key Statutes Hong Kong Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (AMLO); Guideline on Anti-Money Laundering and Counter- Terrorist Financing in 2012 (Guideline) USA BSA, PATRIOT Act Title 3 Major Regulator HKMA, SFC, DOJ FINCEN, SEC, DOJ What to launch? AML/CTF Systems AML Compliance Program Written Policies and Procedures Required? Yes, particularly on staff training (Ch.9 of the Guideline) & if there s overseas branches, on record keeping (AMLO Sch. 2 Part 4) Yes, AML Compliance Program HK VS. US IN AML LAWS Compliance Officer Required? Record Keeping Necessary? Yes, and also a money-laundering reporting officer (Ch.2 of the Guideline) Yes, AMLO Sch. 2 Part 3, Ch.8 of the Guideline Yes, AML Compliance Program Yes, AML Compliance Program 81

82 On-going Training Yes, Ch. 9 of the Guideline Yes, AML Compliance Program Independent Tests Yes, Ch. 2 of the Guideline Yes, AML Compliance Program Suspicious Transactions Yes, RTRPO, OSCO, UNATMO, Ch. 7 of the Guideline Yes, SARs in BSA and PATRIOT Act CDD & EDD Yes, Ch.4 of the Guideline Yes, AML Compliance Program Sanctions By regulated authority: Penalty up to HKD$10m (USD$1.3m) or 3 times the value of funds involved (AMLO s.21); By DOJ: Imprisonment up to 7 years By regulated authority: Penalty up to USD$1m or 2 times the value of funds (PATRIOT s.363); By DOJ: Imprisonment up to 20 years (BSA s.2) HK VS. US IN AML LAWS 82

83 Reference Protiviti, Guide to US Money Laundering Requirements, 4th Edition, 2010 HK VS. US IN AML LAWS 83

84 About CompliancePlus specializes in compliance and regulatory requirements for licensed firms, licensed persons, fund management companies, hedge fund managers and all types of financial institutions in Asia. Our team members have a proven track record of delivering practical and tested compliance solutions to our clients, with extensive industry experience in different areas and business divisions of the finance industry. Some of them have served as Senior Compliance personnel in major financial institutions with offices and operations across the Asia Pacific Region. CompliancePlus brings the most comprehensive and value-added compliance services to our clients, enhancing their competitiveness in the finance industry. HK VS. US IN AML LAWS This presentation is for information only and in no way constitute legal or other professional advice Contact : Josephine Chung, Director, jchung@complianceplus.hk Tel: Copyrights 2013 Limited 84

85 THE END 85