Anti-Money Laundering Refresher. A.D.Banker&Company

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1 Anti-Money Laundering Refresher A.D.Banker&Company

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3 Table of Contents Anti-Money Laundering - Refresher Introduction...1 Definition of Money Laundering Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) The Crime of Money Laundering Types of Money Laundering United States Money Laundering Enforcement Agencies...5 Federal Bureau of Investigation (FBI) The Financial Crimes Enforcement Network (FinCEN) Other Federal Agencies United States Laws Pertaining to Money Laundering...6 The Bank Secrecy Act (BSA) Money Laundering Control Act of 1986 (MCLA) USA PATRIOT Act Intelligence Reform and Terrorism Prevention Act of 2004 (IRTPA) FATF 40 Recommendations...9 Prevention...10 Preventive Measures Required by Insurance Companies and Producers Requirements for Insurer AML Training Red Flags...14 Willful Blindness Suspicious Activity Report (SAR)...15 SAR Confidentiality Money Laundering Safeguards...17 Customer Identification Program (CIP) Know Your Money Specially Designated Nationals (SDN) Politically Exposed Persons (PEP) AML Summary...20 i

4 Copyright 2015 A.D. Banker & Company, L.L.C. This course, seminar, or publication provides general information regarding the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. The publisher hereby expressly excludes all warranties ii

5 Anti-Money Laundering Refresher Introduction Anti-money laundering (AML) describes the efforts of government agencies and the financial services and insurance industries to prevent, detect, and report money laundering activities. In general, money laundering is a term that describes the concealment of the original source of funds acquired through illegal means. The motivation to engage in money laundering is generally the desire to camouflage criminal activity as the source of income either to make the funds appear legitimate or to funnel them into other illegal activities such as drug trafficking or terrorism. According to the United Nations, money laundering is Any act or attempted act to disguise the source of money or assets derived from criminal activity. It is the process whereby dirty money produced through criminal activity is transformed into clean money. In this course, we will examine various money laundering techniques. We will also discuss the history of money laundering and its evolution from the basic offshore account to the present-day practices of money placement, layering, and integration. National and international government agencies, laws, and other safeguards will be reviewed, as will the effects of money laundering. Finally, we will increase awareness of the insurance industry s role in recognizing and combating money-laundering techniques. Every day throughout the world, money launderers seek new ways to funnel illegally gained profits back into legitimate commerce, using whatever financial means are available. Even the insurance industry, once thought to be immune to the trappings of cash-heavy crime money, is no longer beyond the reach of money launderers. Definition of Money Laundering The Internal Revenue Service (IRS) is one of the government agencies responsible for investigating violations of federal money laundering statutes; specifically, the IRS investigations violations of 18 U.S.C Laundering of Monetary Instruments and 18 U.S.C. - Engaging in Monetary Transactions in Property Derived from Specified Unlawful Activity. 1 On its website, the IRS defines money laundering as: 2 the activities and financial transactions that are undertaken specifically to hide the true source of the money. In most cases, the money involved is earned from an illegal enterprise and the goal is to give that money the appearance of coming from a legitimate source. 2 Anti-Money Laundering/Combating the Financing of Terrorism (AML/ CFT) According to the International Monetary Fund, money laundering and the financing of terrorism are financial crimes with economic effects. 3 Anti-money laundering efforts and combating the financing of terrorism protect the financial framework of all jurisdictions worldwide

6 2 ANTI-MONEY LAUNDERING-REFRESHER Throughout this course, the term jurisdiction is used. It should be noted that jurisdiction does not necessarily translate into the terms state or country. The legal definition of jurisdiction is: 4 1. Power of a court to adjudicate cases and issue orders. 2. Territory within which a court or government agency may properly exercise its power. Cornell University Law School considers the term jurisdiction to mean the same thing as power. This means one court or legal system may actually have power, or jurisdiction, over another with respect to making judicial and legal decisions. In other words, one court, territory, state, or country has legal authority over another. This legal authority may apply to all laws, or only to specific laws such as AML/ CFT laws. A number of international and federal organizations exist to work together to prevent and detect the crimes of money laundering and financing terrorism and to investigate and prosecute those who commit them. In addition, AML/CFT measures adopt universal standards to regulate specific types of financial transactions and activities. We will discuss these organizations, measures, and standards throughout this course. The Crime of Money Laundering According to the IRS and the Financial Crimes Enforcement Network (FinCEN) 5, criminal activity utilizing financial fraud was the origination of money laundering in the U.S., despite the public s perception it originated during Prohibition and became popular because of gangsters such as Al Capone. Although organized crime did not create the concept of money laundering, it employed it at a high level. Notorious underworld figure Meyer Lansky is credited with transforming money laundering to an art form. He is regarded as the first individual to establish a labyrinth of foreign banks, dummy companies, and offshore accounts to move and hide money. Lansky even managed to dodge the Swiss Banking Act of 1934 by purchasing his own Swiss bank. Lansky was the only high-profile mobster of his time who was never arrested or convicted of money laundering (or any other crime). Despite being indicted for income tax evasion, Lansky was later acquitted. The Watergate scandal introduced the term money laundering to the public in the United States, incorporating it into common vocabulary when a presidential fundraising committee moved illegal campaign contributions to Mexico, then transferred the funds back into the U.S. through transactions using a shell company in Miami. From there, the money was re-donated to the committee by entities that appeared legitimate. These types of illegal activities prompted the enactment of banking laws to require the creation of a paper trail for certain types of financial transactions and activities. The purpose of the paper trail is to allow government agencies and the judicial system to enforce laws pertaining to financial crimes. The IRS and Financial Crimes Enforcement Network (FinCEN) began investigating and prosecuting money laundering in the 1970s. The initial federal legislation that addressed money laundering was enacted in Referred to as the Bank Secrecy Act (BSA), the Currency and Foreign Transactions Reporting Act requires American financial institutions to help government officials detect and prevent money laundering

7 ANTI-MONEY LAUNDERING-REFRESHER 3 The FinCEN definition of financial institution appears below: 7 A financial institution includes any person doing business in one or more of the following capacities: (1) bank (except bank card systems) (2) broker or dealer in securities (3) money services business (4) telegraph company (5) casino (6) card club (7) a person subject to supervision by any state or federal bank supervisory authority In particular, the BSA requires financial institutions to: Document the cash purchase of a negotiable instrument (i.e., a document that guarantees the payment of a specific dollar amount of money and meets other requirements of 3 U.C.C ); File a report for all daily cash transactions that exceed an aggregate of $10,000; and Report suspicious activity that might indicate money laundering, tax evasion, and/or other criminal activity might be occurring. The BSA is referred to as an anti-money laundering law and has been amended several times, most notably by the USA PATRIOT Act of Although individual instances of deceptive transactions such as income tax evasion and bribery were prosecuted before 1986, the actual laundering of money was not declared a crime until the enactment of the Money Laundering Control Act of The Act described, defined, and prohibited the practice of money laundering. In the United States, money-laundering laws include: Bank Secrecy Act (1970) Money Laundering Control Act (1986) Anti-Drug Abuse Act (1988) Annunzio-Wylie Anti-Money Laundering Act (1992) Money Laundering Suppression Act (1994) Money Laundering and Financial Crimes Strategy Act (1998) USA PATRIOT Act (2001) specifically, Title III, also known as the International Money Laundering Abatement and Financial Anti-Terrorism Act Intelligence Reform & Terrorism Prevention Act (2004) The definition of money laundering stated here deals primarily with the origin of money; however, terrorists are equally concerned with concealing the destinations and purposes of the proceeds from their illegal activities. In fact, terrorists and terrorist organizations rely almost exclusively on laundered money because no financial institution or government wants to be identified with them. Money laundering is a global problem and is outlawed in most countries. The International Monetary Fund (IMF) is an organization of 188 countries that work together to foster global monetary cooperation. 8 According to the IMF s director: Effective anti-money laundering and combating the financing of terrorism regimes are essential to protect the integrity of markets and of the global financial framework as they help mitigate the factors that facilitate financial abuse

8 4 ANTI-MONEY LAUNDERING-REFRESHER It should be kept in mind that money laundering makes money derived from criminal activity appear to have been obtained legally, such as through a bank loan, the sale of property, or from the operation of a legitimate business. A person earning illicit income (i.e., a drug trafficker or a con man) has as much to fear from the Internal Revenue Service (IRS) as it does from law enforcement and other regulatory agencies. Types of Money Laundering Money laundering typically involves one of several methods, which include: Structuring (also known as smurfing ) breaks cash down into smaller amounts. Sometimes money orders are purchased with the cash and then ultimately deposited into an account. Bulk cash smuggling involves smuggling cash physically from one location to another location where banking laws are less stringent. Cash businesses receiving the majority of their income in cash may use bank accounts to deposit both legally and illegally obtained funds in an attempt to claim all the funds as legitimate earnings. The downside to this process is that taxes must be paid on all the monies deposited. In an effort to avoid paying taxes on the illegally earned money, launderers may make payments to themselves in the form of salaries or consulting fees. A variation of this method is to park the illegal money in the company bank account, which is referred to as balance sheet laundering. This method of laundering money is easily detected. Trade-based laundering involves the creation of invoices for items that are overvalued or undervalued. Shell corporations have no active business operations, no physical locations, and no employees. Although shell companies do exist for the purpose of serving as a channel for another legitimate business, they are often established to conceal the identities of their owners and their assets Bank capture the purchase of a controlling ownership in a bank, usually in a country that does not utilize strict controls. Launderers are able to move illegally obtained money through the banking system without detection. Casinos have the potential to launder large amounts of money. A person may visit a casino, purchase chips, gamble, and then cash in the chips. A check will be issued to the gambler and will later be claimed as winnings, thus disguising the origin of the money. Real estate purchases with illegally obtained money, followed by the immediate sale of that property, is a popular method of money laundering because the proceeds received from the sale appear legitimate. Shadow salaries are paid by companies to their employees with illegally obtained cash. The employees are not reported as employees to the IRS, other authorities, and insurance companies. Trusts of certain types do not require their owners to reveal their names, thus allowing money launderers to hide their identities. It is important to keep in mind that while the majority of money laundering schemes involve cash of which the primary advantage is anonymity other schemes involve a variety of financial transactions and forms of money. Some of the more sophisticated methods of money laundering include the use of foreign banks, offshore accounts, shell companies, import-export currency exchange, fake employment, and any number of other ruses. Some countries are alleged to have far more dirty money in Swiss banks than they produce in their own economies gross domestic industries. Worldwide interest in such funds has grown with the increase in international terrorism.

9 ANTI-MONEY LAUNDERING-REFRESHER 5 One Associated Press article alleged that a former lawyer and a stock trader concocted a fraudulent scheme that involved insider trading and money laundering. 10 After being nabbed in a government sting operation, it was revealed the scheme had brought in so much money the two had considered burning $175,000 in cash to avoid detection. More such examples will be offered as we proceed through the course. United States Money Laundering Enforcement Agencies Federal Bureau of Investigation (FBI) The mission of the Federal Bureau of Investigation (FBI) is: to protect and defend the United States against terrorist and foreign intelligence threats, to uphold and enforce the criminal laws of the United States, and to provide leadership and criminal justices services to federal, state, municipal, and international agencies and partners. 11 The FBI investigates and enforces more than 200 categories of federal law, including white-collar crimes such as money laundering. The FBI also traces overseas deposits, a necessary step in the apprehension and conviction of U.S. based criminals who use foreign depositories. The FBI website states that it: maintains a proactive approach when investigating money laundering. After identifying a specified unlawful activity that generates illicit proceeds, a parallel financial investigation is conducted in order to locate the proceeds and prove their connection to the underlying crime. 12 The website also states its overall accomplishments with respect to asset forfeiture in terms of investigations and their resulting criminal indictments, convictions, and dollar amounts in restitutions, recoveries, and fines. The Financial Crimes Enforcement Network (FinCEN) The Financial Crimes Enforcement Network is a bureau of the U.S. Department of the Treasury. 13 FinCEN s mission is: to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities. FinCEN is the financial investigation unit (FIU) of the U.S. government and it exercises its regulatory functions primarily through the BSA and its amendments, including the USA PATRIOT Act. FinCEN regulations require financial institutions to establish anti-money laundering training programs and report suspected money laundering activities on the Suspicious Activity Report (SAR). Law enforcement agencies working through FinCEN maintain points of contact at U.S. financial institutions and with the FIUs and financial crime investigations in other countries around the world. FinCEN has the authority to develop the rules under which investigative information is sought and safeguarded. Foreign, state, and local entities must allow reciprocal requests from the federal government when the requests include: The seriousness and magnitude of the suspected criminal conduct The dollar amount involved

10 6 ANTI-MONEY LAUNDERING-REFRESHER Information about whether the analysis was being conducted as part of a multi-agency task force Suspected involvement in organized crime Multi-regional or cross-border implications Once FinCEN approves a request, it is submitted to the appropriate financial institution through the 314(a) Secure Information Sharing System. Other Federal Agencies The U.S. Drug Enforcement Agency (DEA) investigates money laundering as it relates specifically to illicit drug trafficking. The Criminal Investigation (CI) division of the Internal Revenue Service is responsible for investigating those who are suspected of violating Internal Revenue Code and committing financial crimes. These investigations include those related to cases of suspected money laundering and currency reporting violations in the United States. U.S. Immigration and Customs Enforcement (ICE) is the primary investigative body of the U.S. Department of Homeland Security. Along with U.S. Customs and Border Protection (CBP), ICE focuses on detecting, intercepting, and investigating money laundering threats that involve people and goods crossing U.S. borders. United States Laws Pertaining to Money Laundering The Bank Secrecy Act (BSA) The Currency and Foreign Transactions Reporting Act of 1970, more commonly referred to as the Bank Secrecy Act or Anti-Money Laundering law, was a mandate from Congress that American financial institutions must support the federal government s efforts to expose and put a stop to money laundering 14. Essentially, the BSA required all financial institutions to: File reports of aggregate daily cash transactions exceeding $10,000 Maintain records of the cash purchase of negotiable instruments (i.e., drafts and notes a check is a draft and a CD is a note; money and securities are not negotiable instruments) Report dubious goings-on that might indicate the existence of tax evasion, money laundering, and other criminal conduct According to the IRS, when financial institutions file documents required by the BSA, they are used by law enforcement officials and government agencies at domestic and international levels to: identify, detect, and deter money laundering whether it is in furtherance of a criminal enterprise, terrorism, tax evasion, or other unlawful activity. 15 The IRS is one of the partners of the U.S. National Money Laundering Strategy. The BSA requires all persons to file Form 8300 with the IRS within 15 days after cash is received in connection with the conduct of trade or business. IRS filing requirements: 16 Apply to payments of more than $10,000 received in one transaction or in a series of related transactions; for example: o One lump sum of more than $10,000 o Two or more related payments that total more than $10,000 o Payments received as part of a single transaction (or two or more related transactions) that cause the total cash received within a 12-month period to total more than $10, Form-8300

11 ANTI-MONEY LAUNDERING-REFRESHER 7 Define a transaction as the underlying event resulting in the transfer of cash, which includes: o The sale of goods, services, or any type of property o The rental of goods or any type of property o Cash exchanged for other cash o The establishment, maintenance of, or contribution to a trust or escrow account o A loan repayment o The conversion of cash to a negotiable instrument such as a check or bond Define a related transaction as one of two types: o Transactions between a buyer (or its agent) and a seller that occur within a 24-hour period o Transactions more than 24 hours apart if the recipient of the cash knows or had reason to know that each transaction is one of a series of connected transactions Define cash as: o Money from any country, such as currency and coins o Monetary instruments such as a cashier s check, a bank draft, a traveler s check, or a money order if it is received per the definition on Treasury Reg. Section I-1(c)(iii) this generally includes retail sales of a consumer durable or collectible or a travel or entertainment activity It should be noted that personal checks are NOT considered cash with respect to reporting requirements of Form Form 8300 can be filed by mailing to the Internal Revenue Service or online through FinCEN. In addition, the BSA requires the reporting of certain foreign bank and financial accounts (i.e., brokerage accounts, mutual funds, unit trusts). Money Service Businesses (MSBs) must also meet certain requirements under the BSA; MSBs include businesses that offer check cashing, money orders, travelers checks, money transfers, currency exchanges, and pre-paid access products (formerly called stored value cards). MSBs must also be registered with the U.S. Department of the Treasury by filing FinCEN Form 107. Finally, the BSA requires each person who transports, mails, ships, or causes the physical transportation of currency, traveler s checks, and certain other specified monetary instruments in excess of $10,000 to file FinCEN Form 105. This applies to funds transported into or out of the United States. Money Laundering Control Act of 1986 (MCLA) The Money Laundering Control Act (MLCA) was enacted in 1986 and declared money laundering a federal crime, banned structuring financial transactions to avoid filing a currency transaction report (CTR) with FinCEN, and declared that property and proceeds obtained through BSA violations are subject to civil and criminal forfeiture. 17 Forfeiture is the process of the government seizing property (including money) in response to civil and criminal violations of law. In most cases, forfeiture is the government s response to illegal activities, usually with respect to illicit drug trafficking. 17

12 8 ANTI-MONEY LAUNDERING-REFRESHER According to 18 U.S.C. 1956, in order to be guilty of money laundering, a person must: Conduct or attempt to conduct a financial transaction that involves the proceeds of a specified unlawful activity Know the proceeds involved in the transaction are the proceeds of a specified unlawful activity Have acted with one of four specific intentions: 1. To promote the carrying out of a specified unlawful activity 2. To engage in tax evasion or tax fraud 3. Knowledge the transaction was intended to hide or disguise the nature, location, source, ownership, or control of proceeds from the specified unlawful activity 4. Knowledge the transaction was intended to avoid the filing of a currency transaction report or other transaction report required by federal or state law The definition of specified unlawful activity includes the following criminal offenses: Drug trafficking (i.e., manufacture, importation, sale, or distribution of a controlled substance in violation of law) Murder, kidnapping, robbery, extortion, arson, counterfeiting, espionage, copyright infringement, illegal exportation of firearms, and certain violent crimes Fraud, misappropriation of bank funds, and violations of the International Banking Act of 1978 Bribery of a public official and financial misconduct Smuggling, trafficking in persons, and sexual exploitation of children Environmental crimes (i.e., violations of the Federal Water Pollution Control Act, the Safe Drinking Water Act, etc.) Terrorist activities Certain RICO offenses, such as mail and wire fraud Depending on the specific violation, penalties range from fines of $500,000 to $1 million, or twice the value of all money and property involved, whichever is greater. In addition, a prison sentence of up to 20 years may be imposed in place of, or in addition to, applicable fines. These penalties would apply to insurance agents who knowingly participate in a money laundering scheme even if their only offense was to accept and deposit money they knew or suspected was dirty. Considering the breadth of its laws, regulations, and statutes, the United States has the most effective antimoney laundering legislation in the world and they relate to all three phases of the laundering process: placement, layering, and integration. USA PATRIOT Act The USA PATRIOT Act (Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act, Public Law ) was enacted in October 2001 in response to the terrorist attacks on the United States on September 11, FinCEN states that the purpose of the USA PATRIOT Act is to: deter and punish terrorist acts in the United States and around the world to enhance law enforcement investigatory tools, and other purposes... One of the primary goals of the Act is to identify, deter, and prosecute those who commit international money laundering and finance terrorism. 18

13 ANTI-MONEY LAUNDERING-REFRESHER 9 With respect to its money laundering provisions, the USA PATRIOT Act expanded existing laws, such as the BSA, and cited weaknesses in global monetary systems that abetted money laundering. Among these were: Offshore banking and similar facilities that provide anonymity to their customers Weak supervision and enforcement of existing money laundering regulations Corrupt banking and government officials Outdated banking equipment Outdated and inadequate laws The USA PATRIOT Act gave the Secretary of the Treasury full authority to require financial institutions to evaluate, correct, and upgrade their existing anti-money laundering programs and to create AML programs where none had existed previously. The U.S. Department of the Treasury assigned this task to FinCEN, which then required insurance companies to develop and institute their own anti-money laundering programs. FinCEN also designated how insurance companies must comply with AML regulations and specified exactly which industries or businesses are covered and what products will be included in its jurisdiction. Intelligence Reform and Terrorism Prevention Act of 2004 (IRTPA) Congress created the National Commission on Terrorist Attacks Upon the United States (the 9/11 Commission) to prepare a bipartisan and complete accounting of the events related to the September 11, 2001 terrorist attacks on the United States. As a result of the 9/11 Commission s report, which claimed the terrorist attacks were the significant result of failures on the part of U.S. law enforcement and intelligence-gathering communities, the Intelligence Reform and Terrorism Prevention Act of 2004 (IRTPA), Public Law , was enacted. 19 IRTPA recommended a new, government-wide approach to unify U.S. law enforcement and intelligence agencies and established a Director of National Intelligence who has authority to establish procedures to facilitate its recommendations. With respect to anti-money laundering, the Act amended the BSA to enable the Secretary of the Treasury to proscribe regulations requiring certain financial institutions to report cross-border electronic transmittals of funds. Such reporting was deemed reasonably necessary to aid in the fight against money laundering and terrorist financing. FATF 40 Recommendations Within a year of its creation, the FATF issued a report of global money laundering techniques and trends that included a set of 40 Recommendations designed to provide a worldwide plan of action to combat money laundering. 20 The 40 Recommendations were revised in 1996 and endorsed by 130 countries. They were revised again in 2001 to address the financing of terrorism; that revision resulted in the creation of the Eight Special Recommendations. The last revisions were in 2003 and in February 2012, when they were last adopted and published. 21 The 40 Recommendations were designed to establish a reliable and thorough structure of guidelines countries are urged to put into action to contend with both money laundering and the financing of terrorist activities. Because each country has its own laws and unique concerns, it may not be possible for a country to utilize precisely the same method of adopting the FATF Recommendations. The purpose of the FATF Recommendations is to:

14 10 ANTI-MONEY LAUNDERING-REFRESHER Identify the risks, and develop policies and domestic coordination Pursue money laundering, terrorist financing, and the financing of the proliferation of weapons of mass destruction Apply preventive measures for the financial sector and other designated sectors Establish powers and responsibilities for the competent authorities (i.e., investigative, law enforcement, and supervisory authorities) and other institutional measures Enhance the transparency and availability of beneficial ownership information of legal persons and arrangements Facilitate international cooperation Beneficial owner refers to the natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement Prevention The financial services industry in the United States is large, diverse, and complex. Most depository institutions are required to meet all anti-money laundering requirements of the BSA, including the implementation of internal controls, accurate record keeping, a Customer Identification Program, and the reporting of any suspicious activity. The securities industry comprised of investment advisers, life insurers, and money service businesses is required to establish AML programs and file suspicious activity reports. Preventive Measures Required by Insurance Companies and Producers Insurance companies and their representatives are defined as any person or entity engaged within the United States as a business in the issuing or underwriting of any covered product. Agents and brokers are excluded from the requirement to develop and implement their own individual anti-money laundering programs; however, they must be included in, and abide by, the AML procedures set forth by the insurance companies they represent. This requirement includes the obligation to notify their insurers when they suspect unlawful activity on the part of their clients or prospective clients. Failure to abide by AML regulations and procedures may result in the termination of the contract an agent or broker has with an insurer. An agent is defined as: a sales and/or service representative of an insurance company who sells, markets, distributes, or services an insurance company s covered products. It includes both captive agents who only work for or on behalf of a single company (or group of companies), and independent agents who work on behalf of multiple companies. Agents, also referred to as producers, represent the insurance companies they represent. In general, fiduciary responsibility passes through the agent to the company. A broker is defined as: one who, by acting as the customer s representative, arranges or services covered insurance products on behalf of the customer. 23

15 ANTI-MONEY LAUNDERING-REFRESHER 11 Brokers represent their customers. While they must comply with the terms of the contracts they execute with insurers, their primary responsibility is to the customer. Insurance companies already registered with the Securities and Exchange Commission as broker-dealers are required to utilize AML programs under statute and are exempt from establishing a separate plan of their own. So long as an insurer s current SEC plan satisfies the requirements of the FinCEN final rule, it is exempt. In addition, insurance companies are subject to state regulation. FinCEN lists three reasons for excluding agents and brokers from the requirement to develop and implement their own AML programs: 1. Because the insurance company bears the risk of its products and stands to gain the most from sales, it should retain the responsibility for guarding against illegal use of those products. 2. An insurance company can assume the cost of compliance more easily and effectively than individual agents and brokers can. 3. Many insurers can integrate the AML requirements into existing anti-fraud training. Insurance Products Covered by FinCEN Regulations The following products are subject to regulation by FinCEN: Permanent life insurance policies other than group life insurance policies (i.e., whole life, universal life, and variable life); Annuity contracts other than group annuity contracts; and Any other insurance product with cash value or investment features. The purpose of including insurance products that contain cash value or investment features in the definition of covered products is to ensure that any new life insurance or annuity products having characteristics that might make them vulnerable to money laundering are covered in the future. Group life insurance policies and annuities, with or without these characteristics, are administered according to guidelines that make them generally less vulnerable to money laundering and abuse by participants in the plan. Insurance Product Excluded by FinCEN Regulations The following types of insurance are exempt from AML requirements because they are not designed to include cash values or investment features: 26 Property and casualty insurance Term life insurance Reinsurance Health insurance Group insurances Although various crimes are committed with respect to these exempted types of insurance (i.e., staged auto accidents, phony death and medical claims), the crimes are considered insurance fraud rather than money laundering unless cash settlements were specifically used in a separate laundering scheme. When using insurance products, money launderers typically prefer individual life and annuity products because they can hide larger sums of money more easily and transfer them to third parties with less risk of detection

16 12 ANTI-MONEY LAUNDERING-REFRESHER Requirements for Insurer AML Training When money laundering first began to flourish in this country, insurance products were seldom used to launder money and insurers were exempt from AML training and similar requirements. As criminals discovered cash value-rich insurance products such as annuities and variable life products, their interest was aroused. Insurance companies are now required to incorporate the detection of money laundering into their training programs. In effect, insurance company personnel at every level including employees, agents, brokers, and producers have joined the ranks of other financial professionals who are expected to combat today s money launderers. As noted previously, insurance companies are responsible for the development and implementation of their own AML training programs. Senior management must approve all programs before they are integrated into the insurer s operating procedures. The actual training may be conducted in-house or by a competent third party, such as a private vendor or another financial institution that is subject to AML rules. Under the USA PATRIOT Act, the training may be conducted through live presentations, videos, online courses, or other media. Each insurance company must appoint its own compliance officer or compliance committee to bear the responsibility of creating, implementing, and monitoring its AML program. Compliance officers are expected to be familiar with current AML laws and how they apply to its employer s business operations. Compliance officers have the authority to enforce the policies they set forth and must also monitor those programs to ensure full participation by all employees, agents, and brokers. Finally, compliance officers are charged with updating the program as necessary. At a minimum, an AML program should include: A description of money laundering and the reason for the training Common red flags associated with money laundering so employees are better able to detect it; Actions required of agents encountering actual or suspected laundering and how to report those activities The importance of confidentiality and the consequences for failing to maintain it A basic AML policy outline for an insurance company s training might appear as follows: I. Risk Assessment Most Susceptible Products A. Product and policy risks B. Service-related risks C. Client-related risks II. Training Program A. Development, approval and implementation B. Money laundering red flags and warning signs C. Suspicious activity report (SARs) D. Confidentiality. III. Testing and Monitoring A. Responsibility and accountability B. Captive versus independent agents and brokers C. Periodic updates

17 ANTI-MONEY LAUNDERING-REFRESHER 13 Testing and Monitoring The same rules that mandate insurance company AML programs also require periodic testing of those systems. Responsibility and accountability for testing lies with the insurance companies, primarily through their compliance officers. Monitoring and testing are intended to: Monitor compliance of agents and brokers who are required to take, and who have completed, the training. A certificate of completion will only be satisfactory evidence of compliance if passing an exam is part of the training. Monitor the effectiveness of the training by matching test results against actual reporting. If the number of trained and certified employees increases dramatically but the reporting of suspicious activities does not increase as well, the training might need to be rewritten or reinforced. Document test results for recommendations to the AML compliance officer and senior management. No minimum frequency of testing is required; FinCEN leaves this matter to the discretion of insurers. FinCEN trusts insurance companies to tailor their AML testing to their individual risk assessment results. The testing should be stricter and more frequent where the risk of laundering is higher (i.e., in U.S. border areas). Although insurers may use their own training personnel or a third party to conduct testing, it may not be conducted by the company s compliance officer or anyone who might later be directly involved in evaluating a suspicious activity report. Money laundering is not static; it is always expanding and evolving. Sometimes standards seem to change without notice. As money laundering takes on new forms and dimensions, those combating it find themselves adjusting their training and tactics right along with the ever-changing innovations utilized by criminals. In the insurance industry, adapting training to meet the current money laundering climate is the responsibility of the compliance officer, who will draw on information being shared by national and global organizations. That sharing is one of the main purposes of the international groups. At street level, the agent or broker must be on the alert for new information as it becomes available. More importantly, agents can contribute to a healthy financial environment by adhering to a simple rule: report any suspicious activity. Captive versus Independent Agents It is easier for insurance companies with captive agents to ensure their agents complete AML training. Insurers utilizing independent agents have a more difficult time verifying their agents have completed approved AML training. An independent agent s contract with an insurance company should contain AML requirements and provisions that: Enable the insurer to oversee and analyze an agent s performance regarding AML efforts; and Obligate the agent to document AML training before securing an appointment with the insurer. As with captive agents, an insurer may train independent agents through the use of one of the other insurers the agent represents or by a third party. It cannot be emphasized strenuously enough that AML training rules state proof of course attendance is not sufficient to verify compliance. An insurer must be able to document and evaluate the quality of the course completed and verify that actual learning took place. Statistics indicate that money launders often target independent agencies and agents, believing them to be less knowledgeable about money laundering than their captive counterparts and, therefore, more vulnerable to whatever schemes they have concocted. It is imperative for ALL agents, whether captive or independent, to stay informed regarding the latest money-laundering news as it applies to the insurance industry.

18 14 ANTI-MONEY LAUNDERING-REFRESHER Red Flags The warning signs listed below were derived from transactions involved in actual court cases. They are examples of what real-world experience warns agents to look for. These red flags are mentioned briefly here and will be discussed in more detail later in the course: A purchase inconsistent with a customer s needs An unusual method of payment such as cash or a cash-equivalent (i.e., money order) either in a large, lump sum or broken down into smaller amounts (i.e., structured) Early termination of an insurance product at a cost to the customer if remittance was made in cash or by an unrelated third party (early-termination charges are an accepted cost of business with relation to money laundering) A policy benefit is transferred to an unrelated third party Borrowing the maximum cash value available soon after the insurance product is purchased Reluctance to provide identifying information or providing seemingly fictitious information when conducting an insurance transaction Showing little or no concern for the insurance product s investment performance but great concern about early cancellation features Allowing third parties to withdraw cash value Willful Blindness 27 According to a recent Supreme Court opinion, willful blindness is a term used in law that describes a situation in which an individual purposely takes action to avoid learning a fact that he or she believes has a high likelihood of existing. In other words, the individual is virtually certain misconduct or illegal behavior has occurred and he or she deliberately behaves in a manner that prevents confirmation of the facts. 27 Failure to comply with the BSA relating to willful blindness may result in an individual being fined for noncompliance. The IRS publishes on its website BSA penalties. 28 Under its AML Program Violations, the IRS calls for penalties for Civil Willfulness, which is established by evidence showing a voluntary intentional violation of a known legal duty. The IRS states that if a person does not know of the legal duty but it can be proven he or she made a conscious effort to avoid learning of the duty, the individual will be considered having acted with civil willfulness under the concepts of willful blindness or reckless disregard. The compliance policy of a particular bank states that penalties may be levied against employees who violate the BSA by acting in either of two ways: by knowledge or by willful blindness. 29 The bank defines the two terms as follows: Knowledge exists when an employee knows or should have known that conducting a transaction will or might promote an unlawful activity. Willful blindness exists when an employee intentionally fails to inquire about a transaction he or she considers suspicious or when the employee chooses to ignore the circumstances surrounding a suspicious transaction. In connection with a District Court s decision concerning the claims brought by the trustee of Bernie Madoff against investors, the court claimed the definition of willful blindness means an individual intentionally [chose] to blind himself to the red flags that suggest a high probably of fraud. 30 This court case, along with many other judicial and regulatory decisions, confirms that ignoring information is not an acceptable excuse for sidestepping the legal consequences of misconduct or unlawful activity dbb2b979-c b701-a7aa116da017/fsl_newswire_dec2011.pdf

19 ANTI-MONEY LAUNDERING-REFRESHER 15 Suspicious Activity Report (SAR) The BSA requires the filing of specific forms via the BSA E-Filing System under certain circumstances. 31 The BSA E-Filing System requires the following forms to be filed electronically; more information can be found online at Suspicious Activity Report (SAR), FinCEN Report 111 Currency Transaction Report (CTR), FinCEN Report 112 Designation of Exempt Person, FinCEN Report 110 Registration of Money Services Business, FinCEN Report 107 Report of Foreign Bank and Financial Accounts, FinCEN Report 114 Report of Cash Payments Over $10,000 Received in Trade or Business, FinCEN Form 8300 FinCEN s SAR filing instructions require the following financial institutions operating in the U.S. to file a report of any suspicious transaction that relates to a possible violation of law or regulation: 32 Banks, including Bank and Financial Holding Companies Casinos and Card Clubs Money Service Businesses Brokers or Dealers in Securities Mutual Funds Insurance Companies Futures Commission Merchants and Introducing Brokers in Commodities Residential Mortgage Lenders and Originators The types of transactions that must be reported include those involving at least $5,000 where the financial institution knows, suspects, or has reason to suspect the transaction (or a pattern of transactions): 33 Is part of a plan to avoid any federal transaction reporting requirement or violate any federal law or regulation that: o Involves money originating from illegal activity o Is intended or conducted to disguise or hide money originating from illegal activity (including the ownership, nature, source, location, or control of the money Is designed to evade any requirement of the BSA or certain other federal laws Has no business or apparent lawful purpose or is not the type of transaction or transactions the particular customer might ordinarily be expected to request AND the financial institution does not have any reasonable explanation for the transaction after reviewing all available facts Involves the financial institution to conduct criminal activity 31 C.F.R indicates that insurers must report any suspicious transaction of $5,000 or more that involves a covered insurance product that relates to a possible violation of law or regulation. 34 The most recent guidance issued by FinCEN concerning the filing of SARs and Currency Transaction Reports contains details about the timeline and filing method, as well as characteristics of suspicious activity. 35 Insurers are responsible for reporting transactions handled by their agents and brokers; however, certain agents may have a separate obligation to report suspicious transactions. If an agent is required to file a separate SAR, only one form needs to be filed so long as it contains all pertinent facts and includes the words joint filing in the narrative section, along with the names of the filing parties (i.e., agent and insurer). Both parties must comply with filing requirements, including the recordkeeping of supporting documentation

20 16 ANTI-MONEY LAUNDERING-REFRESHER Note: Insurers issuing variable products have separate requirements, per 31 C.F.R SARs are required to be filed by insurers within 30 calendar days of the initial detection of suspicious activity. If the insurer is not able to identify a specific suspect at that time, it may delay filing the SAR for another 30 calendar days during which it attempts to make identification. However, the SAR filing cannot be delayed more than 60 calendar days after the initial detection. Situations such as suspected terrorist financing or ongoing money laundering schemes require insurers to make an immediate report, in addition to the filing of an SAR, by telephone to FinCEN or to the appropriate law enforcement agency. FinCEN s Financial Institutions Hotline can be reached by dialing Insurance companies are required by law to retain copies of all SARs they file for five years from the date of filing. Supporting documentation must also be retained and will be considered filed with the SAR. As stated previously, if an insurer files an SAR jointly with another party, these same filing requirements apply. With respect to insurance, the following transactions are typically reported with respect to suspicions of money laundering: Excessive insurance; Excessive or unusual cash borrowing against the policy or annuity; Proceeds are sent to or received from an unrelated third party; Suspicious life settlement sales take place (i.e., STOLIs and Viaticals); Suspicious terminations of the policy or annuity; and No insurable interest or the insurable interest is not apparent. With respect to securities, the following transactions are typically reported with respect to suspicions of money laundering: Insider trading; Market manipulation/wash trading; Misappropriation; and SAR Confidentiality FinCEN is committed to the vigilance of its requirements with respect to the sharing of information and the confidentiality of SARs. It issued a number of guidance reports for individual types of financial institutions, as well as its Confidentiality of Suspicious Activity Reports 37 and Maintaining the Confidentiality of Suspicious Activity Reports. Rules pertaining to confidentiality of SARs can be found in 31 C.F.R (e). 38 Essentially, the SAR itself, along with any information that might reveal its existence, is confidential and cannot be disclosed other than as authorized by law as follows: Disclosure by insurance companies: o No insurer including its directors, officers, employees, and agents may disclose the existence of an SAR or any information that might reveal the SAR exists. o If an insurer or its representatives is subpoenaed or requested to disclose a SAR or information that would reveal its existence shall decline to produce the SAR or such information, citing this section and 31 U.S.C. 5318(g)(2)(A)(i), and shall notify FinCEN of any such request and the response hereto C.F.R (e)(1)(i)

21 ANTI-MONEY LAUNDERING-REFRESHER 17 o Insurers and their representatives may disclose the existence of an SAR if all the following apply: No person involved in any reported suspicious transaction is notified the transaction was reported, AND The disclosure is made to:» FinCEN» A federal, state, or local law enforcement agency» A federal regulatory agency that examines insurers for compliance with the BSA The disclosure is consistent with Title II of the BSA Disclosure by government authorities: o No government authority including its directors, officers, employees, and agents may disclose the existence of an SAR or any information that might reveal the SAR exists unless the disclosure fulfills official duties consisted with Title II of the BSA. o Official duties does NOT include responding to a request for disclosure of non-public information or a request for use in a private legal proceeding. Insurance companies and their representatives cannot be legally liable for filing an SAR voluntarily (including joint filings) or for failing to disclose that an SAR was filed. FinCEN has the authority to examine insurance companies for compliance with SAR confidentiality regulations and, if an insurer violates confidentially laws or regulations, it may be found in violation of the BSA. Potential civil and criminal penalties for unauthorized disclosure of SARs are: 40 Up to $100,000 per violation for civil penalties Up to $250,000 and/or imprisonment up to five years for criminal penalties In addition, if a financial institution is found deficient in its AML programs (i.e., with respect to internal controls or training), it may also be liable for penalties up to $25,000 per day for each day a violation continues. Money Laundering Safeguards Money laundering is a crime that occurs in all types of businesses, not just in the illegal drug trade. People who earn income from illegal gambling and the fencing of stolen-goods, along with those desiring to avoid paying income tax, will always find ways to launder their illicit income. Agents must be alert for potential abuses of the insurance industry and suspicious insurance transactions. Protective measures and tools are available to help agents safeguard themselves, their agencies, and their insurers from money laundering scams and from being implicated in those fraudulent schemes. The Financial Industry Regulatory Authority (FINRA) has a webpage with links that provide information about AML rules, regulations, and compliance, all of which provide valuable information to agents intent on exhibiting due diligence in their efforts to combat money laundering. 41 Customer Identification Program (CIP) A customer identification program (CIP) is based on Section 26 of the USA PATRIOT Act, sometimes referred to as Know Your Customer. Every financial institution is required to establish and enforce specific guidelines regarding obtaining and maintaining information about client identity. FINRA guidelines require agents to obtain and maintain documentation of the following information:

22 18 ANTI-MONEY LAUNDERING-REFRESHER For individuals: o Name, date of birth, and address o Identification number: For U.S. citizens the Social Security number or employer identification number (EIN) For non-citizens the taxpayer ID number, passport number and country of issue, alien ID card number, or government-issued ID showing nationality, residence, and a photograph For other legal entities (i.e., corporations, LLCs, trusts): o Principal place of business and other business locations o Employer identification number (EIN) o Government-issued business license o Articles of incorporation and/or o Partnership or trust agreement Know Your Money The U.S. Secret Service is one of the oldest investigative agencies of the American government and was originally established in 1865 as a branch of the U.S. Department of the Treasury to battle the counterfeiting of United States currency. Currently, the Secret Service s has two primary missions: Investigate crimes against the financial infrastructure of the United States, including: a. Counterfeiting U.S. currency and other obligations b. Forgery or theft of U.S. Treasury checks, bonds, and other securities c. Fraud of the following types: credit card, telecommunications, computer, and identity d. Certain crimes affecting federally insured financial institutions 2. Protect the president and other individuals (i.e., vice president, immediate families of the president and vice president, former presidents and certain members of their immediate families). As a result of the Homeland Security Act of 2002 (Public Law ), the Secret Service was transferred from the Department of the Treasury to the Department of Homeland Security to accomplish expanded goals as outlined in the USA PATRIOT Act. Along with the Federal Reserve Board and the Department of the Treasury, the Secret Service administers a website, Know Your Money, 44 which provides details about U.S. currency, training and educational resources for industries that rely on cash, images and features of the U.S. Treasury notes in current circulation, and an extensive FAQ library. The $100 was redesigned to include new security features to both deter counterfeiting and help individuals and businesses determine whether it is authentic. Currently, the only U.S. bank notes in circulation are of the following denominations: $1, $2 $5, $10, $20, $50, and $100. Notes in denominations larger than $100 are obviously counterfeit. 45 Specially Designated Nationals (SDN) The Office of Foreign Assets Control (OFAC), a division of the Department of the Treasury, maintains a list of specially designated nationals (SDNs). 46 A specially designated national (SDN) is defined as: an individual or company owned or controlled by, and acting on behalf of, targeted countries

23 ANTI-MONEY LAUNDERING-REFRESHER 19 OFAC also keeps a current list of countries under sanction for money laundering as well as persons and entities known by their criminal activity and that are not related to a specific country (i.e., terrorists and narcotics traffickers). Insurance agents may contact OFAC when faced with a suspicious customer or situation by visiting the Resource Center on the Department of the Treasury s website, which contains the most recent SDN List. Agents may also subscribe to SDN updates. If an agent has been approached by a person or business whom he or she knows or believes to be hostile to the U.S., OFAC must be notified within 10 days. While an agent or broker may notify OFAC directly, it is advisable to utilize insurance company channels for this process. Regulatory officials recommend agents finding a match on the SDN list for one of their clients to conduct additional research before filing a report. Unless the name is an exact match, it is possible the match is what is termed as a false hit. If a match is similar and not exact, agents are urged to contact OFAC Compliance before actually filing a report and blocking assets. The OFAC hotline is Politically Exposed Persons (PEP) Under its Recommendations 12 and 22, FATF defines a politically exposed person (PEP) as: Examples of PEPs include: 48 an individual who is or has been entrusted with a prominent function. Many PEPs hold positions that can be abused for the purpose of laundering illicit funds or other predicate offenses such as corruption, bribery, or terrorist financing. Foreign and Domestic PEPs: Heads of State; senior politicians; senior government, judicial, or military officials; senior executives of state owned corporations, and important party officials International PEPs: Members of senior management of international organizations, such as directors, deputy directors, and members of the board Family members and close associates of foreign, domestic, and international PEPs Because of the potential risks connected with PEPs, FATF and other AML/CFT organizations require the use of additional preventive measures by those with business relationships with PEPs. It cannot be emphasized enough that the required measures are considered preventive and not criminal, as well as within the FATF s customer due diligence requirements. Financial institutions and insurance agents must know who their customers are and have access to many external sources of information to determine if customers, and potential customers, are PEPs: Commercial and other organizations databases Internet and media searches Government-issued PEP lists In-house databases and information sharing with other financial groups or countries Asset disclosure systems Customer self-declarations Information sharing by authorities In addition to obtaining information about an individual s likelihood of being a PEP, agents should be alert for known indicators that cast suspicion on the potential for misuse of the financial system. The following list is illustrative; the complete list can be found in the FATF Guidance: 49 Shielding identity through the use of legal entities that obscure their beneficial owners Use of corporate vehicles without a legitimate business purpose

24 20 ANTI-MONEY LAUNDERING-REFRESHER Use of intermediaries that do not conform with normal business practices or for the seeming purpose of shielding identity of one or more PEPs Use of family members or close associates as legal owner An inquiry by the individual about the AML or PEP policy of the financial institution, insurer, or agent Hesitancy or reluctance to provide details about the source of wealth or funds Information provided by the individual contradicts information that is available publicly (i.e., asset declarations and official salaries) The provision of inaccurate or incomplete information The individual has been, or is, denied entry to the country (i.e., denial of visa), and/or The individual is from a country that does not allow, or limits, its citizens from holding accounts or owning certain property in a foreign country For additional information about how to determine if an individual is a PEP, and guidance about the use of information, applicable measures to use, supervision, and other issues, FATF issued a guidance: Politically Exposed Persons (Recommendations 12 and 22). 50 AML Summary The fact that insurance professionals are required to complete AML training is an indication of the pervasiveness of the crime of money laundering in our society. Perhaps, the cliché most relevant to exposing money laundering is follow the money! When the banking and securities sectors of the global financial world initiated training, discipline, and control against money laundering, criminals found new methods of laundering money one of these methods was the use of the insurance industry. Until regulators, insurers, and agents manage to destroy money laundering at its roots, it will continue to undermine both the strength and the progress of the insurance industry. Thousands of regulations and laws are in place across many industries and jurisdictions, and numerous government agencies and international organizations exist for the sole purpose of eradicating money launderers. The SEC is also aware of the continuing and ever-changing threats posed by the practice of transforming dirty money into clean money. Insurance agents and brokers are not expected to keep abreast of all the latest modifications, amendments, and regulatory statues regarding efforts to combat money laundering the financing of terrorism. That responsibility lies with insurers; however, agents and brokers have the responsibility to understand and implement measures that are in place to mitigate the crime of money laundering and its consequences within the insurance industry. The success of AML/CFT efforts do not rely entirely upon individuals. Computers utilize technology that includes software and programs that assess and evaluate an infinite amount of information and data about clients and prospective clients. These programs are designed to call attention to abnormal or unusual activity. However, technology and computer programs are only responsible for a limited amount of success. Some automated anti-money laundering software is still experimental; some is already obsolete and some does not always produce the desired results. Despite the sophistication of modern technology, when it comes to the insurance industry s vulnerability to money laundering, insurance agents, brokers, and producers are the first line of defense. Without them, electronic progress will not keep up with the ever-increasing prevalence of financial chicanery. There is no substitute for the well-trained agent who interacts with the public every day. An agent s level of competence, knowledge, and experience may well be the key to uncovering the next money laundering scheme and putting its masterminds out of business. 50

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