AML Compliance: Keep The Bulls-Eye Off Your Industry

Transcription

1 AML Compliance: Keep The Bulls-Eye Off Your Industry Presented to the Association of Corporate Counsel of Greater New York September 17, 2015 Carolina A. Fornos, Pillsbury Winthrop Shaw Pittman LLP Bari Koss, Morgan Stanley Pillsbury Winthrop Shaw Pittman LLP

2 Introduction: Why AML Compliance Matters Corruption is estimated to be at least a $40 billion dollar a year business. Every day, funds destined for schools, healthcare, and infrastructure in the world s most fragile economies are siphoned off and stashed away in the world s financial centers and tax havens. The Puppet Masters: How the Corrupt Use Legal Structures to Hide Stolen Assets and What to Do About It, The International Bank for Reconstruction and Development/The World Bank (2011) Money laundering has a significant global financial impact. UN also reported that the largest income for transnational organized crime comes from illicit drugs which account for approximately 20% of all crime proceeds. Less than 1% of the total amounts that are laundered are seized. 1 AML Compliance: Keep The Bulls-Eye Off Your Industry

3 Introduction: Why AML Compliance Matters AML and Sanctions failures account for some of the largest industry Operational Risk losses: BNP Paribas ($8.9bn); JPM ($2bn); TD Bank ($52.5M); HSBC Bank USA and HSBC Holdings ($1.92bn); Standard Chartered ($700M) and ING Bank ($619M); MoneyGram International, Inc. ($100M); Commerzbank ($642M). Regulatory trend to hold the person at the firm with AML oversight personally liable for the firm s AML violations. 2 AML Compliance: Keep The Bulls-Eye Off Your Industry

4 The Goal of An AML Program Your AML Program has two basic goals: DETECT How your industry is used to launder illicit proceeds, which requires an industry specific assessment to properly notify law enforcement DEFEND A robust AML compliance program should defend you when regulatory agencies inquire about your potential failure to detect 3 AML Compliance: Keep The Bulls-Eye Off Your Industry

5 Part I: Detect Criminal Activity 4 AML Compliance: Keep The Bulls-Eye Off Your Industry

6 Detection: What? What is Money Laundering? Any transaction, series of transactions or other arrangements that conceal/disguise the source of proceeds of illegal activities Process to make dirty money appear legitimate Post September 11th, the definition of money laundering expanded to include legitimate funds being funneled through organizations to fund illegitimate activities (e.g., charitable organizations fronts for terrorism) 5 AML Compliance: Keep The Bulls-Eye Off Your Industry

7 Detection: Who? Criminals will use your industry and exploit vulnerabilities. It is a fulltime job for them Most AML compliance investigations by regulatory authorities are the result of a discovery of a criminal enterprise by law enforcement Law enforcement views YOU are their best partners. You need to know how your firm can be exploited to create an effective AML program Financial institutions have an important role to play in safeguarding the financial system against fraud, money laundering, terrorist financing, and other financial crime. U.S. Treasury s Financial Crimes Enforcement Network, FinCEN 6 AML Compliance: Keep The Bulls-Eye Off Your Industry

8 Detection: How Are Criminals Using Your Industry? Big Banks/Regional Banks/Credit Unions Shell Companies. Lack of transparency in the formation and operation of shell companies is a vulnerability that allows these companies to disguise their ownership and purpose (sex trafficking, prostitution, fraud, corruption) Source of funds. Vast incoming sums from Treasury checks, money orders, or suspicious credit card transaction activity but no apparent monitoring of account activity; no reports and no account closings (fraud) Cash Deposits Across the US. Cash deposits into business accounts throughout the US but no actual business front at location of cash deposits. Sometimes not just round numbers but odd amounts of cash deposits (ending in.15;.25; etc.) (Black Market Peso Exchange) 7 AML Compliance: Keep The Bulls-Eye Off Your Industry

9 Detection: How Are Criminals Using Your Industry? Third Party Payment Processors & Credit Cards Third Party Payment Processors. Risk of Third Party Payment Processors that are not subject to BSA/AML regulatory requirements may be vulnerable to money laundering, identity theft, fraud schemes, or other illicit transactions. How adequate is your processor-approval program? Do you know who your Third Party Payment Processors is contracting with? Are the Third Party Processors monitoring the Independent Sales Organizations? Credit Cards. Expectation that merchant acquirers be aware of the fraud and money laundering risks where merchant acquirers use third parties (e.g., Independent Sales Organizations (ISOs) to perform underwriting and/or provide equipment or other services on behalf of the merchant acquirer) Do you know who are these ISOs? Who is getting credit card terminals and by what criteria? 8 AML Compliance: Keep The Bulls-Eye Off Your Industry

10 Detection: How Are Criminals Using Your Industry? Casinos Risk that illicit funds are being laundered through casinos due to a lapse in the casino s AML compliance program Treasury s 2015 National Money Laundering Risk Assessment highlights that suspicious activity is minimal gaming, characterized by a customer buying chips or depositing funds into an account with the casino and then cashing out after little or no play. 9 AML Compliance: Keep The Bulls-Eye Off Your Industry

11 Detection: How Are Criminals Using Your Industry? Pre paid gift cards and cash equivalents Insurance Money-wiring services Precious metals 10 AML Compliance: Keep The Bulls-Eye Off Your Industry

12 Detection: Where are the Sources of Information? Advisories, Bulletins, FAQs. Regulatory advisories, bulletins and FAQs provide insights into latest trends, areas of focus, etc. Enforcement Actions. DOJ reports of prosecutions, press releases provide information on regulatory expectations for an AML program. Subpoenas. Criminal Grand Jury Subpoenas provide insight into potential illicit activity. Determine what agency issued subpoena/ Research AUSA prosecutions Investigate account in question and activity. Was a SAR already filed? Reach out to AUSA or the federal agent to help law enforcement Determine potential SAR filing 11 AML Compliance: Keep The Bulls-Eye Off Your Industry

13 Part II: Your Program Should Defend You 12 AML Compliance: Keep The Bulls-Eye Off Your Industry

14 Defend: What is the Bank Secrecy Act (BSA)? Established requirements for recordkeeping and reporting by private individuals, banks and other financial institutions Designed to help identify the source, volume, and movement of currency and other monetary instruments transported or transmitted into or out of the United States or deposited in financial institutions Required banks to (1) report cash transactions over $10,000 using the Currency Transaction Report; (2) properly identify persons conducting transactions; and (3) maintain a paper trail by keeping appropriate records of financial transactions Currency and Foreign Transactions Reporting Act of 1970, as amended by the USA PATRIOT Act of 2001 (PATRIOT Act) and other legislation, which legislative framework is commonly referred to as the Bank Secrecy Act (BSA) The BSA is codified at 12 U.S.C. 1829b, 12 U.S.C , 18 U.S.C. 1956, 1957, and 1960, and 31 U.S.C and and notes thereto, with implementing regulations at 31 CFR chapter X. See 31 CFR (e). 13 AML Compliance: Keep The Bulls-Eye Off Your Industry

15 Defend: Why the Bank Secrecy Act (BSA)? Overview: Why passed? On October 26, 1970, in response to increasing reports of people bringing bags full of currency of doubtful origin into banks for deposit, Congress passed Public Law This law is often cited as the BSA because Part I, codified mostly in Title 12 of the United States Code (USC), was intended to address a concern by Congress that U.S. citizens may have been using the bank secrecy laws of other countries to conceal illegal activities. Part II of the law is cited as the Currency and Foreign Transactions Reporting Act. It is codified now at 31 USC, Money and Finance, Chapter 53, Monetary Transactions, Part II, Records and Reports on Monetary Instruments Transactions. 14 AML Compliance: Keep The Bulls-Eye Off Your Industry

16 Defend: What is the Purpose of the BSA? To require financial institutions to keep certain records and file reports that the Secretary of the Treasury determines to have a high degree of usefulness in criminal, tax, and regulatory matters, or in the conduct of intelligence or counterintelligence activities to guard against international terrorism. 31 U.S.C AML Compliance: Keep The Bulls-Eye Off Your Industry

17 Defend: What is the Purpose of the BSA? Translation: To assist federal agencies to detect and prevent money laundering by: 1. Keeping records of cash purchases of negotiable instruments 2. File reports of cash transactions exceeding $10,000 (daily aggregate amount) 3. Report suspicious activities that might signify money laundering/tax evasion/or other criminal activity 16 AML Compliance: Keep The Bulls-Eye Off Your Industry

18 Defend: To Whom Does the BSA Apply? Financial Institutions (not just banks) Banks Credit unions Broker or dealers Insurance companies Loan companies Currency exchanges Finance companies Operator of a credit card system Pawnbroker Dealer of precious metals, stones, or jewels [Investment advisors] see FinCEN Proposed Rule See 31 U.S.C. 5312(a)(2)(A) (Z) 17 AML Compliance: Keep The Bulls-Eye Off Your Industry

19 Defend: What Are the BSA Requirements? Anti-Money Laundering (AML) Program 1. Internal policies, procedures, and controls 2. Designated compliance officer to monitor compliance on day-to-day basis 3. Ongoing employee training program 4. An independent audit function to test the institution s program (either by in house internal audit department, outside auditors, or qualified consultants) Tailored to the institution s size, business lines, and risks Approved by Board of Directors (best practices: should be reviewed and approved annually, note approval in board minutes) - Potential for increased criminal and civil penalties based upon specific provisions - Heightened regulatory scrutiny and potential for reputational exposure 31 U.S.C. 5318(h)(1) 18 AML Compliance: Keep The Bulls-Eye Off Your Industry

20 Defend: What Are the BSA Requirements? Reporting Requirements: File Suspicious Activity Reports (SARs) Report all suspicious transactions that involve $5,000 and which are known or suspected to: Involve funds derived from illegal activity or hide funds derived from illegal activity (e.g., hiding ownership/nature/source/location or control of funds) Designed to evade BSA reporting requirements No apparent legitimate business purpose Using the industry to facilitate criminal activity (money may be legit) 31 U.S.C. 5318(g); 31 C.F.R AML Compliance: Keep The Bulls-Eye Off Your Industry

21 Defend: What Are the BSA Requirements? File Currency Transaction Reports (CTRs) Applies to all deposits/withdrawals/payments/transfers greater than $10,000 For purposes of calculating the $10,000 threshold, multiple transactions during any one business day must be treated as a single transactions if bank knows transactions are made by or on behalf of the same person 31 C.F.R , AML Compliance: Keep The Bulls-Eye Off Your Industry

22 Defend: What Are the BSA Requirements? Customer Identification Program (CIP) Know your customer Verify identity of anyone seeking to open an account Maintain copies of identification documents Consult lists of suspected terrorists or terrorist organizations * includes Enhanced Due Diligence (EDD) Requirements in Certain situations (e.g., based on higher risk assessment due to business activity, ownership structure, volume of transactions, or activity in high risk jurisdictions) 31 U.S.C. 5318(l). See also Customer Due Diligence Requirements for Financial Institutions, 79 FR (Aug. 4, 2014). 21 AML Compliance: Keep The Bulls-Eye Off Your Industry

23 Defend: What Have You Considered? Risk assessment should consider geographic locations, industry types, customers, products/services, trends in enforcement actions Geographic location risks April 2015: FinCEN issued Geographic Targeting Order (GTO) to about 700 Miami businesses to shed light on cash transactions that may be tied to trade-based money laundering schemes. These complex schemes are a primary method used by drug cartels, including the Sinaloa and Los Zetas, to launder their illicit proceeds. August 2014: GTO issued seeking to increase transparency in cross border cash movements by armored car services (ACS) and couriers (August 2014) High risk industry types (e.g., MSBs, operating companies, shell companies, etc.) note that FinCEN issued a proposed rule in Aug 2014 to amend BSA regulations to prevent the use of anonymous companies used to launder proceeds Foreign citizens from high-risk countries Products/ services offered to clients (i.e., products with cash value; investments in higher risk countries/industries) Trends in enforcement actions 22 AML Compliance: Keep The Bulls-Eye Off Your Industry

24 Part III: Enforcement Trends 23 AML Compliance: Keep The Bulls-Eye Off Your Industry

25 Trends in Enforcement: Criminal and Individual Liabilities for Compliance and AML Officers January 2014: Banorte-Ixe Securities International, Ltd.'s former Chief Compliance and AML Officer fined $450,000 and suspended for 30 days for firm's failure to properly identify, investigate and report suspicious activity. February 2014: Brown Brothers Harriman's former Global AML Compliance Officer fined $25,000 and suspended for one month for firm's failure to monitor and detect suspicious penny stock transactions. July 2014: Global financial institution BNP Paribas S.A. pleads guilty to a criminal charge of conspiring to violate U.S. Economic Sanctions and is fined $8.9 billion for its role in processing billions of dollars on behalf of Sudanese, Iranian and Cuban entities subject to U.S. economic sanctions. December 2014: Former MoneyGram International Inc. s Chief Compliance and AML Officer fined $1 million and FinCEN seeks to ban him from the financial industry for his willful failure to maintain an effective AML program. 24 AML Compliance: Keep The Bulls-Eye Off Your Industry

26 Trends in Enforcement: Community and Regional Banks November 2014: North Dade Community Development Federal Credit Union of Miami Gardens, Florida was assessed a civil money penalty of $300,000 for violating the BSA by not implementing an effective AML program. Deficiencies included: Lack of automated system to identify suspicious activity and reliance on manual review by employees No BSA officer Maintaining correspondent bank accounts for Mexican and Dominican money services businesses (MSBs) but had inadequate training that lacked training on risks associated with MSBs. No due diligence on high risk accounts April 2015: National Credit Union Administration liquidated the North Dade Community Development FCU for violations of various federal laws and regulations. 25 AML Compliance: Keep The Bulls-Eye Off Your Industry

27 Trends in Enforcement: Community and Regional Banks In February 2015, FinCEN and the Office of the Comptroller of the Currency (OCC) penalized First National Bank of Dunmore, Pennsylvania for BSA/AMML deficiencies related to its failure to detect and report the proceeds of corruption. Penalty: $1.5 million In June 2014, OCC issued a consent order and a $500,000 civil money penalty against Associated Bank of Green Bay, Wisconsin for BSA violations, namely failing to adequately conduct risk assessments, perform sufficient due diligence identify high-risk customers, or properly educate and train its staff. In January 2014, the OCC issued a consent order and $500,000 civil money penalty against Old National Bank of Evansville, Indiana for similar BSA/AML inadequacies. 26 AML Compliance: Keep The Bulls-Eye Off Your Industry

28 Other Trends in Enforcement Increased regulatory focus on AML risk in non-traditional AML-related activities (i.e., microcap securities and penny stocks, cyber fraud, operational processes, DVP/RVP accounts) Due diligence on delivery versus payment (DVP) and receive versus payment (RVP) accounts has been limited historically because of the perceived notion that these account types do not pose a significant AML risk. DOJ is also targeting non-traditional financial institutions: commercial banks and credit unions, insurance companies, paycheck services, casinos and pawnbrokers 27 AML Compliance: Keep The Bulls-Eye Off Your Industry

29 Trends in Enforcement: Real Estate Transactions Federal audit takes aim at money-laundering real estate transactions in Vancouver area (The Province, Aug. 24, 2015) Buyer concealment loopholes involving lawyers and legal trust funds Purchase of Canadian real estate assets with offshore money and or by offshore persons High number of cash transactions Few cash transaction reports Few suspicious transaction reports Although banks are properly filing CTR and SARS, banks are erring by not scrutinizing real estate as a high-risk money-laundering sector. 28 AML Compliance: Keep The Bulls-Eye Off Your Industry

30 Trends in Enforcement: Real Estate Transactions Towers of Secrecy: Stream of Foreign Wealth Flows to Elite New York Real Estate (New York Times, Feb. 7, 2015) $15.65 million apartment at Time Warner Center purchased in 2010 by 25CCST74 LLC traced to a Russian senator and banker barred from Canada due to organized crime connections $21.4 million apartment purchased in 2014 by another shell company traced to Greek businessman arrested as part of a corruption sweep in Greece other apartments owned by another company traced to a Chinese business man associated with a construction company housing workers in hazardous, unsanitary conditions condos registered in trusts, limited liability companies or other entities that shield their names 29 AML Compliance: Keep The Bulls-Eye Off Your Industry

31 Trends in Enforcement: Real Estate Transactions Potential Flags Foreign or non-resident parties to transaction and sole purpose is capital investment (no intent to reside at the property) All identification presented is foreign, or hard to verify Transaction is completely anonymous via attorneys and attorneys trust account. Closing with large amounts of cash 30 AML Compliance: Keep The Bulls-Eye Off Your Industry

32 Trends in Enforcement: Real Estate Transactions Flags Balance is financed by offshore bank Multiple real estate purchases in a short time frame Lack of concern regarding risks, commissions, or transaction costs Use of legal entities or shell companies Purchaser in a rush to complete deal Purchaser purchases property without inspecting it 31 AML Compliance: Keep The Bulls-Eye Off Your Industry

33 Other Emerging Regulations & Recent Regulatory Areas of Focus Proposed Investment Advisor Rule On August 31, 2015, FinCEN announced proposed regulations to require certain investment advisors to establish anti-money laundering programs and report suspicious activity to FinCEN under the BSA. Investment Advisors would be considered financial institutions under the BSA and thus, be subject to compliance, reporting, and record keeping requirements. FinCEN is taking this action to regulate investment advisers that may be at risk for attempts by money launderers or terrorist financers seeking access to the U.S. financial system through a financial institution type not required to maintain AML programs or file suspicious activity reports ( SARs ). Proposed Rule 32 AML Compliance: Keep The Bulls-Eye Off Your Industry

34 Other Emerging Regulations & Recent Regulatory Areas of Focus Customer Due Diligence (CDD) Beneficial Ownership Rule Originally proposed in Aug Comment period expired on October 3, 2014 Sought to increase CDD obligations of banks, broker r dealers, mutual funds, futures commission merchants and introducing brokers in commodities Requires that entities know and verify the identities of beneficial owners who own and control and profit from companies they service 33 AML Compliance: Keep The Bulls-Eye Off Your Industry

35 Other Emerging Regulations & Recent Regulatory Areas of Focus Customer Due Diligence (CDD) Beneficial Ownership Rule (Key Elements): Identifying and verifying the identity of customers (CIP) Identifying and verifying the identity of beneficial owners of legal entity customers (i.e., the natural persons who own or control legal entities) Understanding the nature and purpose of customer relationships Conducting ongoing monitoring to maintain and update customer information and to identify and report suspicious transactions See Customer Due Diligence Requirements for Financial Institutions, 79 FR (Aug. 4, 2014). 34 AML Compliance: Keep The Bulls-Eye Off Your Industry

36 Other Emerging Regulations & Recent Regulatory Areas of Focus Marijuana-related businesses Virtual Currencies (i.e., bitcoins) Tax-related product advisories The Office of the Comptroller of the Currency (OCC) issued guidance on August 4, 2015 to outline safety and soundness measures that national banks and federal savings associations should follow if they offer tax refund-related products. 35 AML Compliance: Keep The Bulls-Eye Off Your Industry

37 Conclusions Detect Criminal Activity by conducting an industry-specific AML compliance program Defend any failure to detect criminal activity by a robust AML program How can we help? Q&As 36 AML Compliance: Keep The Bulls-Eye Off Your Industry