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2 The ABC s of AML: An Introduction To The Law Of Anti-Money Laundering February 14, 2013 Presented By: Peter C. Harvey, Partner Harry Sandick, Partner Patterson Belknap Webb & Tyler LLP New York, New York 2

3 What is money laundering? The act of making money from Source A, an illegal source, look like it came from Source B, a legal source. 3

4 How is Money Laundered? 4

5 Criminal Activity Placement Integration Layering 5

6 ü Black Market Colombian Peso Exchange ü Overseas bank ( offshore accounts ) ü Underground/alternative banking ü Shell companies ü Investing in legitimate businesses ü Structuring Deposits ( smurfing ) 6

7 Structuring Remains one of the most commonly reported suspected crimes on SARs Money launderers and criminals have developed many ways to structure large amounts of currency to evade the currency transaction report (CTR) filing requirements Make deposits or withdrawals that are less than $10,000 Use currency to purchase official bank checks, money orders, or traveler s checks with currency in amounts less than $10,000 Exchange small bank notes for large ones in amounts less than $10,000 7

8 What laws govern federal money laundering? ü Bank Secrecy Act of 1970 ü Money Laundering Control Act of 1986 ü USA PATRIOT Act of

9 What steps must financial institutions take to prevent money laundering? Bank Secrecy Act of 1970, as amended (BSA) (31 USC 5311 et seq.) Financial institutions must file currency transaction reports (CTRs) for transactions involving more than $10,000 in currency Must maintain a Monetary Instrument Log (MIL) of any issuance or sale of monetary instruments totaling $3,000 to $10,000 Requires a Suspicious Activity Report (SAR) where customer appears to be engaged in a violation of law or an effort to avoid reporting 9

10 What federal laws criminalize money laundering? Money Laundering Control Act of 1986, as amended (18 USC 1956 et seq.) Section 1956(a)(1): Prohibits conducting financial transaction with funds known to be the proceeds of unlawful activity, inter alia, with intent to promote specified unlawful activities or conceal information about the funds Section 1956(a)(2): Prohibits international movement of funds with intent to promote specified unlawful activities Section 1956(a)(3): Allows the use of sting operations 10

11 What federal laws criminalize money laundering? Money Laundering Control Act of 1986, as amended (18 USC 1956 et seq.) (cont d) Section 1957: Money spending statute prohibits financial transactions in excess of $10,000 that involve property known to be derived from a crime Section 1960: Prohibits the operation of an unlicensed money transmitting business 11

12 What steps must financial institutions take to prevent money laundering? USA PATRIOT Act of 2001 Expands AML compliance program requirements set forth in prior statutes All financial institutions must implement a written AML compliance program and must develop and maintain a customer identification program (CIP) 12

13 What steps must financial institutions take to prevent money laundering? USA PATRIOT Act of 2001 (cont d) Prohibits institutions from establishing, maintaining, administering, or managing correspondent accounts in the U.S. for, or on behalf of foreign shell banks or a non-united States person Requires federal banking agencies to consider a bank s AML record when reviewing bank mergers and acquisitions 13

14 What are Some of the Penalties for Money Laundering? 14

15 Criminal Penalties Up to a maximum of twenty years in prison and a $500,000 fine (or twice the value of property involved in the offense) Civil Penalties Equal to the amount involved in transaction (if any) up to $100,000 or $25,000 for each violation of the AML program or suspicious transaction reporting requirements, with a separate violation each day 15

16 Civil Penalties (cont d) Penalty equal to at least two times the value of the transaction, up to $1 million, for insufficient policies and controls with respect to correspondent accounts Civil Forfeiture Civil forfeiture of any property involved in a transaction in violation of Sections 1956, 1957 or 1960, or any property traceable to such property 16

17 Suspicious Transactions: Recent Money Laundering Investigations 17

18 HSBC (2012) HSBC Group agreed to pay $1.92 billion (forfeiture of $1.25 billion in illegal transactions and $655 million in civil penalties) as part of a deferred prosecution agreement Summary: HSBC lacked an effective AML program Failed to conduct due diligence on certain foreign correspondent accounts Failed to detect and report evidence of money laundering 18

19 HSBC (2012) (cont d) Product Risk: HSBC cleared $290 million of sequentially numbered traveler s checks without investigating for money laundering Customer Risk: High-risk Mexican currency exchange houses customers ( casa de cambios ) and other money transmitter clients were not given closer scrutiny Country Risk: No structure to AML program to ensure systematic risk assessments 19

20 HSBC (2012) (cont d) Transaction Monitoring: Ineffective monitoring of U.S./ Mexico cross-border bulk cash movements Transaction monitoring: Delayed filing of suspicious activity reports (more than one year after the underlying transactions) Inadequate testing and staffing for compliance Insufficient due diligence on foreign correspondent accounts 20

21 Wachovia (2010) Willfully failed to establish anti-money laundering (AML) program Was aware as early as 1996 of high risk that drug money was being laundered through casas de cambios, but continued to do business with CDCs Entered into deferred prosecution agreement and forfeited $160M to resolve charges Agreement is the result of an investigation into transactions with CDCs 21

22 Bank of New York (2005) Bank did not adequately monitor and report suspicious accounts Scheme involved unlicensed transmissions of about $7B, which originated in Russia, passed through U.S. accounts, and then moved into other accounts worldwide Bank agreed to pay $38M in penalties and victim compensation Nine individuals convicted, including Bank of New York President, for their role in money laundering scheme 22

23 American Express Bank International (2007) Failed to detect drug-related money transactions laundered through a subsidiary over several years Charged with failing to maintain an effective AML program Justice Department found specific instances of suspicious or illicit activity in drug-related money laundering transactions moved through Black Market Peso Exchange wire transfers Entered into deferred prosecution agreement and forfeited $55M to resolve Bank Secrecy Act Violations 23

24 Broadway National Bank (2002) First bank prosecuted for failing to file Suspicious Activity Reports (SARs) Failed to report suspicious transactions that occurred over a two-year period, including hundreds of bulk cash deposits and thousands of structured deposits Resulted in a $4M fine and a guilty plea by the bank 24

25 Who s Paying Attention? 25

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27 Other AML rules and requirements are provided by the following regulatory agencies and organizations: Office of the Comptroller of the Currency Board of Federal Reserve System Federal Deposit Insurance Corporation National Credit Union Administration 27

28 Federal criminal investigations into AML violations: Department of Justice U.S. Attorney s Offices Asset Forfeiture and Money Laundering Section (AFMLS) Federal Bureau of Investigation Internal Revenue Service 28

29 How to Prevent Money Laundering 29

30 Who must have an AML program? Financial institution is broadly defined (31 U.S.C. 5312) Banks, credit unions, trust companies, finance companies Broker-dealers and investment banks Insurance companies Money transmitters Casinos Non-covered institutions, like hedge funds, may still have AML policies Remember: no one may violate criminal prohibitions 30

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32 1) Policies, procedures, and controls Develop a company policy statement Develop a risk-based AML program that will comply with the PATRIOT Act CIP Due diligence and enhanced due diligence for foreign correspondent and private banking accounts Comply with special measures imposed by the Department of Treasury SARs Information sharing with law enforcement and other financial institutions 32

33 2) Designate an AML Compliance Officer Should be competent and knowledgeable regarding applicable laws and money laundering risk Should be empowered with full responsibility to develop and enforce appropriate policies and procedures Responsibilities should include: Monitoring compliance with AML program Updating AML program, as necessary Providing appropriate AML training to personnel Assisting in resolution of due diligence and red flag issues Ensuring that AML records are maintained and filed in accordance with applicable regulations 33

34 3) Independent Audits Should be conducted internally or by qualified independent parties Should be performed periodically or at least on an annual basis Results of audit should be reported to senior management, board of directors, or designated board committee Audit should identify areas of weakness or recommendations for enhancing AML program 34

35 4) Training Can be accomplished by employees watching a video or conducting a live or interactive web-based training Should be conducted regularly Should focus on: Particular areas of the financial institution that are vulnerable to money laundering Internal policies designed to prevent money laundering Looking for red flags in everyday transactions 35

36 Common red flags Customers who provide insufficient or suspicious information Efforts made by customer or bank employee to avoid reporting or record keeping requirement Funds transfer activity is unexplained, repetitive, or shows unusual patterns Suspicious Automated Clearinghouse (ACH) transactions Activity inconsistent with customer s business Suspicious lending activity Changes in bank-to-bank transactions 36

37 Common red flags (cont d) Increased cross-border financial institution transactions Bulk currency shipments Trade finance Privately-owned ATMs Shell company activity Personal accounts/transactions used for official embassy and foreign consulate business Strange employee behavior 37

38 What should I do if I see a red flag? " Report it! Don t ignore red flags! " Fill out the SAR narrative accurately " Don t disclose to any person involved in suspicious activity that a SAR has been filed " Maintain proper supporting documentation when filing an SAR 38

39 How can your institution monitor red flags for potentially suspicious activity? " Incorporate red flags into AML procedures " Don t copy template red flags without tailoring them to your institution " Implement systems that would allow the institution to monitor money movements and other account activity " Develop an administrative process for filing SARs and reviewing SAR filings 39

40 Executive Summary v Money laundering can result in civil and criminal penalties v Large and small institutions are vulnerable to money laundering v Protect your institution by establishing an AML program that is in compliance with the PATRIOT Act remember the Four Pillars v Use the regulatory agencies and organizations as a source for up-to-date information about money laundering prevention v Training: You can t detect money laundering if you don t know what you are looking for take heed to the red flags! 40

41 How can we help? ü Patterson Belknap has a practice dealing with financial crimes and wrong-doing, with particular attention to money laundering ü Our firm s lawyers have assisted investigative authorities in highprofile money laundering probes ü Our firm has formulated pro-active compliance programs designed to help clients avoid money laundering scandals * * For more information, contact us or go to Peter C. Harvey Harry Sandick pcharvey@pbwt.com hsandick@pbwt.com 41

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