BSA/AML/OFAC for Bankers Jennifer Morrison Education Chair, COAFP for Buckeye Financial Forum, April 24, 2017

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1 BSA/AML/OFAC for Bankers Jennifer Morrison Education Chair, COAFP for Buckeye Financial Forum, April 24, 2017

2 Disclaimer The following represents the opinions of the presenter, not those of my employer, the COAFP or the AFP. Assuming your employer has a BSA/AML/OFAC training program, please comply with your internal training. This training is designed to provide general information regarding the subject matter. It shall not be construed as legal advice or legal opinion. For legal advice or legal opinion, please consult your attorney.

3 Source: PWC Global, 2016 Global Money Laundering Report

4 Agenda Introduction to BSA/AML/OFAC De-Risking SARs and SAR Trends Questions Resources

5 Introduction to BSA/AML/OFAC

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7 History 1970 Financial Recordkeeping and Currency and Foreign Transaction Reporting Act Currency Transaction Reporting (CTR) and Recordkeeping Requirements 1986 Money Laundering Control Act (BSA) Money laundering became a crime in the U.S. Financial institutions must establish a formal BSA/AML Program

8 History 1998 Money Laundering & Financial Crimes Strategy Act Added Risk Assessment Must have a process to assess, identity & assign risk to customers, products & services, and geographies Identify high risk customers at account opening Heed the advice of independent auditor when advice is provided

9 History 2001 USA Patriot Act Terrorist Financing made distinct from Money Laundering Broadened the definition of financial institution Imposed law on foreign banks doing business in U.S.

10 Financial Crimes Enforcement Network: FinCEN Bureau of U.S. Dept. of Treasury Mission: 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. The U.S. Financial Intelligence Unit (FIU)

11 Four Pillars of BSA/AML 1. System of internal controls 2. Appointment of a BSA/AML Officer (qualified!) 3. Training: everyone gets trained a. Frontline staff gets more training b. Board must be trained too c. Training must include tailored content 4. Independent testing annually

12 Plus One Beneficial Ownership (CDD FINAL Rule) U.S. is NOT in alignment with international standard Defines Customer Due Diligence, adding Beneficial Ownership Must determine the natural person who has 25% or more ownership of the entity opening an account Must determine who has control of the entity opening an account By May 11, 2018

13 OFAC Office of Foreign Assets Control Office within U.S. Dept. of Treasury Administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals SDN List, other lists Sanctions via EO s

14 Money Laundering

15 Money Laundering Money Laundering defined: Criminal Finance; post-9/11 includes Terrorist Financing A person who conducts a financial transaction WITH KNOWLEDGE that the funds or property involved are the proceeds of a crime, and who intends to further that crime or to conceal or disguise those proceeds is laundering money.

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17 Money Laundering Three stages of money laundering: Step One: Placement the physical disposal of cash or other assets derived from criminal activity, typically into the financial system; the introduction of dirty money into circulation Step Two: Layering the separation of illicit funds from their source through creating complex layers of financial transactions to disguise the audit trail, ownership and source of funds Step Three: Integration the re-entry of the funds into the economy in what appears as normal business or personal transactions

18 Terrorist Financing To intimidate a population or compel a government or organization to act in a desired manner through the threat of violence Ideologically motivated financial activities Unlawful & legitimate sources of funds Unlawful & legitimate financial transactions

19 Terrorist Financing Money from the sale of used cars and consumer goods was sent through U.S. accounts to pay Asian suppliers of consumer goods.

20 Difference Between Money Laundering and Terrorist Financing Money Laundering Motivation Profit Ideological Source of Funds Internal from within criminal organization Terrorist Financing Internal self-funding cells (often criminal activity) External benefactors & fundraisers Conduits Favors formal financial system Favors cash couriers or informal financial system (hawalas, casa de cambio/currency exchanges) Detection Focus Suspicious transactions deposits uncharacteristic of customer s wealth or expected activity (relational risks) Transaction Amounts Financial Activity Large amounts often structured to avoid reporting requirements Complex web of transactions often involving shell or front companies, bearer shares, offshore secrecy havens Money Trail Circular money eventually ends up with person who generated it Suspicious relationships wire transfers between seemingly unrelated parties (transactional risks) Small amounts usually below reporting thresholds No workable financial profile of operational terrorists exists Linear money generated is used to propagate terrorist group & activities

21 Alternative Payments Fraud Payments Hustler Deals in illicit products or services Usually operates online May initially accept credit cards via front business Loses card network access Moves to alternate payments methods Know Your Merchant

22 Alternate Payments Fraud

23 De-Risking

24 Risk Assessment in CIP/CDD/EDD Customer Identification Program (CIP) identify, verify, risk assess Customer Due Diligence (CDD) monitor regular customer Enhanced Due Diligence (EDD) high or higher risk customer

25 High Risk Customers A BSA/AML program must be risk based and recognizes that certain aspects of a FI s operations present greater risk than others. Customer Risks Geographic Risks Products/ Service Risks Customer type: consumer or business; partnership/public/private companies; beneficial ownership; PEPs/non resident aliens/msbs and cash-intensive businesses like marijuana businesses HIFCA/HIDTA/Narcotics and Bulk Currency Corridors, FATF countries, OFAC See Topics Covered by FFIEC BSA/AML examination manual: Expanded Examination Overview and Procedures for Products & Services e.g., bulk shipments of currency, private banking, trust services, prepaid access (gift cards), ACH, wires, and TPPPs

26 High Risk Geographies: HIFCAs

27 High Risk Geographies: HIDTAs

28 High Risk Customers/Geographies

29 High Risk Products/Services Electronic Funds Transfers (Wires) International Wires Currency (Cash) Transfers Private Banking Third-Party Payment Processors Prepaid Access (Gift Cards) IATs Bitcoin, alternative payment methods?

30 SARs & SAR Trends

31 Suspicious Activity Reports (SARs) SAR Filing Thresholds $0 Insider Zero Tolerance Know Your Employees $5,000 Criminal/Suspicious Activity with a Suspect Identified $25,000 Criminal/Suspicious Activity without a Suspect Identified $5,000 BSA Violations Structuring to Avoid CTR Reports & Money Laundering

32 Suspicious Activity Reports (SARs) Three Legal Definitions 1. Transaction is illegal File the SAR (if meets Thresholds) 2. Transaction is designed to evade the reporting requirements of BSA (e.g., Structuring) 3. Transaction is inconsistent with the customer s normal behavior (as determined by risk assessment and subsequent CDD/EDD) SAR Test File the SAR ($5,000 Threshold) File the SAR (if meets Thresholds)

33 Suspicious Activity Reports (SARs) SAR Test: The transaction has no business or apparent lawful purposes, or is not the sort in which the particular customer would normally be expected to engage, and the FI knows of no reasonable explanation for the transaction after examining the available facts, including the background and possible purpose of the transaction

34 Suspicious Activity Reports (SARs) Reportable Transactions: Know who and how to notify at your FI that you have suspicious or suspected illegal activity Sufficient evidence or proof is not relevant! Confidentiality: A SAR, and any information that would reveal the existence of a SAR are confidential, and shall not be disclosed except as authorized in the regulation

35 SAR Trends

36 Questions?

37 Resources

38 Resources BSA/AML/OFAC Examination Manual Released 11/17/14 version on 12/2/14

39 Resources Financial Crimes Enforcement Network (FinCEN): FinCEN Regulatory Help Line: SAR Hotline for Terrorist Activity: HIFCA designations

40 Resources Office of Foreign Asset Control (OFAC): structure/offices/pages/office-of-foreign-assets- Control.aspx SDNs and SDN Information: Financial Action Task Force (FATF) Wolfsberg AML Principles:

41 Resources Office of National Drug Control Policy (ONDCP): (check back soon) Drug Enforcement Administration HIDTA designations and explanations