Developing and Implementing an AML- CFT Compliance Program. Sarah Green, Senior Director, Enforcement and BSA Policy November 2015

Transcription

1 Developing and Implementing an AML- CFT Compliance Program Sarah Green, Senior Director, Enforcement and BSA Policy November 2015

2 Anti-Money Laundering (AML) What is Money Laundering? Involves acts committed to conceal or disguise the criminal origin of funds. Process to make illegitimate income appear legitimate. Includes use, acquisition and possession of such criminal property if its origin is or should have been known. Copyright 2015 FINRA 1

3 Anti-Money Laundering Three Stages of Money Laundering: 1. Placement customers attempt to physically insert illegally obtained cash or bearer instruments into financial system. Proceeds can be generated in securities account no placement 2. Layering customers create complex or multiple layers of financial transactions to disguise trail of funds and to provide anonymity. 3. Integration Process of inserting illegal funds back into the economy. Often done by mixing them with funds from legitimate sources, so appear to have legitimate origins. Provides money customer with an apparently legitimate explanation for his/her wealth. Copyright 2015 FINRA 2

4 Money Laundering Basics Placement Customer introduces his illegal profits into the financial system. May be done by breaking up large amounts of cash into smaller sums that are deposited directly into a bank account, or by purchasing a series of monetary instruments that are collected and deposited into accounts at another location. The placement phase of ML in the brokerage space is limited, but becoming more and more frequent with brokerage accounts being able to use banking features (ATM, checks, etc.) How can customers place illicit funds into the financial system through brokerage accounts? Cash deposits Monetary instruments (money orders, cashiers checks, etc.) Securities deposits Copyright 2015 FINRA 3

5 Money Laundering Basics Layering Customer engages in a series of conversions or fund movements to distance funds from their source. Funds might be channeled through the purchase and sales of investment instruments, or the customer might wire the funds through a series of accounts across the globe. The use of widely scattered accounts is especially prevalent in those jurisdictions that do not co-operate in AML investigations. In some instances, the customer might disguise the transfers as payments for goods or services, thus giving them a legitimate appearance. How will layering occur in brokerage accounts? Money movements into and out of accounts Sales of securities deposited into accounts Transfers of securities into and out of accounts Purchases of fixed income instruments with short-term maturities Copyright 2015 FINRA 4

6 Money Laundering Basics Integration Funds re-enter the legitimate economy. The customer might choose to invest the funds into real estate, luxury assets, or business ventures. How will integration occur in brokerage accounts? Purchases of legitimate securities Purchases of high value/luxury assets Purchases of businesses Copyright 2015 FINRA 5

7 Securities Industry and Drug Proceeds Copyright 2015 FINRA

8 Anti-Money Laundering What is Terrorist Financing? Most terrorist financing involves the process of Reverse Laundering Legitimate funds are used to later commit a crime of purpose such as an act of terrorism. Copyright 2015 FINRA 7

9 Anti-Money Laundering The Four Pillars AML Program Requirements 1) Procedures to detect and cause reporting of suspicious activity and achieve compliance with Bank Secrecy Act 2) Independent testing 3) Designate AML compliance officer 4) Ongoing training Copyright 2015 FINRA 8

10 Anti-Money Laundering Summary Customer Identification Program Suspicious Activity Monitoring Currency Transaction Reporting Currency Transaction Reports (CTRs) Currency and Monetary Instrument Transportation Reports (CMIRs) Funds Transfers and Transmittals (Joint/Travel Rule) Report of Foreign Bank and Financial Accounts (FBARs) Due Diligence for Correspondence Accounts and Private Banking Accounts Shell Bank Prohibitions Mandatory and Voluntary Information Sharing Section 311 Countries/Entities of Primary Money Laundering Concern Copyright 2015 FINRA 9

11 Anti-Money Laundering FINRA Rule 3310 An AML Program must be: Approved in writing by senior management; and Reasonably designed to achieve and monitor firms ongoing compliance with requirements of Bank Secrecy Act and implementing regulations. Bank Secrecy Act requires most of program to be Risk-Based Copyright 2015 FINRA 10

12 Anti-Money Laundering Risk Customer Risk: Online accounts Intermediated accounts (hidden beneficiaries, mult. levels of ownership) Customer type (PEP, non-u.s. customer, hedge funds, charities) Entities that obscure ownership or beneficial interest (LLCs, PICs, offshore trusts) Geographic Risk: Location of BD Location of customer/customer s business High-risk jurisdictions Offshore funding sources / funds transfers Business Risk: Source of wealth (offshore funding sources/transfers of funds) Product risk (variables, derivatives, penny stocks, money movements, retail, institutional) Copyright 2015 FINRA 11

13 Anti-Money Laundering CIP Customer Identification Program CIP Goal: Procedures must enable firm to form a reasonable belief that it knows the true identify of the customer. Approval: Must be approved by senior management Be appropriate for its size and business At a minimum, contain procedures to: Identify customer Verify customer s identity Recordkeeping Comparison with government lists Customer notice Copyright 2015 FINRA 12

14 Anti-Money Laundering CIP Customer: a person that opens a new account or an individual who opens a new account for an individual who lacks legal capacity or for an entity that is not a legal person. does not include persons who fill out account opening paperwork or who provide information necessary to establish an account, if such persons are not the accountholder as well. Exemptions: a financial institution regulated by a federal functional regulator, governmental entities, publicly listed companies or a person that has an existing account with the broker-dealer, provided the broker-dealer has a reasonable belief that it knows the true identity of the person. Account a formal relationship with a broker-dealer established to effect transactions in securities, including, but not limited to, the purchase or sale of securities, securities loan and borrowing activity, and the holding of securities or other assets for safekeeping or as collateral. Exemptions: (1) accounts acquired through acquisition, merger, purchase of assets or assumption of liabilities and (2) an account opened under an ERISA plan. Copyright 2015 FINRA 13

15 Anti-Money Laundering CIP Identification: Required Information Name Date of Birth (for an individual) Street Address Identification Number (US: SSN, non-u.s.: passport, TIN, etc.) Verification Must be verified in reasonable amount of time How long is reasonable depends on the risk Consider terms under which customer may conduct transactions while BD attempts to verify customer s identify Copyright 2015 FINRA 14

16 Anti-Money Laundering CIP Verification through Documents Natural persons Unexpired, government-issued identification evidencing nationality or residence and bearing photograph Entities Documents showing existence of entity, e.g., certified articles of incorporation, government-issued business license, partnership agreement or trust instrument Verification through Non-Documentary Methods Comparing information provided by customer with information obtained from consumer reporting agency, public database or other source; Checking references with other financial institutions; or Obtaining financial statement. Copyright 2015 FINRA 15

17 Anti-Money Laundering CIP What about? Omnibus accounts RVP/DVP accounts Private placement firms M&A firms Copyright 2015 FINRA 16

18 Anti-Money Laundering Account Opening Customer Due Diligence General Know Your Customer based on risk Due Diligence for Suspicious Activity Monitoring Section 312 Due Diligence for Foreign Correspondent Accounts: Banks Business organized under a foreign law that if located in the U.S. would be a broker-dealer, FCM, introducing broker in commodities or mutual fund Money transmitter or currency exchanger Enhanced due diligence for certain foreign accounts Private banking accounts for non-u.s. persons Copyright 2015 FINRA 17

19 Anti-Money Laundering SARs Broker-dealers required to file a SAR for: Any transaction conducted or attempted by, at or through broker-dealer involving (separately or in aggregate) funds or assets of at least $5,000, and Broker-dealer knows, suspects, or has reason to suspect transaction (or pattern of transactions of which the transaction is a part); Involves funds related to illegal activity, or is hiding or disguising funds or assets derived from illegal activity; Is designed, whether through structuring or other means, to evade requirements of Bank Secrecy Act. Has no business or apparent lawful purpose, or is not the sort in which this particular customer would normally be expected to engage, or Involves use of broker-dealer to facilitate criminal activity. Copyright 2015 FINRA 18

20 Anti-Money Laundering SARs Suspicious Activity Reporting What: Form SAR Where: Filed with FinCEN (instructions are on the form) When: Not later than 30-calendar days after date that the firm has determined that that activity is suspicious (although regulation says 30 days after initial detection by reporting Broker- Dealer of facts that may constitute a basis for filing the SAR) (60 days if accountholder is unknown) Recordkeeping: Five years Copyright 2015 FINRA 19

21 Anti-Money Laundering - SARs Firms need to have reasonable procedures to detect and report Monitoring Automated or manual is OK but it must be adequate Does the monitoring identify potential suspicious transactions or patterns of transactions? Wires, penny stocks, foreign customers? One day snapshots or reports that show trends? Does their monitoring cover potentially suspicious securities transactions and money movements? Reporting > FINRA Enforcement Actions: Scottrade, E*Trade, Legent Does the firm s process and staffing ensure timely reporting? > FINRA Enforcement Action: Penson Copyright 2015 FINRA 20

22 Anti-Money Laundering SARs Suspicious Activity Red Flags Published in numerous guidance documents; never an exhaustive list An awareness of red flags will ensure that broker-dealer personnel can identify circumstances warranting further due diligence Appropriate red flags should be described in firm s written AML policies and compliance procedures. (Small Firm Template) Red flags should be tailored to the firm s risks Copyright 2015 FINRA 21

23 Anti-Money Laundering Red Flags Structures deposits, withdrawals or purchase of monetary instruments below a certain amount to avoid reporting or recordkeeping requirements. Wire activity that is unexplained, repetitive, unusually large Physical certificate does not bear a restrictive legend, but based on history of the stock and/or volume of shares trading, it should have such a legend Customer engages in prearranged or other non-competitive trading, including wash or cross trades of illiquid securities. Two or more accounts trade an illiquid stock suddenly and simultaneously. Customer journals securities between unrelated accounts for no apparent business reason. Customer has opened multiple accounts with the same beneficial owners or controlling parties for no apparent business reason. Customer transactions include a pattern of receiving stock in physical form or the incoming transfer of shares, selling the position and wiring out proceeds. Copyright 2015 FINRA 22

24 Suspicious Trading and Market Manipulation Prearranged, directed or controlled trading of the security. For example, matched and wash trades. Purchases or increases in bids when already substantially long. Patterns of orders executed at successive increasing or decreasing prices. Large limit orders that are canceled once the order hits the market place. Overall leadership in movement or maintaining the market price of stock and/or concentration of trading volume over a period of time. Sudden and/or rapid surge or spike in price and/or volume that is not directly proportional to news events surrounding the security. A movement of price back to normal ranges when artificial price supports are removed. Copyright 2015 FINRA 23

25 Money Laundering and Terrorist Financing Typologies Bribery and Corruption Terrorist Financing Payments to foreign officials or state sponsored entities for order flow via foreign finder arrangements Payments to foreign officials or state sponsored entities for business Payments to consultants for no apparent reason Capital flight of funds derived from embezzlement and corruption Funds sent/received from high risk countries Use of multiple foreign bank accounts Multiple small deposits followed by a large international wire transfer Frequent payment or receipt of contributions to charities and NGOs Students with activity beyond what would be anticipated Copyright 2015 FINRA 24

26 Money Laundering and Terrorist Financing Typologies Black Market Peso Exchange Third party payments for goods or services unrelated to the seller/purchaser. Payments exceed customers known financial wherewithal. Wires are in large, round dollar amounts. Funds transferred into U.S. accounts and subsequently transferred out in the same or similar amounts. Customer is unable to provide supporting documentation (invoices, etc.) or documentation appears suspicious. Funnel Accounts Account associated with a bank which can receive deposits in multiple states Deposits made into accounts are under the $10,000 reporting threshold Checks and wire transfers are issued from the account to purchase goods which are to be shipped to foreign countries for sale Once sold, proceeds are transferred to the criminal organization Copyright 2015 FINRA 25

27 Money Laundering and Terrorist Financing Typologies Case study: Ayman Joumaa and Lebanese Canadian Bank Used cars bought in U.S. for cash Cars sold in West Africa Local currencies exchanged for USD in local black market USD deposited into accounts at LCB Car sales proceeds mingled with drug sales proceeds USD wired to fund Hizballah operations abroad USD wired to pay for drug shipments Copyright 2015 FINRA 26

28 Money Laundering and Terrorist Financing Typologies Case study: LA Fashion District Raids Drugs sold in US for USD High value fashion items purchased in cash Fashion items shipped to Mexico Fashion items sold for Mexican pesos Copyright 2015 FINRA 27

29 Enforcement Cases: Atlas One Key Allegations: Failure to implement a program reasonably designed to be able to monitor for, detect and report suspicious activity; failure to maintain books and records; failure to report customer complaints and update Forms U4 and U5 Facts: In 2007, DOJ froze six Atlas One accounts that were all controlled by one customer in connection with a money laundering scheme. Additional red flags: Multiple accounts controlled by same individual Accounts all listed the same mailing address in San Jose, Costa Rica Accounts all listed the address for another Atlas One customer as contact information for the account Copyright 2015 FINRA 28

30 Enforcement Cases: Atlas One Facts: 18 additional accounts that had not been part of DOJ's action. Certain customers' accounts engaged in significant money movements with little to no securities activity. Atlas One's AML program required Aponte to monitor for potentially suspicious activity and AML red flags, investigate suspicious activity and report suspicious activity by filing a suspicious activity report (SAR), when necessary. Result: $350,000 fine for Atlas One $25,000 joint and several fine and 3 month suspension for Aponte Copyright 2015 FINRA 29

31 Foreign Correspondent Accounts Due diligence on Correspondent Accounts for Foreign Financial Institutions Appropriate, specific, risk-based, and where necessary, enhanced policies, procedures and controls reasonably designed to detect and report known or suspected money laundering Policies and Procedures shall include: Determining whether the foreign financial institution is a foreign bank; Assessing the money laundering risk presented by the correspondent account; and Applying risk-based procedures and controls to such accounts to detect and report suspicious activity, including periodic review of account activity, to determine consistency with the type, purpose and anticipated activity of the account. Copyright 2015 FINRA 30

32 Foreign Correspondent Accounts Relevant Risk Factors: The nature of the foreign financial institution s business (e.g., banking, insurance, securities, etc.) and the markets it serves The type, purpose and anticipated activity of the account The nature and duration of the relationship with the foreign financial institution The AML supervisory regime of the country that issued the foreign financial institution s charter or license and, if reasonably accessible, of the jurisdiction in which an owner of the foreign financial institution is incorporated or chartered Known or reasonably available information about the foreign financial institution s anti-money laundering record Copyright 2015 FINRA 31

33 Foreign Correspondent Accounts Enhanced Due Diligence Requirements Section 312 requires U.S. financial institutions to apply enhanced due diligence when establishing or maintaining a correspondent account for certain foreign banks: Under an offshore license; In a jurisdiction found to be non-cooperative with international AML principles; In a jurisdiction found to be of primary money laundering concern under Section 311 of the USA PATRIOT Act. Copyright 2015 FINRA 32

34 Foreign Correspondent Accounts Enhanced Due Diligence Requirements Section 312 requires U.S. financial institutions to take reasonable steps to: Conduct appropriate enhanced scrutiny; Obtain information about customer for whom the bank has payable through accounts; Determine whether your customer has correspondent accounts for other banks and take reasonable steps to mitigate risk; Identify owners of such foreign bank if its shares are not publicly traded. Copyright 2015 FINRA 33

35 Case Study: Banorte Copyright 2015 FINRA 34

36 Section 314(a) Information Requests FinCEN Requests for Information on behalf of Law Enforcement What: Request for information about suspected money laundering and terrorist financing. When: FinCEN batches and sends requests every two weeks. How: Via of URL. Timing: Firms have two weeks to complete their searches and respond with any matches. FinCEN has implemented a new system so the firm can prove that it accessed the database. Copyright 2015 FINRA 35

37 Section 314(a) Information Requests Procedures: Conduct an immediate search of specific records. Review current accounts and accounts maintained by a named subject during the preceding 12 months and transactions not linked to an account conducted by a named subject during the preceding six months. Report only matches. Copyright 2015 FINRA 36

38 Section 314(b) Information Sharing Information Sharing Among Financial Institutions Firms can share client account information with other firms under the privacy safe harbor, which provides protection from charges for violating of Reg. S-P and RFPA related to information concerning terrorist financing, or money laundering. Firms file an initial, and then annual notice with FinCEN. Firms may share information about money laundering and terrorist financing, they may not share SARs (or fact that a SAR was filed). Copyright 2015 FINRA 37

39 Section 314(b) Information Sharing Notice requires broker-dealer to take necessary steps to protect confidentiality of information and to use information only for purposes of: Identifying, and where appropriate, reporting on money laundering or terrorist activities; Determining whether to establish or maintain an account or to engage in a transaction; Assisting the firm in complying with any requirement of the BSA. Copyright 2015 FINRA 38

40 Hypothetical You: Anti-Money Laundering Compliance Officer at ABC Securities, LLC Facts: A new team of representatives has joined your firm and have informed you that they are onboarding three new customers: Customer A: Foreign bank with a correspondent account with an anticipated business in fixed income Customer B: Investment adviser acting on behalf of a family office Customer C: A personal friend of one of the registered representatives Copyright 2015 FINRA 39

41 Audience Polling Question 1. What steps are you required to take at the account opening stage? Customer A: Foreign bank with a correspondent account with an anticipated business in fixed income Customer B: Investment adviser acting on behalf of clients, including a family office Customer C: A personal friend of one of the registered representatives A. CIP for B and C only, because CIP isn t required for correspondent accountholders B. CIP for A, B and C, and for A, CIP the foreign bank as your customer only C. CIP for A and C and B s underlying customers only D. CIP for A, B and C, and for A, CIP and perform foreign financial institution due diligence on the foreign bank Copyright 2015 FINRA 40

42 Audience Polling Question-Answer 1. What steps are you required to take at the account opening stage? Customer A: Foreign bank with a correspondent account with an anticipated business in fixed income Customer B: Investment adviser acting on behalf of a family office Customer C: A personal friend of one of the registered representatives A. CIP for B and C only, because CIP isn t required for RVP/DVP accountholders B. CIP for A, B and C, and for A, CIP the foreign bank as your customer only C. CIP for A and C and B s underlying customers only D. CIP for A, B and C, and for A, CIP and perform foreign financial institution due diligence on the foreign bank Copyright 2015 FINRA 41

43 Audience Polling Question 2. What are some red flags that might concern you while monitoring each of these customers for suspicious activity? Customer A: Foreign bank with a correspondent account with an anticipated business in fixed income Customer B: Investment adviser acting on behalf of a family office Customer C: A personal friend of one of the registered representatives A. Customer A engages primarily in microcap liquidations B. Customer B has a lot of trading in derivatives of an issuer that has ties with the family office C. Customer C has $100,000-$200,000 worth of wires in/out each month, but no securities transactions D. All of the above Copyright 2015 FINRA 42

44 Audience Polling Question-Answer 2. What are some red flags that might concern you while monitoring each of these customers for suspicious activity? Customer A: Foreign bank with a correspondent account with an anticipated business in fixed income Customer B: Investment adviser acting on behalf of a family office Customer C: A personal friend of one of the registered representatives A. Customer A engages primarily in microcap liquidations B. Customer B has a lot of trading in an issuer that has ties with the family office C. Customer C has $100,000-$200,000 worth of wires in/out each month, but no securities transactions D. All of the above Copyright 2015 FINRA 43

45 Anti-Money Laundering Independent Testing FINRA Rule 3310(c) Independent Testing Must review and assess adequacy and level of compliance with firm s AML compliance program. Member personnel or a qualified outside party may perform testing. If a firm uses internal personnel, sufficient separation of functions should be maintained to ensure independence. Most firms required to perform test annually (on a calendar basis). Firms may test every two years if they: Engage solely in proprietary trading; or Conduct business with only other broker-dealers. Copyright 2015 FINRA 44

46 Anti-Money Laundering AML Compliance Officer FINRA Rule 3310(d) requires: Designate and identify to FINRA (by name, title, mailing address, e- mail address, telephone number, and facsimile number) an individual or individuals responsible for implementing and monitoring the day-to-day operations and internal controls of the program such individual or individuals must be an associated person of the member and Provide prompt notification to FINRA regarding any change in such designation(s). Copyright 2015 FINRA 45

47 Anti-Money Laundering Training Rule 3310(e) Provide ongoing training for appropriate personnel Developed under the leadership of the AML compliance person or senior management. Vary based on the type of firm and its size, its customer base, and its resources. Written educational materials, videos, online resources, in-person lectures and explanatory memos may be appropriate training vehicles for AML training. Tailored Training A broker-dealer should scrutinize its operations to determine if there are certain employees who may need additional or specialized training because of their duties and responsibilities. Copyright 2015 FINRA 46

48 Proposed Customer Due Diligence Rule The Proposed CDD Rule is composed, at a minimum, of four key elements: Identifying and verifying the ID of customers (i.e. CIP Rule); Identifying and verifying the ID of beneficial owners of legal entity customers (i.e. natural persons who own or control the legal entity); Understanding the nature and purpose of customer relationships; Conducting ongoing monitoring to maintain and update customer information and identify suspicious transactions. Copyright 2015 FINRA 47

49 CDD: Identifying Beneficial Owners of Legal Entities FinCEN s proposed definition of beneficial owner has two independent prongs: ownership and control Firms must verify natural persons who own 25% or more of the legal entity; and Firms must also verify at least one natural person who controls (i.e. has significant responsibility to control, manage or direct) the legal entity. Copyright 2015 FINRA 48

50 Proposed Investment Adviser AML rule IAs now considered Financial Institutions Under BSA Does include: 4 pillars 314a and b CTR filing Recordkeeping (Joint and Travel rule) Does not include: CIP CDD PA Section 312 requirements Copyright 2015 FINRA 49

51 Other Frequently asked questions Model validation De-risking Cash Management accounts Copyright 2015 FINRA 50