Bank Secrecy Act for Volunteers Southeast Leadership Development Conference Destin, Florida November 5, 2015 April N. Ales, BSACS, CCUFC, CUDE Overview of Presentation What Laws Govern Money Laundering & Steps to Prevent It NCUA and The Bank Secrecy Act Elements of BSA Volunteers Responsibilities Policies and Procedures Member Due Diligence & Member Identification Program Money Services Businesses Currency Transaction Reports Suspicious Activity Reports & Red Flags Case Samples Law Enforcement Requests BSA Penalties Information Sharing OFAC/Penalties Enforcement Human Trafficking 2 1
WHAT LAWS GOVERN FEDERAL MONEY LAUNDERING? Bank Secrecy Act of 1970 Money Laundering Control Act of 1986 USA PATRIOT Act of 2001 3 STEPS TO PREVENT MONEY LAUNDERING The Bank Secrecy Act (BSA) Requires financial institutions to create a paper trail of financial transactions to help detect and prevent money laundering activities associated with drug trafficking, terrorism, organized and white collar crime. Report daily cash transactions of $10,000 or more Requires recordkeeping on beneficiaries and originators of funds transfers of $3,000 or more Requires information gathering and recordkeeping on sales of monetary instruments in amounts between $3,000 and $10,000 Established certain exemptions to the currency transactions reporting requirements 4 2
Money Laundering 5 NCUA AND THE BANK SECRECY ACT National Credit Union Administration (NCUA) Rules & Regulation Section 748 by law charges the NCUA as regulator/insurer with ensuring Bank Secrecy Act (BSA) compliance within credit unions. At a minimum, a credit union s internal compliance program must be written, approved by the board of directors, and noted in the board s meeting minutes. The program must include: 1. System of internal controls 2. Independent testing 3. Compliance Officer 4. Ongoing training 6 3
INTERNAL CONTROLS Credit unions must have appropriate internal control procedures to allow them to detect money laundering. These procedures must provide, among other things, a credit union with the ability to identify and report: (1) currency transactions in excess of $10,000 (cash) transactions and suspicious in nature. 7 INDEPENDENT TESTING Compliance with the BSA should be independently tested at least annually by an internal audit department, outside auditors, or consultants. At a minimum the audit should be able to: Attest to the effectiveness of internal procedures for monitoring compliance with the BSA by, for example: Sampling large currency transactions traced to CTR filings; Testing the validity and reasonableness of exemptions granted; and Reviewing a sample of SARs filed for completeness and accuracy. Assess employees knowledge of regulations and procedures. Assess adequacy of training programs. Audit findings should be incorporated into a report for senior management and board review. Appropriate follow-up should be ensured. 8 4
COMPLIANCE OFFICER Board designates a qualified employee(s) to serve as the BSA compliance officer. Responsible for management of the credit union s BSA compliance program. Board ensures the BSA compliance officer(s) has the sufficient authority and resources to administer the compliance program Line of communication should allow the BSA compliance officer(s) to regularly apprise the board and senior management of ongoing BSA compliance 9 TRAINING All appropriate personnel must be trained in the applicable aspects of the BSA Include regulatory requirements and the credit union s internal policies, procedures and processes Inform board and senior management of changes to the BSA and the implementing regulations Document training program: Employee printed names, signature, materials, and dates The following elements should be included in the training program and materials: The importance the board of directors and senior management place on ongoing education, training and compliance 10 5
FINCEN SAYS Advisory FIN-2014-A007 FinCEN provided guidelines to strengthen a credit union s BSA compliance culture including: Board of Directors, executive and senior management should actively support, understand and be engaged in compliance efforts. Managing and mitigating BSA deficiencies and risks should not be compromised by revenue interests. Relevant information should be shared throughout the credit union. Adequate human and technological resources should be devoted to compliance functions. Credit union leadership and staff should understand the purpose of BSA efforts and reporting. The BSA compliance program should be tested by an independent and competent party. 11 WHY SHOULD VOLUNTEERS CARE? It s simple EXAMINERS DO!! Examiner focus and current trends in recent exams reflected deficiencies in: Policy and Procedures Adequacy of Staff Training Member Due Diligence Addressing MSBs SAR Filings Validating Systems 12 6
BOARD OF DIRECTORS RESPONSIBILITIES Protect the credit union from being used for illegal purposes. Be aware of the credit union s BSA/AML programs and activities. Support senior management in the BSA/AML efforts. Don t ignore or downplay indications that a member may be involved in illegal or illicit activities. Keep BSA/AML matters confidential. Conduct an annual review and approval of all BSA/AML and related policies along with appointment of the BSA Officer(s). REMEMBER penalties for non-compliance can be costly to you and the credit union 13 SUPERVISORY COMMITTEE RESPONSIBILITIES Verify that the Board has approved a BSA, Member ID Program and OFAC policy Verify that above are reviewed and revised as necessary Verify that knowledgeable BSA compliance officer(s) have been appointed and are regularly monitoring the program for compliance Confirm that adequate BSA tools have been implemented at the credit union and are appropriate for the credit union s level of risk Ensure that an independent audit and staff training are conducted at least annually 14 7
POLICY AND PROCEDURES Every credit union must have a written compliance program that is tailored to its level of risk. Directors are responsible for ensuring that the credit union has a written BSA compliance program that is tailored to its level of risk Written policies, procedures and processes Must be written, approved by the board of directors and noted in the board minutes 15 ADEQUACY OF STAFF Board designates a qualified employee(s) to serve as the BSA compliance officer Responsible for management of the credit union s BSA compliance program Board ensures the BSA compliance officer(s) has the sufficient authority and resources to administer the compliance program Line of communication should allow the BSA compliance officer(s) to regularly apprise the board and senior management of ongoing BSA compliance 16 8
MEMBER DUE DILIGENCE (MDD) Requirements are found in the FFIEC BSA/AML Examination Manual located at www.ffiec.gov Obtain information at account opening to understand normal activity for all members; Collection of this information allows credit unions to distinguish low and high risk members. Member s normal and expected transactions activity Changes in the member s risk profile Periodically monitor information to ensure it s up to date Collect from all members-not just high risk 17 Member Due Diligence Things to consider: Have you verified that all members have been appropriately risk rated? How do you detect changes in a member s behavior, entity ownership etc.? Are you consistently following your credit union policy? What services do you provide for non-members? Adjust risk ratings as members increase their utilization of higher risk products and services. 18 9
MEMBER IDENTIFICATION PROGRAMS (MIPS) USA PATRIOT Act, Section 326, requires credit unions to implement procedures to verify identity of all members Maintain records of how member was identified Periodically check membership against OFAC list Quarterly if not automatically performed by data processing system for credit unions with less risk Notify members of information collection requirements New members before opening account Including joint account holders and beneficiaries MIP must be incorporated into overall BSA program and approved by the Board of Directors Acceptable forms of ID and how ID is verified 19 MONEY SERVICE BUSINESS (MSB) Be sure you know which members are providing MSB Services Run periodic queries against your transaction files or achieved statements to identify MSB-like transactions Visually review members statements for higher risk or questionable transactions periodically Review FinCEN registration lists and distribute to appropriate personnel Be knowledgeable of State and Federal legal requirements Findings included: Credit Union have unidentified MSBs in the FOM 20 10
Money Service Business (MSB) Product or Service Money Orders Traveler's Checks Money Transmission Check Cashing Currency Exchange Currency Dealing Prepaid Access Capacity(Type of MSB) Issuer of money orders Seller of money orders Redeemer of money orders Issuer of traveler's checks Seller of traveler's checks Redeemer of traveler's checks Money transmitter Check casher Dealer in foreign exchange Dealer in foreign exchange Provider of Prepaid Access Seller of Prepaid Access 21 Money Service Business (MSB) ASSESSMENT OF CIVIL MONEY PENALTY North Dade Community Development Federal Credit Union Miami Gardens, Florida 11/2014 one branch, with five employees, and assets of $4.1m MSBs were located outside of its geographic field of membership and were engaged in high-risk activities MSBs included $54.8 million in cash orders, $1.01 billion in outgoing wires, $5.3 million in returned checks, and $984.4 million in remote deposit capture MSB activity accounted for 90% of total annual revenue in 2013 (mostly wire transfers) Penalty in this matter $300,000 11/2014 Liquidated by NCUA March 31, 2015 22 11
BUSINESSES INELIGIBLE FOR EXEMPTION Certain business can never be exempted from CTR filings Gaming Institutions Law Firms Accountancy Firms Doctors Motor Vehicle Dealers Investment Advisors and Investment Banking Service Providers Real Estate Brokers Pawn Shops Title Insurance and Real Estate Closing Companies 23 CURRENCY TRANSACTION REPORTS (CTRS) Regulation designed to make it tougher for criminals. Must be filed for each deposit, withdrawal, payment, transfer or other transaction involving currency (cash) of more than $10,000. Multiple transactions by or on behalf of one person in one business day: consolidate the transactions and report them as one if the total exceeds $10,000. Must be filed within 15 calendar days after the date of the transaction. May be fined up to $10,000 per day for each CTR not filed 24 12
SUSPICIOUS ACTIVITY REPORT (SAR) Employees that have a reasonable, substantial basis for believing that a member, employee or director has committed attempted or is involved in a crime, should report the activity to the BSA Officer. SOMETHING AIN T RIGHT 25 SAR SAFE HARBOR Credit union directors, officers, employees and agents that report a suspicious transaction to the appropriate authorities are granted a safe harbor from any civil liability under any law or regulation, regardless of whether such reports are filed pursuant to the SAR instructions This safe harbor applies to SARs filed within the required reporting thresholds as well as those filed voluntarily on any activity below the threshold 26 13
SUSPICIOUS ACTIVITY REPORT (SAR) What should the credit union do to combat suspicious activities? Understand what are normal and expected transactions of your members Identify and report unusual or suspicious activities management Evaluate concerns, monitor and/or terminate relationships as a result of suspicious or unusual activity Understand the credit union s policy and procedures Avoid Willful Blindness at all costs Never disclose the existence of a SAR filing 27 SUSPICIOUS ACTIVITY REPORT (SAR) Credit unions are required to file a SAR with respect to the following: Criminal violations involving insider abuse in any amount Criminal violations aggregating $5,000 or more when a suspect can be identified Criminal violations aggregating $25,000 or more regardless of a potential suspect 28 14
COMMON RED FLAGS Members who provide insufficient or suspicious information Efforts made by the member or 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 29 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 30 15
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 31 CIGARETTE SMUGGLING OPERATION A married couple structured millions of dollars through their retail cigarette business using multiple financial institutions and branches. Plead guilty to structuring more than $10 million in illegal funds generated through the sale of untaxed cigarettes. Over a 14-month period the defendants routinely visited branches of seven banks and made cash deposits of $9,900 or less and over 300 CTR filings, 24 SARs were filed. SAR narratives were helpful to investigators as they detailed the structuring activity in all banks. The narratives also stated that the couple often visited multiple branches within the same day. These details led authorities to subpoena additional business accounts and encompass the entire activity of the scheme. 32 16
SAR LEADS TO GUILTY PLEA IN CASE AGAINST DOCTOR Chiropractor sentenced to 8 months imprisonment and fined $30,000 for structuring a series of transactions Frequently converted a portion of income into cash, and it was transactions involving cash that raised suspicions with the defendant s bank The reporting bank noticed two cash deposits of approximately $9,000 made on consecutive days. The transactions were reviewed by the bank for a two-month period and identified multiple deposits of cash ranging from $8,300 to $9,500 that totaled over $100,000. BSA record searches, investigators learned that the defendant was the subject of a CTR filed almost ten years earlier, confirming knowledge of the reporting requirement. 33 WEIGHT LOSS DOCTOR Weight-weight-loss doctor. The doctor allegedly ran a weight-loss clinic, but in reality orchestrated a scheme to provide prescriptions for cash. A financial institution recognized the structured transactions, filed SARs that triggered an investigation, and ultimately may have saved lives. The doctor made in excess of $60,000 in structured cash deposits into three accounts he had at a domestic financial institution A different bank filed six SARs totaling more than $1 million of potentially suspicious activity 34 17
ATTORNEY SENTENCED IN FRAUD CASE As part of the scheme, the attorney promised investors that a certain product could accurately predict movements in the stock market, making it possible for software users to receive high percentage returns on stock trades and option contracts, whether the market was rising or falling. Sentenced to more than four years probation based on a conviction for mail fraud and structuring of currency transactions and ordered to pay nearly $3 million in restitution to the victims of the various schemes. 35 LAW ENFORCEMENT REQUEST The decision to comply with a request from law enforcement to maintain certain accounts to aid in their investigation is left to the credit union. Pros and cons for complying should be weighed by the credit union. Get the request in writing. Ensure the request is issued by a supervisory agent or an attorney representing federal, state, or local law enforcement Maintain documentation of such requests for at least 5 years after the requests have expired. 36 18
LAW ENFORCEMENT REQUEST If a credit union maintains an account that reflects suspicious activity would still be expected to complete and file a SAR on the account. Complying with a LE request does not relieve a credit union of its recordkeeping and reporting responsibilities under BSA. For example, a CI that opts to maintain an account that reflects suspicious activity would still be expected to complete and file SARs on the account. 37 38 19
PENALTIES FOR BSA VIOLATIONS Credit Unions Cease and Desist Order Loss of Charter Criminal money penalties up to the greater of $1 million or twice the value of the transaction Civil money penalties Individuals Removal and bar from banking (criminal and civil) Civil penalties not to exceed the greater of the amount (not to exceed $100,000) involved in the transaction or $25,000. Criminal penalties can be up to $500,000 and up to 10 years in prison. 39 INFORMATION SHARING USA PATRIOT Act Two types of information sharing: Between the law enforcement and financial institutions [314(a)]; and Between financial institutions [314(b)] 40 20
INFORMATION SHARING - 314(A) REQUESTS Between the Credit Union and Law Enforcement FinCEN may require a credit union to search its records to determine whether it maintains or has maintained accounts for, or engaged in transactions with a specified person, entity or organization during the past 12 months (or 6 months if there is a transaction where no account is involved) Must report to FinCEN within 14 days, unless the request specifies otherwise Sent out once every 2 weeks via secure website Must be kept confidential Report matches to FiCEN 41 INFORMATION SHARING - 314(B) REQUESTS Permits sharing of information with another FI to help identify and report activities that are suspected to involve possible money laundering or terrorist activity. FI must notify FinCEN of its intent to engage in information sharing, and that it has established and will maintain adequate procedures to protect the information A notice to share information is effective for one year Should ensure that the other FI or association has filed its required FinCEN notice Cannot share SARs or SAR filing information If request relates to a transaction subject to a SAR, disclose only the transaction and member information requested 42 21
OFAC Requirements are separate and distinct from the BSA, but they share a common national security goal OFAC regulations require the following: Block accounts and other property of specified countries, entities and individuals Prohibit or reject unlicensed trade and financial transactions with specified countries, entities and individuals Reporting blocked and prohibited transactions to OFAC 43 PENALTIES FOR OFAC VIOLATIONS Varies depending on specific law violated Corporate or personal penalties up to $1 million and 12 years in jail Civil penalties up to $250,000/incident Forfeiture of funds involved in violation PLUS criminal penalties YTD 11 Penalties or Settlements (www.treasury.gov) Total $269,890,107 44 22
ASSOCIATED RISKS Compliance risk can occur when the credit union fails to implement an effective program implementing the requirements of the BSA. Reputation risk can occur when the credit union incurs fines and penalties as a result of failure to comply with the BSA. Enforcement actions against institutions are public information, and negative publicity can result from such exposure. 45 ENFORCEMENT The Financial Crimes Enforcement Network (FinCEN), along with the assistance of the banking regulatory agencies (NCUA) is tasked with administering the Bank Secrecy Act FinCEN was created to work towards maximizing information shared between law enforcement agencies and financial institutions. 46 23
Human Trafficking & Smuggling Human trafficking and smuggling is slavery It s a new type of crime that generates proceeds which then needs to be laundered Preys on the weak and desperate Leads to virtual slavery Forced prostitution (sex slavery) Child pornography The launders make deposits into their personal or business accounts. The proceeds are then wired to the owners of the traffickers Human Trafficking 47 Human Trafficking & Smuggling Human trafficking and smuggling are immensely profitable crimes that generate mountains of illicit proceeds. Unlike the victims of most crimes, however, neither the underage victims of human trafficking nor the undocumented aliens who are exploited by human smuggling organizations will report these crimes to law enforcement 48 24
Resources NCUA: www.ncua.gov CUNA: www.cuna.org NASCUS: www.nascus.org FinCEN: www.fincen.gov IRS Detroit Computing Center: (800) 800-2877 FinCEN s Financial Institutions Terrorist Hotline to report terrorist activity against the U.S.: 1-866-556-3974 FinCEN s BSA/AML Examination Manual: www.ffiec.gov/bsa_aml_infobase/pages_manual/manual_onli ne.htm FBI: www.fbi.gov OFAC: www.treas.gov/ofac 49 25