Anti-Money Laundering Primer for Health Insurers Health Care Compliance Association April 26, 2004 Stephen W. Koslow and Rhys W. Jones PwC
Agenda The Crime of Money Laundering The Risk of Money Laundering Common Areas of Difficulty The Critical Role of Monitoring and Testing 2
Executive Order 13224 September 23, 2001 I, GEORGE W. BUSH, President of the United States of America, find that grave acts of terrorism and threats of terrorism committed by foreign terrorists... and the continuing and immediate threat of further attacks... constitute an unusual and extraordinary threat to the national security, foreign policy, and economy of the United States...and hereby declare a national emergency to deal with that threat. I also find that because of the pervasiveness and expansiveness of the financial foundation of foreign terrorists, financial sanctions may be appropriate for those foreign persons that support or otherwise associate with these foreign terrorists...... all property and interests in property of the following persons that are in the United States or that hereafter come within the United States, or that hereafter come within the possession or control of United States persons are blocked: 3
The Crime of Money Laundering 4
What is Money Laundering? the process whereby criminals attempt to hide and disguise the true origin and ownership of the proceeds of their criminal activities, thereby avoiding prosecution, conviction and confiscation of the criminal funds. Money laundering is not the same as fraud - Fraud involves the loss or disappearance of assets or revenue; whereas - Money laundering involves the movement of large quantities of illicit proceeds. 5
The Narcotics Money Laundering Triad $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Placement Cash is converted to monetary instruments or is deposited into accounts $ $ $ $ $ $ Corporate banking $ Equities $ Treasury Layering Debt Funds are moved to other FS institutions to obscure origins. $ $ account account Legitimate asset Integration Funds are used to acquire legitimate assets or fund activities. 6
The Terrorism Triad $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Distribution Funds are distributed to finance terrorist activities $ $ $ $ $ $ Corporate banking $ Equities $ Layering Treasury Debt Funds are moved to other FS institutions to obscure link between origin & destination. $ $ account account Legitimate asset Placement Potentially legitimate assets are deposited into the financial system 7
Legal Framework The Crime of Money Laundering Sections 1956 and 1957 of the U.S. Criminal Code (18 U.S.C. Sec. 1956-57) Knowingly conducting a financial transaction with proceeds of specified crimes or with intent to conceal source of funds Severe penalties up to $500,000 and/or 20 years 8
The USA PATRIOT Act of 2001 Sec 352: Applied existing law to require other financial institutions to establish an AML program: Development of Internal Policies, Procedures and Controls Designation of a Compliance Officer Ongoing Employee Training Programs Independent Testing of Programs Sec 326: Verification of Identity (Know Your Customer) Sec 356: Broker / Dealer SAR Requirements 9
The Role of FinCEN Treasury bureau with primary responsibility for establishing and/or implementing the policies and regulations designed to deter and detect money laundering and enforcement Facilitates communication among government agencies // cooperation with law enforcement Supports investigations with technological assistance Approx. 300 employees Annually receives, analyzes, processes and reports on over 14 million reports Manages US relationship with OECD Financial Action Task Force (FATF) 10
The Role of Self Regulatory Organizations Sec 352 AMENDS Section 5318(h) of the BSA; The Secretary of the Treasury...may prescribe minimum standards for programs... ; 31 CFR Part 103: A financial institution will be in compliance with the law if it complies with the AML regulations of its SRO (e.g. The NASD for B/Ds); NASD Proposed Rule 3011: Anti-Money Laundering Compliance Program; NASD NTM 02-21: Guidance from the NASD. 11
Guidance for Broker-Dealers NASD Rule 3011: Applies to all NASD-member broker-dealers, including mutual fund underwriters and distributors. Sets forth minimum standards for broker-dealer compliance programs: Establish and implement policies and procedures that can be reasonably expected to detect and cause the reporting of [required] transactions... Establish and implement policies, procedures and internal controls reasonably designed to achieve compliance with the Bank Secrecy Act... 12
The Risk of Money Laundering 13
Risk Assessment and Risk Management Reputational Risk Strategic Risk Compliance Risk Operational Risk 14
The Language of 3011 and NTM 02-21 Rule 3011: Establish and implement policies and procedures that can be reasonably expected to detect and cause the reporting of [required] transactions... Establish and implement policies, procedures and internal controls reasonably designed to achieve compliance with the Bank Secrecy Act... 15
The Language of 3011 and NTM 02-21 NTM 02-21...procedures must reflect the firm s business model and customer base It is the fiduciary responsibility of officers and directors to ensure the firm s compliance programs are viable and effective. the obligation to develop and implement an AML compliance program is not a "one-size-fits-all" requirement. The general nature of the requirement reflects Congressional intent that each financial institution should have the flexibility to tailor its AML program to fit its business. 16
Heightened Scrutiny on Good Corporate Governance Money laundering deterrence is part of good governance and risk management, and is incorporated into the risk-focused supervision of financial institutions. Your supervisors expect you to know this and to manage your business accordingly. 17
Heightened Scrutiny on Good Corporate Governance Directors and Senior Management Are Now Being Held To a Very High Standard: US Federal Sentencing Guidelines (1991) require effective compliance program ; Caremark Case (1996) Board of Directors is responsible for ensuring that effective compliance programs are in place (state corporate law); Treadway Commission (1987) and Blue Ribbon Committee on Improving the Effectiveness of Audit Committees (1998); Increasing demands for accountability by institutional investors, employees, and other stakeholders, threat of shareholder derivative suits. 18
The Compliance Governance Model 19
AML Compliance is Multi-Dimensional 20
Common Areas of Practical Difficulty 21
Written Policies and Procedures Should be specific to your business Comprehensive and include the following topics: General policy statements from sr. management Roles and responsibilities of key personnel Program components (e.g. Account Opening, OFAC, SAR Reporting, Monitoring, KYC Procedures) Training and awareness communication Record keeping and external reporting (e.g. Cash and Cash Equivalents, Monetary Instruments, Fund Transfer) 22
AML Awareness and Training Programs Senior Management Down Enterprise Wide Coordination Documentation Use of Technology Continually Updated 23
Sec. 326: Know Your Customer Rules Section 326 requires Treasury to adopt Know Your Customer rules by October 26, 2002. At a minimum, these procedures will require financial institutions to: verify, to the extent reasonable and practical the identity of any person seeking to open an account. To maintain records used to verify such identity. To check that the potential customer does not appear on any list of known or suspected terrorist or terrorist organizations 24
OFAC Compliance Office of Foreign Assets Control Enforces federal laws prohibiting economic transactions with individuals, businesses and governments subject to U.S. sanction under the OFAC laws ( SDNs ) Financial institutions required to monitor accounts and transactions and block accounts to prevent payments, transfers or withdrawals Compliance requires due diligence to correctly identify true beneficial owner or source of incoming funds Applies to everybody and every entity in the United States 25
KnowYourCustomer The USA PATRIOT Act has created a need for financial institutions to formulate: a customer acceptance policy and a tiered customer identification program that involves extensive due diligence for high risk accounts and suspicious conduct and transactions, and a proactive account monitoring solution for suspicious activities a robust risk assessment process is key. 26
Customer Identification Programs Require a Risk-Based Approach ID / Verification Strategy Name DOB Address TIN/EIN MVR Credit Checks On-Site View Database Screening Corporate Documents Other More Scrutiny Less Scrutiny Lower Risk Increased Scrutiny for Particular Purchases or Unusual Situations Risk Analysis Strategy Higher Risk Product - $ - Owner / Payer Contractual Change Source of Wealth Payment Claimant Other 27
Additional KYC Challenges Knowing Your Customer is not enough Your company must also have a process that includes: Know Your Agent Know Your TPA Know Your Vendor Know Your Employee 28
AML - Health Insurance Perspective Health insurance payments are made in relation to services, not as cashouts or investment proceeds Health plans and insurers typically deal with financial transactions relating to three specific constituencies Constituency Transaction Magnitude Controls Employers Healthcare premium payments Large in aggregate Small marginal amounts per employee Premiums tie to insureds, monthly payments (not prefunded) Members and insureds Claim payments Claim reimbursements Small payments to member for reimbursement Large and small payments to provider on behalf of member Documentation of service, payment direct to provider, antifraud program Providers Claim payments Large and small payments to provider on behalf of member Documentation of service, debarment listings, anti-fraud program 29
Potentially Suspicious Behavior Issuing policy Lack of concern for risks or costs of the policy Preoccupation with surrender procedures Unusual concern of the customer for secrecy Difficulty describing nature of the business / source of funds Payments for policy disproportionate to occupation or income Transactions that lack any business purpose Policy monitoring At termination the client shows no concern for penalties Early termination Rapid cashing in of all or a significant percentage of single premium policy Transfer of beneficiaries and then termination General Suspicious Behavior Policy applications from overseas, where a similar policy could be provided in that country Customers using cash, when transaction type is normally handled by check / other payment instruments Use of 3rd party checks to purchase a policy 30
The Critical Role of Monitoring and Testing 31
The Importance of Independence Independent Testing is Required Under Sec 352 (Internal or External) Understand the Regulatory Requirements and Risks Test the Functionality of the AML Program Perform a Gap Analysis, Compliance / Controls Diagnostics Kick the Tires Prepare and Use a Specific Set of Control Objectives Report Analysis, Make Recommendations and Verify Remediation Benchmark the Reasonableness of the Program 32
Seven Top Expectations of Regulators for AML Programs Good Governance Comprehensive Program Enterprise-Wide KYC Foundation Meaningful Information, Effective Communication and Training Beyond Monitoring Transactions Leveraging Technology Continuous Maintenance and Refinement 33
pwc For more information please contact: Stephen W. Koslow (312) 298-3829 stephen.w.koslow@us.pwc.com Rhys W. Jones (813) 222-6237 rhys.w.jones@us.pwc.com PwC