AML Meets ABC:Leveraging AML Tools for

Strong Anti-Bribery and Corruption Programs

Presented by Hillary RosenbergCounsel, Lewis Baach Kaufmann Middlemiss

ACFCS Webinar February 19, 2014

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CounselLewis Baach Kaufmann Middlemiss

New York

Hillary Rosenberg

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Objectives• Convergence: Integration & Optimization of

Operations, Systems, and Structures

• ABC vs. AML Similarities and Differences

• Leveraging and Expanding AML Controls for ABC Compliance

• Growing importance of third party due diligence for both AML and ABC

Emphasis on Anti-Corruption“As we’ve all seen – and as President Obama has said – “[t]he struggle against corruption is one of the great struggles of our time.” Fortunately [...] corruption is no longer widely seen as an accepted cost of doing business. It is no longer tolerated as an unavoidable aspect of government. On the contrary – it is now generally understood that the consequences of corruption are devastating – eroding trust in public and private institutions, undermining confidence in the fairness of free and open markets, siphoning precious resources at a time when they could hardly be more scarce, and all too often breeding contempt for the rule of law [...] This is why, as Attorney General, I’ve consistently worked to ensure that anticorruption remains a top priority for my colleagues at every level of the United States Department of Justice – within as well as beyond our borders.”

– Attorney General Eric Holder at the Arab Forum on Asset Recovery in Morocco (Oct. 28, 2013)

I am acutely aware that we have many urgent law enforcement priorities – fighting child exploitation, stemming the flow of narcotics from South America and elsewhere, stopping gang violence. I am here to tell you that fighting global corruption is just as urgent, and with the momentum of many countries behind us, now is the time to redouble our anti-corruption efforts.

– Former Deputy Attorney General, Lanny Breuer, ACI Conferences on the Foreign Corruption Practices Act (Nov. 16, 2012)

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Emphasis on Anti-Corruption

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• 2013: 8 SEC and 19 DOJ Enforcement Actions• 92 Pending Corporate Investigations as of January 2014 (FCPA Blog)

Alcatel-Lucent (2010)

Weatherford (2013)*

Daimler AG (2010)

JGC Corp. (2011)*

Technip (2010)*

Snamprogenti Netherlands BV (2010)*

ENI/Snamprogetti (2010)*

Total S.A. (2013)*

BAE Systems (2010)*

KBR/Haliburton (2009)*

Siemens (2008)

0 100 200 300 400 500 600 700 800 900

Top Ten FCPA Monetary Settlements (corporations)

Settlements (in millions)

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OverviewIntegration Optimization Model - Financial Crimes Compliance

General Definitions• Corruption/Bribery: The giving, offering,

promising, soliciting of anything of value, to a foreign official, with the intent to improperly influence that official in order to obtain or retain business.

• Money Laundering: The process by which criminals disguise the original source of the proceeds of criminal conduct by making such proceeds appear to have derived from a legitimate source.

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AML v. ABC Risk in a Financial Institution

• AML Risk– Bad actor clients will use the bank to launder illicit

funds• Where did the money come from?

• ABC Risk – Bad actor employees/agents/other third party’s

under the bank’s control will engage in bribery• Where is the money going?

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Examples - Corruption• Company A needs to obtain a license to mine gold in an African

country. – Only one license is available – Other companies are seeking to obtain the license– To secure the license, employees at Company A pay for the deputy

minister of mining in the African country to fly to NY with his wife, stay at expensive hotels, eat at 5 star restaurants, and receive Broadway tickets.

• Alternatively, Company A hires a third party agent to secure the mining license on Company A’s behalf. The deputy minister informs the third party agent that if $100K is wired into his personal bank account, he can guarantee Company A will receive the license. The agent wires $100K into the minister’s account.

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Examples – Money Laundering• Cash proceeds from drug trafficking are used to purchase chips at a

casino. – Money launderer gambles for a while, cashes in the chips, and receives a

check payment– Check is deposited into the bank– Cash is later withdrawn to purchase consumer goods

• The deputy minister of mining [in the corruption example] deposits the $100K from Company A’s third party agent into his local bank account. He then transfers the $100K into his son’s account at a U.S. financial institution. The son, who lives in the U.S., then uses the $100K to purchase a fancy sports car.

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AML v. ABC Risk in a Financial Institution

Financial Institution

(FI)AML

Client’s Illicit Funds Flow Through the FI

ABCFI’s Funds Used Illicitly

to Bribe

3rd Party/Client

3rd Party/Client

• Gifts & Entertainment

• 3rd Party Intermediaries

• Transactions

• Account Opening

• Transaction Monitoring

• SAR Reporting

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Law & OrderLegislation:

• The Foreign Corrupt Practices Act (FCPA)

• Bank Secrecy Act (BSA)

• Patriot Act

• Sanctions Regimes & SDN List

Enforceable by: • Department of Justice• Securities and Exchange Commission• Treasury Department (including OCC, the Fed, OFAC, FinCen)• State and Local Prosecutors• SROs, like FINRA

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ConvergenceIntegration & Optimization of Operations, Systems, & Structures- Same Goal: Identify and Mitigate Risk- Leverage and Expand Existing Infrastructure- Financial and Human Resource Efficiency- Unified Approach- Increased Sharing of Information- Greater Understanding of Risk- Greater Consistency in Responding to Risk - Overall Increased Awareness, compliance and business

Key Overlapping Risk Factors1. Geographic Risk2. Industry/Customer Risk

– E.g. Extractive Industry, Arms & Defense, Telecom, Construction, Public Works

3. Nexus with Government Officials/PEPs4. Reputation5. Third Party Involvement

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Compliance Program RequirementsBasic Requirements – 4 pillars:1. Governance 2. Risk Based Policies and Procedures– clear policy/code of conduct, stand alone or integrated– commitment from senior management – risk assessment– due diligence – monitoring– confidential reporting, internal investigations, disciplinary

measures

3. Training/Awareness program4. Independent Testing and Updating of Controls

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Compliance Program Requirements• Governance

– High level commitment; Individual(s) responsible for oversight and accountability• Independence• Access to the board• Risk Control/Rep Risk

– Management Information (MI) – Front-office engagement– Proactive Attitude and Willingness to “Look Back”– AML and ABC separate compliance groups?

• Resource Sharing• Uniformity of Compliance Plan & Program Structure• Information Sharing• Overall Awareness• Cross Training• Priorities

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Compliance Program Requirements• Risk Assessment– One Assessment, One Time, One Team, One

Comprehensive Analysis– Collaborative engagement with front-line business

personnel– Senior management sign-off and review– Sufficient engagement at board-level– Results Reported to Lines of Business

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Compliance Program Requirements• Due diligence – One Questionnaire– Information Sharing– Technology Expansion and Repurposing

• Negative News• Government Official/PEPs involvement & control

– OFAC/PEP/GO lists– Client Databases

• Contractual Representations and Warranties – Legal Team Leverage– Indemnification & Termination

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Compliance Program Requirements• Monitoring– Who is Monitored?• Clients vs. Employees/Third Parties

– What is Monitored?• Client Transactions vs. Employee/Bank Transactions

with Third Parties (Payments, G&E, etc.)

– Expand Existing Use of Alerts and Other AML Systems • Red Flags• Typologies

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Compliance Program Requirements• Confidential reporting, internal investigations,

and disciplinary measures– Centralized, specialized, aggregated investigative

function– Policy Violation Accountability and Tracking– SAR Filings not just for AML

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Compliance Program Requirements• Training/Awareness Program– Cross-Referential– Driven by Risk Assessment• Enhanced, Specialized Training For Higher Risk Groups

– Documentation and Tracking

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Compliance Program Requirements• Continual Independent Testing – Reported to senior management/board

• Updating Controls • Gap Analysis

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Third Party Relationships• Managing Third-Party Relationships is Critical

• Intermediaries/Finders/Agents• Joint Ventures• Subsidiaries• Distributors• Third Party Providers & Sub-Contractors• Other Business Partners

• Existing and Prospective Third Party Risk

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Third Party Controls• “Third-Party” Plan• Who and Why this Third Party• Third Party’s Risk Management Controls• Contractual Terms – Reps, Warranties and Indemnifications• Pay Commensurate with Work Performed

• No discretionary bonuses or success fees• Pre-Engagement Training • On-Going Monitoring and Oversight

• Periodic Due Diligence Refresh• Training• Audit rights• Annual Compliance Certifications

• Documentation• Higher Level Sign Off for Higher Risk Parties• Involvement of Reputational Risk Committee

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AML & ABC Shared Red Flags• Lack of cooperation or hesitancy in providing answers

• Lack of compelling business rationale

• Use of third party to perform tasks that require no special knowledge or skills

• Activity inconsistent with stated purpose, including abnormal compensation arrangements

• Third party’s use of multiple shell companies to conduct transactions

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AML & ABC Shared Red Flags• Use of or payments to offshore accounts

• Sloppy book keeping and poor financial controls

• Lack of transparency & documentation

• “Informal” arrangements

• Excessive use of cash; payments in cash

• Close ties to or business associations with government officials

Challenges• “Big Data”

• Data Quality

• Aggregation of Data and Alerts

• Communication Between & Integration of Technology Systems

• Expanding Existing Technology Uses

• Status Quo

• Next Steps: Human Trafficking Compliance

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Questions