Commonalities, money laundering, ethics, international standards, gac 1-27-14

Part 1: Financial Crime Commonalities

Money LaunderingEthics

International StandardsGlobal Anti-Corruption

CFCS Examination Preparation SeriesJanuary 27, 2014

Presented ByCharles Intriago

Brian Kindle

Brian KindleEditorial and Training Advisor

Association of Certified Financial Crime SpecialistsMiami, FL

Charles A. IntriagoPresident and Founder

Association of Certified Financial Crime SpecialistsMiami, FL

Certification, News, Guidance, Training, Networking

The Credential That Shows Your Knowledge and Skill Across the Financial Crime Spectrum

CFCS Certification

• Universal and not based on the laws or regulations of any country

• Allows diverse professionals to demonstrate skill and knowledge across multiple fields

• Designed for private and public sector specialists• Promotes career growth, better jobs and pay,

confidence

What the CFCS Certification is

• Eight month process– Identification of Job Tasks– Worldwide survey– Writing of exam items based on job task and

survey findings– Detailed review and selection of items by 60

experts and psychometricians• Experienced ACFCS staff that has built 3 prior

certifications

Construction of CFCS Certification

• Over 1,000 professionals in 64 countries have registered for CFCS certification

• Eleven global financial institutions have purchased certifications in bulk for their staffs

Demand for CFCS Certification

• An extensive 330-page Exam Study Manual, regularly revised and updated

• This Live Online Exam Training Course, as well as prerecorded versions on the website

• Topic specific online training courses now available or in development on crucial subjects, like– The US Foreign Corrupt Practices Act – The Foreign Account Tax Compliance Act (FATCA)

CFCS Exam Study Aids

About the Exam• There are 145 scenario based, four choice,

multiple choice questions• 125 scored questions and 20 unscored

questions• Four hour exam session with no breaks, at one

of over 700 testing centers or online proctored• Passing score is 63%• Results given immediately

Preparation Suggestions• Recommended three weeks of study, if you commit 6

– 8 hours a week• Review manual in detail, including referenced

materials in appendix• Prepare based on your own strengths and

weaknesses • Exam based on best practices, not what you might do

at your organization

Financial Crime Commonalities


Defining Financial Crime and its Permutations

• Crimes that have money or economic advantage as goal

• Non-violent action resulting in unlawful taking, moving or disguising of money or other value by artifice, corruption or deception for benefit of perpetrator or another

• ACFCS does not include profit-motivated crimes, like drug and human trafficking at their source

• But, nearly all criminals become ‘financial criminal’ when they possess or control the criminal proceeds

The Financial Crime Spectrum• Money Laundering• Fraud• Corruption • Tax evasion •Terrorist financing•Asset recovery • Sanctions • Compliance• Enforcement

Globalization of Financial Crime

• FCPA, UK Bribery Act, GAC crackdown

• FATCA, IGAs, multinational tax enforcement

• FATF’s changing standards pointing to convergence

• Shrinking world, cross-border activity

• Secrecy havens, beneficial ownership

• G20 call for greater financial transparency, cooperation

Technology and Financial Crime

• Identity theft, data breaches, other cybercrimes

• Compliance and enforcement technology-driven

• Data analytics in transaction monitoring, investigations, customer due diligence

• Data security grows in importance for public, private sectors

Commonalities of All Financial Crimes• Require money laundering• Require a financial institution• Result in tax evasion • Have interface with a government agency• Create necessity to recover assets• Often involve multiple countries• Often involve public or private corruption

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Benefits of Convergence

Regulatory expectations, emerging best practice Government agencies doing it Leveraging data, systems, tools to access and study data Common case management system Helps manage stakeholder interests, expectations Can produce better SARs All financial crime cases have AML component Many cases involve complicit employees; security, HR Broader career choices for staffs of converged units

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Practical Considerations on Convergence

A single financial crime job family Sharing best practices Merge organizations or just work together? History and culture clash Skills – some units have skills others lack Managing internal stakeholders’ expectations Managing external stakeholders’ expectations

Money Laundering


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Overview and Definition

• Actions or conduct designed to conceal source, movement, control or ownership of money illegally derived

• Movement of money derived through legitimate means, but which is intended or destined to further a crime

• Common element of all financial crimes

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Stages of Money Laundering• Placement

• First step in the process• Infusion of criminal proceeds into traditional or non-

traditional financial institutions• Typically most vulnerable to detection at this point• Moving assets away from their source

• Structured deposits• Changing currency into other financial instruments• Using non-bank institutions, like casinos• Complicity of banks, brokers or other institutions

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Stages of Money Laundering• Layering

• Separates criminal proceeds from source through layers of transactions

• Often involves multiple participants and entities, like shell corporations, cross-border transactions

• More layers, more difficult it is to trace funds to perpetrator• Wire transfers• Asset movement among entities perpetrator controls• Purchasing multiple financial instruments

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Stages of Money Laundering• Integration

• Puts laundered proceeds into legitimate economy to appear legitimately derived, allowing funds to return to financial criminal

• Makes it difficult to distinguish legitimate, illegitimate funds• Detecting integration often requires informant, undercover

agent, forensic accounting. Examples:• Real estate investments• Trade-based money laundering• Loans, business arrangements among complicit entities

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AML Compliance Programs

• Obviously better to prevent illicit funds from entering financial system than chasing them after the fact

• Key is robust anti-money laundering programs: • Customer due diligence measures, including ongoing due

diligence• Customer profiling and risk assessment• Automated transaction monitoring systems• Customer screening• Investigation of suspicious or atypical customer transactions

and behavior• Enhanced due diligence procedures for higher-risk customers

• Will be described in more detail in later section

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Characteristics and Indicators of Money Laundering

• Red flags are situation-specific, depend on type of organization, customer and scenario

• Key is to understand customer’s behavior, source of funds to establish “normal” behavior

• Create customer profile, compare activity, transactions against expectations and peer group

• Good KYC and customer due diligence programs, monitoring essential for detecting laundering

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Characteristics and Indicators of Money Laundering

Potential red flags

• Account activity inconsistent with customer profile

• Account operated by third party• Funds transfers from/to tax

haven• Funds transfers to offshore

jurisdictions with no rationale• Large cash transactions over

short period• Multiple deposits to account by

different people

• Multiple transactions on same day from different geographic locations

• Many large deposits by ATM• Same home address for funds

transfers by different people• Structuring of transactions• Variations in spelling of names,

addresses• Withdrawing all or most funds in

short period

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Money Laundering Methods and Vehicles

Financial Institutions, Intermediaries and Other Entities

• Correspondent Accounts• Private Banking• Securities Brokers• Insurance• Real Estate Agents• Precious Metal Dealers• Casinos• Gatekeepers: Lawyers, Accountants, Auditors, Notaries,

Others

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Financial Vehicles and Value Transfer Systems

• International Trade Price Manipulation• Prepaid Cards• Mobile Money• Credit Facilities and Lending• Black Market Peso Exchange• Hawala

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Structures to Conceal Beneficial Ownership

• Shell Companies• Shelf Companies • Trusts• Bearer Bonds and Securities• Nonprofits, Charities and Foundations• Fronts and Nominees

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Money Laundering and Beneficial Ownership

• Determining “ultimate beneficial ownership” is persistent issue in AML field

• Corporate registries are one key source

• Business data providers, open source intelligence can also be useful

• Increasing regulatory scrutiny, attention being focused on the issue

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Money Laundering Trends and Technologies

• Money laundering risks in new technologies• Mobile payments• Digital currencies • Virtual worlds• Online banking and securities trading

• Money laundering schemes becoming more complex

• Facilitated by many institutions and intermediaries, including company formation agents

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Key Lessons

• Money laundering a constant element of all financial crimes; each has money laundering nexus

• Unraveling complex corporate structures, determining beneficial ownership is key to due diligence, investigations

• AML compliance relies heavily on customer profile, risk assessment, expected transactions and activity

• “Three stages” are useful way to frame, analyze suspicious activity

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Practice Question

A compliance officer at a major insurance company has recently noticed a pattern of potentially suspicious transactions from a long-time customer. The customer is employed in a consulting position that requires her to travel internationally on an unpredictable schedule and she often resides overseas for extended periods.

The customer has several properties insured with the company for large amounts. In the past three years, she has overpaid her premiums numerous times and then requested a refund be issued.

Concerned that the customer may be laundering funds through the overpayment of premiums, the officer is investigating the transactions.

Which fact would BEST indicate money laundering may be taking place?

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Practice Question

A. The customer often requests that refunds be made by wire transfer to banks outside of the country.

B. The customer makes the overpayments at different times of the year and in varying amounts.

C. The customer has recently taken out a sizeable new insurance policy on a commercial property with your company.

D. The customer has requested that refunds on excess premiums be made to an offshore corporation

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Review Question

You are an AML officer at a local bank, which holds accounts for a variety of businesses in your region. Most businesses are tied to the tourism and hospitality industry, as the region is a major vacation destination during the summer months. Many accountholders are small businesses that deal primarily in cash.

You are investigating an alert produced by your transaction monitoring system on an account held by a local, family-owned restaurant located near one of the largest tourist resorts in the area. After reviewing KYC information on the account, you determine the family lives in a neighboring country.

Upon reviewing the account’s activity, you learn the following information. Which fact best supports the possibility that the restaurant account may be used for money laundering?

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Practice Question

A. The restaurant makes large cash deposits into its account biweekly from June until early September.

B. The account shows a pattern of funds transfers each month to an account held at a bank in a neighboring country.

C. The restaurant’s account shows consistent deposit activity throughout the calendar year.

D. The restaurant’s cash deposits were made through a combination of counter and ATM deposits.

Ethics


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Overview

• There is no one accepted international standard

• Ethical standards for different professions and organizations – compliance, regulation, enforcement, law, investigation, etc.

• Financial crime professionals confront numerous ethical risks

• “If you have to ask about it, it’s probably wrong.”

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Duties to Client

• Financial crime specialist owes highest duty of honesty, transparency and professionalism to constituents, client, organization, colleagues

• Identifying who is your client in broad terms, acting in their best interests is key to ethical behavior

• Does not permit unethical or illegal behavior to further “best interests” of client

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Conflicts of Interest

• Take variety of forms – personal interests, current and past clients, multiple clients

• Maintaining ethical standards relies on finding fair and equitable resolution to conflicts

• In most cases, one client’s interests should not be privileged over another

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Conflicts of Interest

• Organizations should screen for conflicts of interest at the start of relationships:

• Assess services, activities, types of employees to identify areas where conflicts of interest may arise

• Implement written disclosure policies• Designate conflict of interest officer or committee• Create “conflicts of interest database”• Training programs for employees on conflicts of

interest and their ethical resolution

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Conflicts of Interest • Conflicts should be recognized early in relationship

• If not, timely response is required, which can include:

• Promptly disclosing to past or present colleagues, clients or organizations the nature of a potential conflict of interest

• Asking these persons and organizations to waive conflicts of interest that may exist, if it is appropriate

• Creating an information wall or other safeguards to assure that persons who were involved with a prior matter will not see or have access to files from the new matter, and will not participate in the new matter

• Declining to accept the prospective matter or case

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Data and Privacy Concerns

• Financial sector professionals often have access to sensitive financial, personal information

• Organizations need policies and procedures to ensure information of customers, clients, and other parties is managed ethically

• “Information barriers” to separate sensitive data and reduce potential for conflicts of interest

• Multi-tiered access systems to limit information to essential staff• Processes to end relationships and purge or delete information

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Ethics Policies and Procedures

• Code of ethics

• Employee training, ethics policies

• Confidential reporting, escalation policies

• Commitment, communication from top leadership

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Key Lessons

• Acting in client’s best interests guides ethical behavior

• Information barriers are essential safeguard at financial institutions

• Conflicts of interest are common ethical dilemma; understanding how to resolve them is critical

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Review Question

• What should be one element of an organization’s ethics policies?

A. Senior management approval for all new customer relationships

B. Dismissal of any employees with conflicts of interest C. Reporting of ethical violations through business

linesD. Regular communication on ethics from senior

management

International Standards


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Overview

• Combating financial crime is an international and cooperative affair

• Financial crime is global phenomenon, requires coordinated action at international level

• International standards set the pace for most of the formal financial sector

• Some national laws have an extra-territorial “international standards” effect

United Nations

• UN Security Council Resolutions– Sanctions programs

• United Nations Convention Against Corruption

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UNODC

• IMOLIN database–Legal library of AML and related laws–https://www.imolin.org/

https://www.imolin.org/

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Transparency International

• Anti-corruption NGO with over 100 chapters worldwide

• Provides research, analysis and reporting on corruption, corporate and financial transparency issues globally

• Releases Corruption Perceptions Index annually• http://www.transparency.org/research/cpi/ove

rview

http://www.transparency.org/research/cpi/overview

http://www.transparency.org/research/cpi/overview

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Corruption Perceptions Index

OECD

• OECD Anti-bribery Convention• Initiatives related to:

– Anti-money laundering– Tax fairness and sharing

• Database of tax sharing agreements

– Corporate transparency– Illicit financial flows

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FATF• Outgrowth of OECD

• Formerly 40 + 9 Recommendations, now 40 Recommendations

• Sets standards for AML cooperation among countries• Peer reviews• “Non-cooperative” jurisdictions, black or grey lists

World Bank

• Stolen Asset Recovery Initiative (StAR)• http://star.worldbank.org/star/

• Doing Business Reports– Database of business laws, regulations and

data on business climate and transparency– www.doingbusiness.org

http://star.worldbank.org/star/

http://www.doingbusiness.org/

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Basel Committee

• Establishes principles relating to banking supervision

• http://www.bis.org/bcbs/• Basel III Accords• Customer Due Diligence for Banks• Consolidated KYC Risk Management

http://www.bis.org/bcbs/

Wolfsberg Group

• Group of largest international banks– Set standards for private banking, correspondent

banking relationships• Wolfsberg AML Principles for Private Banking• Wolfsberg Principles for Intermediaries

– Maintains Due Diligence Repository database– http://www.wolfsberg-principles.com/diligence.ht

ml

http://www.wolfsberg-principles.com/diligence.html

http://www.wolfsberg-principles.com/diligence.html

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EGMONT Group

• Organizations of FIUs meeting standards

• Provides cooperation between FIUs

INTERPOL• Cooperative effort among police of countries• Issue Notices to members that share

information, provide warnings, or request that members track or detain suspects

• Modeled after FATF on regional basis• APGML• Others

• Conduct peer reviews

FATF-style Regional Bodies

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National Laws with International Effect

• US:

• USA Patriot Act

• FCPA

• FATCA

• UK:

• UK Bribery Act

• EU:

• Directives

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Key Lessons

• May not be used on day-to-day basis, but international standards shape public and private efforts

• International best practices may not be your best practices

• Review source documents where possible

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Review Question

• What organization would likely provide the

most useful sources of information for

assessing corruption risks of a country?

A. Basel Committee

B. Transparency International

C. Interpol

D. Wolfsberg Group

Global Anti-Corruption


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Overview• Corruption has many definitions, takes many forms

• “Grand” corruption• Petty corruption• Commercial bribery and corruption

• Widespread negative consequences of corruption to economic development, fair markets and competitiveness, civil society

• ACFCS focuses on corruption of public officials, especially involving corporations, business entities

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What is a Corrupt Payment?• Bribe or corrupt “payment” does not have to be made in cash

• Made from “payor” to recipient

• Can include nearly anything that induces recipient to grant some official favor or advantage that payor should not or would not otherwise have received

• Luxury goods• Services• Free use of property or goods• Access and influence

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Methods to Make and Conceal Corrupt Payments

• Gifts, travel and entertainment expenses• Charitable contributions, contributions to nonprofits under control of

government official• Direct payment of campaign expenses• Payments to fictitious employees, or adding associates of official to

company payrolls• Payments to fictitious businesses, inflated payments to businesses for

the products or services provided• Payments through loans, or allowing official free use of services or

property• Third parties – sales agents, vendors, contractors, attorneys

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Red Flags of Corrupt Payments

• Records of fee payments to a third party are significantly higher than other third parties in the same industry sector, without compelling business rationale

• Abnormal compensation arrangements, such as excessive commissions or unusual reimbursements

• Payments to domestic businesses, persons made to offshore accounts

• Substantial payments to contractors , employees or third parties with little experience in the field they purportedly work in

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Red Flags of Corrupt Payments• Invoices from companies or third parties that are vaguely

worded or do not clearly describe services performed

• Employees or third parties with close ties or past business associations with government officials

• Employees or third parties who have entered into business arrangement or transaction at request of a government official

• Third parties using multiple shell companies to conduct transactions, or are themselves a shell company

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NGOs and Anti-Corruption Advocacy• Non-governmental organizations, with and without backing of

national governments, have been active in anti-corruption

• World Bank• Transparency International

• Corruption Perceptions Index, other publications• United Nations and UN Office on Drugs and Crime

• Convention Against Corruption with 140 signatories• Organization for Economic and Cooperation and Development

• Anti-Bribery Convention with 40 signatories

What Is the Foreign Corrupt Practices Act?

• US law enacted in 1977

• Two areas

- Anti-bribery provision

- Books and records/internal controls provisions

• Enforceable by DOJ and SEC

- DOJ: Criminal, civil jurisdiction over US

companies, their subsidiaries

- SEC: Civil jurisdiction over US “issuers”

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Who the FCPA Covers• Any issuer under US securities laws

• Domestic or foreign public companies registered required to file periodic reports with SEC

• Domestic concerns, including US companies, citizens, nationals, residents

• Person or entity that engages in any act in furtherance of corrupt payment while in US territory

• International scope – 9 of top 10 largest FCPA cases are non-US companies

FCPA Anti-Bribery Provision

• Prohibits corruptly making, offering or

promising to make a payment, gift, or anything

of value, directly or indirectly, to a foreign

official for purpose of obtaining or retaining

business

FCPA Enforcement

Who Is A Foreign Official?

• Very broadly defined• Not limited to high-level officials• Includes people acting on behalf of government entity• Includes employees of government-owned or

government-controlled entities- "Instrumentality" = fact-specific inquiry

• Includes political parties, party officials and candidates• Includes employees of international organizations• Effective "control" of the entity is key

Books and Records Provisions• Only applicable to issuers under US securities laws

-BUT: Should still be part of robust compliance program for private companies

• Issuers must "[m]ake and keep books, records… which… accurately and fairly reflect transactions and dispositions of assets of the issuer“

• Issuer also must "devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances" that transactions are:

- Executed and access to assets is permitted only in accordance with management authorization- Transactions are recorded in a way to permit financial statements to be prepared according to GAAP

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UK Bribery Act

• Enacted in 2010, effective July 2011

• Goes beyond FCPA in enforcement scope, strictness

• Covers any UK citizen, all corrupt activities in UK, and any company with operations in UK

• Stiff penalties – unlimited fines for corporations, 10 years for individuals

• Very limited enforcement so far

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Provisions of UK Bribery Act

• Blanket prohibition on bribing any person, public or private

• Specific provision criminalizing bribery of public officials – can be any “financial or other advantage”

• Creates standalone offense of “failing to prevent bribery” at an organization• Organizations can avoid prosecution by

demonstrating effective anti-corruption compliance

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Anti-Corruption Compliance

US, UK have provided guidance, along with many public and private-sector organizations. Best practices include:

• Commitment from senior management• Effective procedures for risk assessment and internal audit• Clearly articulated compliance policies, procedures, code of

conduct• Compliance program oversight by senior management with

autonomy, adequate resources• Ongoing training for new and current employees, as well as

third parties

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Anti-Corruption Compliance

• Procedures for confidential reporting of corruption violations and internal investigation

• Updating compliance programs and policies through testing and review

• Risk-based due diligence on third parties and transactions

• Due diligence on mergers, acquisitions and proper integration after acquisition, merger, or joint venture

Third Parties

• Managing third-party relationships is critical for FCPA, anti-corruption compliance

• Three steps to retain third parties, reduce FCPA exposure

1. Due diligence on third party's background, reputation, experience, connections with local government officials

2. Contractual provisions (FCPA representations, warranties)

3. Active oversight to ensure third party's commitment to FCPA, other laws

Key Lessons

• Corrupt payments are increasingly made through complex channels – not just stacks of cash and a bag man

• Third parties are a recurring risk, should be one focus of anti-corruption programs

• US FCPA has international reach, has acted as standard-setter in many respects – should be understood

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Practice Question

You are a compliance analyst at a multinational financial institution that provides banking and investment services to large institutional customers.

Your institution is currently seeking new business opportunities providing services to universities, hospitals, and other institutions with potential ties to political officials and government agencies. Your institution plans to expand into Norway, India, Botswana and Chile and has asked you to assess the corruption risks of offering its services in each nation. What is an accurate risk rating for these countries?

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Practice Question

A. Providing investment and banking services in Norway poses the highest risk for corruption due to a history of bribery by Norwegian state-owned oil companies.

B. Providing services in India poses the highest risk for corruption due to the prevalence of state-owned entities and Politically-Exposed Persons (PEPs).

C. Providing investment and banking services in Botswana poses the highest risk for corruption due to widespread graft in government contracts.

D. Providing services in Chile poses the highest risk due to connections between the Chilean government and international organized crime rings.

Your Questions

Thank you for attending

Next Session is Wednesday, January 29, 12:30 PM ET

Commonalities, money laundering, ethics, international standards, gac 1-27-14

Economy & Finance

Transcript of Commonalities, money laundering, ethics, international standards, gac 1-27-14