Commonalities, money laundering, fraud, ethics 2 4-14

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Part 1: Financial Crime Commonalities Money Laundering Fraud Ethics CFCS Examination Preparation Series February 5, 2014 Presented By Beth Berenbaum, Ken Barden, Charles Intriago, Brian Kindle, Hillary Rosenberg, and Jeff Sklar

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Transcript of Commonalities, money laundering, fraud, ethics 2 4-14

  • 1. CFCS Examination Preparation Series February 5, 2014 Part 1: Financial Crime Commonalities Money Laundering Fraud Ethics Presented By Beth Berenbaum, Ken Barden, Charles Intriago, Brian Kindle, Hillary Rosenberg, and Jeff Sklar
  • 2. Brian Kindle Editorial and Training Advisor Association of Certified Financial Crime Specialists Miami, FL
  • 3. Charles A. Intriago President and Founder Association of Certified Financial Crime Specialists Miami, FL
  • 4. Kenneth Barden Senior Anti-Corruption Advisor US Agency for International Development Washington, DC
  • 5. Beth Berenbaum VP, Program Management AML Partners Franklin, NH
  • 6. Hillary Rosenberg Counsel Lewis Baach New York
  • 7. Jeff Sklar Managing Partner Sklar Heyman Hirschfield & Kantor Bellmore, NY
  • 8. Certification, News, Guidance, Training, Networking
  • 9. CFCS Certification The Credential That Shows Your Knowledge and Skill Across the Financial Crime Spectrum
  • 10. What the CFCS Certification is 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
  • 11. Construction of CFCS Certification 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
  • 12. Demand for 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
  • 13. CFCS Exam Study Aids 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)
  • 14. 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
  • 15. 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
  • 16. CFCS Examination Preparation Series February 5, 2014 Financial Crime Commonalities
  • 17. 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
  • 18. The Financial Crime Spectrum Money Laundering Fraud Corruption Tax evasion Terrorist financing Asset recovery Sanctions Compliance Enforcement
  • 19. Globalization of Financial Crime FCPA, UK Bribery Act, GAC crackdown FATCA, IGAs, multinational tax enforcement FATFs changing standards pointing to convergence Shrinking world, cross-border activity Secrecy havens, beneficial ownership G20 call for greater financial transparency, cooperation
  • 20. 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
  • 21. 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
  • 22. 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 22
  • 23. 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 23
  • 24. CFCS Examination Preparation Series February 5, 2014 Money Laundering
  • 25. 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 25
  • 26. Stages of Money Laundering Placement First step in the process Infusion of criminal proceeds into traditional or nontraditional 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 26
  • 27. 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 27
  • 28. 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 28
  • 29. 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 29
  • 30. Characteristics and Indicators of Money Laundering Red flags are situation-specific, depend on type of organization, customer and scenario Key is to understand customers 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 30
  • 31. 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 31
  • 32. 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 32
  • 33. Money Laundering Methods and Vehicles Financial Vehicles and Value Transfer Systems International Trade Price Manipulation Prepaid Cards Mobile Money Credit Facilities and Lending Black Market Peso Exchange Hawala 33
  • 34. Money Laundering Methods and Vehicles Structures to Conceal Beneficial Ownership Shell Companies Shelf Companies Trusts Bearer Bonds and Securities Nonprofits, Charities and Foundations Fronts and Nominees 34
  • 35. 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 35
  • 36. 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 36
  • 37. 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 37
  • 38. Practice Question A compliance officer at a major insurance company has recently noticed a pattern of potentially suspicious transactions from a longtime 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? 38
  • 39. 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 39
  • 40. 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 accounts activity, you learn the following information. Which fact best supports the possibility that the restaurant account may be used for money laundering? 40
  • 41. 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 restaurants account shows consistent deposit activity throughout the calendar year. D. The restaurants cash deposits were made through a combination of counter and ATM deposits. 41
  • 42. CFCS Examination Preparation Series February 5, 2014 Ethics
  • 43. 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, its probably wrong. 43
  • 44. 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 44
  • 45. 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 clients interests should not be privileged over another 45
  • 46. 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 46
  • 47. 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 47
  • 48. 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 48
  • 49. Ethics Policies and Procedures Code of ethics Employee training, ethics policies Confidential reporting, escalation policies Commitment, communication from top leadership 49
  • 50. Key Lessons Acting in clients 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 50
  • 51. Review Question What should be one element of an organizations 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 lines D. Regular communication on ethics from senior management 51
  • 52. CFCS Examination Preparation Series February 5, 2014 Fraud Detection and Prevention
  • 53. Overview and Definition Intentional misrepresentation, concealment or deception in pursuit of financial gain or to further a financial crime Recent fraud trends Greater professionalization, smarter attacks Increased sharing of fraud practices More frauds perpetrated from offshore locations Technical fraud or cybercrime combined with traditional skills More collusion between merchants, fraudsters and organization insiders 53
  • 54. Understanding and recognizing types of fraud Ponzi schemes Despite recent exposure, remain widespread type of fraud Some red flags Investment returns too good to be true Investment statements show growth or performance contrary to market trends Unusual or no fee structure Lack of information or substance behind investment 54
  • 55. Understanding and recognizing types of fraud Securities fraud Misrepresentation around a security, which can be virtually any tradable asset or financial instrument Inaccurate or misleading information to encourage investment Selling a security that is illegal or nonexistent Insider trading Now facilitated by online communications, social networks, other tools 55
  • 56. Understanding and recognizing types of fraud Common types of securities fraud include Microcap or penny stock frauds, like pump and dump schemes Insider trading Hidden terms and agreements Fraud tied to falsified reporting or accounting In US alone, securities fraud estimated to total $10 40 billion annually 56
  • 57. Understanding and recognizing types of fraud Fraud in loans and mortgages Intentional, material misrepresentation or omission to obtain loan or larger loan than lender typically grants May also be perpetrated by lenders: loans with hidden or predatory terms, unlicensed lenders Common schemes Income and employment fraud Occupancy fraud Appraisal fraud Shot-gunning fraud Cash-back fraud Foreclosure scams 57
  • 58. Understanding and recognizing types of fraud Credit and debit card fraud Need not involve physical fraud; increasingly common to steal numbers, personal information online Tampering with card readers at ATM and other pointof-sale locations through skimmers Online theft of numbers through compromise of online security or data breaches Gathering personal information by sending fake applications for cards to targets Physical theft of card 59
  • 59. Understanding and recognizing types of fraud Other types of fraud include: Insurance Health care Government benefits Can be perpetrated by an entity against a customer or by customer against an entity 60
  • 60. Identity Theft and Fraud Fastest growing types of consumer fraud A leading threat to accounts at banks and other institutions Common ways to steal identities Social engineering Creating fake online identities Technological tools skimmers, phishing, malware Internal fraud and data theft 61
  • 61. Red Flags of Identity Theft Common signs indicating a stolen or compromised identity Alerts and warnings from a credit reporting company Suspicious documents, including forged or altered IDs Inconsistent personal identifying information New credit or debit card request immediately after notification of change of address Identity theft furthers many other fraud schemes Using stolen identities to obtain government benefits, tax refunds Obtaining loans or mortgages with false identities Opening accounts with stolen or false identities 62
  • 62. Preventing Fraud Similar measures as other compliance programs, but training, awareness are even more important in fraud prevention Starts with comprehensive fraud risk assessment Create a team with necessary expertise Identify organizations universe of fraud risks Fraudulent financial reporting Misappropriation of assets Expenditures, liabilities for improper purpose Revenue and assets obtained by fraud Costs, expenses avoided by fraud Financial misconduct by management 63
  • 63. Preventing Fraud Assess likelihood of fraud schemes or scenarios Assess materiality of risks: which schemes would have greatest impact Assess preexisting fraud controls, compare them against risks Consider how controls may be over-ridden or manipulated by employees and others Employee collusion is serious fraud risk 64
  • 64. Key Lessons Preventing fraud is heavily reliant on awareness, training, and internal controls Financial crime professionals should be prepared to identify many types of fraud Fraud schemes are frequently linked one element feeds into larger operation 65
  • 65. Review Question Your institution has recently been dealing with a large number of identity theft cases, in which thieves have stolen sensitive customer data and used it to fraudulently apply for credit cards. After an initial investigation, you suspect that an employee is participating in the identity theft scheme. What would be the most effective first step you could take to prevent further theft of customer information? A. Immediately notify customers whose data has been compromised B. Restrict access to sensitive customer data, and monitor employee access on an ongoing basis C. Impose strict alert thresholds in the automated monitoring system for all credit cards D. Conduct a mandatory ethics seminar with all institution employees 66
  • 66. Review Question A mortgage administrator has been dealing with a buyer attempting to obtain a large mortgage on a home from your institution. According to the buyer, he is seeking to purchase the home as an investment property. The buyer has been behaving erratically and has been difficult to contact at times. Concerned about a potential fraud, the administrator has asked you to examine the mortgage application and accompanying documents. You note the following information. Which is the best indicator that the buyer may be committing mortgage fraud? A. B. C. D. A real estate agent from a nearby city is helping to broker the sale The seller is not currently listed as the occupant of the property The buyer currently has a large mortgage outstanding on his own property The buyer has no previous history of obtaining mortgages from your institution 67
  • 67. Your Questions