Examination TechniquesExamination TechniquesPart One Money Laundered in Part One Money Laundered in

BanksBanks

James WrightJames Wright

Office of Technical AssistanceOffice of Technical Assistance

US TreasuryUS Treasury

BanksBanks

Provide to the money launderer multiple Provide to the money launderer multiple services for placement, layering and services for placement, layering and integrationintegration

The Money Laundering ProcessThe Money Laundering Process

PlacementPlacement

LayeringLayering

IntegrationIntegration

PlacementPlacement

The initial movement of The initial movement of criminally derived currency or criminally derived currency or

other proceeds of crime, to other proceeds of crime, to initially change it’s form or initially change it’s form or

location to places beyond the location to places beyond the reach of law enforcement.reach of law enforcement.

Forms of PlacementForms of Placement Depositing into Depositing into accounts via tellers, accounts via tellers, ATMs, or night ATMs, or night depositsdeposits

Changing currency to Changing currency to cashiers checks or cashiers checks or other negotiable other negotiable instrumentsinstruments

Exchanging small bills Exchanging small bills for large billsfor large bills

smuggling or shipping smuggling or shipping out side the countyout side the county

Layering Layering The process of separating the proceeds of criminal The process of separating the proceeds of criminal

activity from their origin.. Disguising the origin through activity from their origin.. Disguising the origin through the movement of funds trough accounts and financial the movement of funds trough accounts and financial

institutions. The use of layers of complex financial institutions. The use of layers of complex financial transactions; loans, letters of credit, investments and transactions; loans, letters of credit, investments and

insuranceinsurance

IntegrationIntegration

The process of using an apparent legitimate transaction to The process of using an apparent legitimate transaction to disguise the illicit proceeds allowing the laundering of funds to disguise the illicit proceeds allowing the laundering of funds to be disbursed back to the criminal. Funds often are used for be disbursed back to the criminal. Funds often are used for payment for operations, spending on luxury goods or payment for operations, spending on luxury goods or investments in businesses.investments in businesses.

Bank Risk AreasBank Risk Areas

wire transferlending

investing

private banking

internationalcorrespondence

trade financing

Safe deposit

insuranceleasing

foreignexchange

sale ofmonetary instruments

deposit

Internet and credit cards

High Risk CountriesHigh Risk Countries

Countries in which the production or Countries in which the production or transportation of illegal drugs may be taking transportation of illegal drugs may be taking placeplace

Bank Secrecy HavensBank Secrecy Havens

Countries identified in FinCEN advisoriesCountries identified in FinCEN advisories

Money laundering countries and jurisdictions Money laundering countries and jurisdictions identified in the US Department of State’s identified in the US Department of State’s annual International Narcotics Control annual International Narcotics Control Strategy Strategy

Depositing Laundered Funds Depositing Laundered Funds Use of third parties (SMURFS)Use of third parties (SMURFS)

Deposits under reporting requirementsDeposits under reporting requirements

Deposits from front businessesDeposits from front businesses

Suspicious Signs in BanksSuspicious Signs in Banks

Increase in cash shipments without Increase in cash shipments without increase in number of accountsincrease in number of accounts

Cash on hand usually exceeds bond limitsCash on hand usually exceeds bond limits

Large turnover in large bills in excess of Large turnover in large bills in excess of small billssmall bills

Suspicious Signs in BankSuspicious Signs in Bank

Cash shipments which appear large in Cash shipments which appear large in comparison to dollar volume of currency comparison to dollar volume of currency transaction reportstransaction reports

Large volume of cash deposits from Large volume of cash deposits from business that are not normally cash business that are not normally cash intensiveintensive

Branches that have far more cash (volume Branches that have far more cash (volume and or value) than usual compared with and or value) than usual compared with other branchesother branches

Suspicious Sale of Monetary Suspicious Sale of Monetary InstrumentsInstruments

When large volume of cashiers checks, When large volume of cashiers checks, money orders or travelers checks are sold money orders or travelers checks are sold for cash.for cash.

When purchases of instruments are When purchases of instruments are unusual for the customer’s type of unusual for the customer’s type of business.business.

Suspicious Currency Suspicious Currency ExchangeExchange

Large volume of currency exchange for Large volume of currency exchange for cashcash

When the need for foreign currency is not When the need for foreign currency is not in keeping with business needsin keeping with business needs

Safe DepositSafe Deposit

Frequent trips to safe deposit prior to Frequent trips to safe deposit prior to movement of funds out of the bankmovement of funds out of the bank

Customer refuse insuranceCustomer refuse insurance

Customer provides little informationCustomer provides little information

Third party pick ups and deliveryThird party pick ups and delivery

Use of parcels, envelopes etc.Use of parcels, envelopes etc.

Money Laundering Account Money Laundering Account ActivityActivity

A

B C

D

E F

Main Account

OffshoreOffshore

Funds are wired to:Funds are wired to:– Europe, US and to bank secrecy countries Europe, US and to bank secrecy countries

– shell corporationsshell corporations

– Back to criminalsBack to criminals

Wire TransferWire Transfer

Launderers wire funds:Launderers wire funds:

form bank to bankform bank to bank

from bank to shell companies overseasfrom bank to shell companies overseas

from shell companies to banks from shell companies to banks

from banks back to criminalsfrom banks back to criminals

International Correspondent International Correspondent AccountsAccounts

Banks enter into agreement with larger Banks enter into agreement with larger international banks to process and international banks to process and complete transactionscomplete transactions

Launderers set up correspondent Launderers set up correspondent accounts in order to transfer money from accounts in order to transfer money from bank to bank and country to countrybank to bank and country to country

International Correspondent International Correspondent AccountsAccounts

ProblemsProblems– Banks don't conduct sufficient due diligence Banks don't conduct sufficient due diligence

review of their foreign bank clients, review of their foreign bank clients, management finance and reputationmanagement finance and reputation

– clients are allowing other foreign banks to use clients are allowing other foreign banks to use their U.S. accountstheir U.S. accounts

Private BankingPrivate Banking

Offers money launderers full line of bank Offers money launderers full line of bank servicesservices

More privacy and more confidentialityMore privacy and more confidentiality

Less bank scrutinyLess bank scrutiny

A high risk because a large amount of A high risk because a large amount of money is managedmoney is managed

TrustsTrustsTrust departments create fiduciary Trust departments create fiduciary relationship in which bank maintains little relationship in which bank maintains little controlcontrol

Trustee must follow customers directionsTrustee must follow customers directions

Through trusts, launderers can create Through trusts, launderers can create Private Investment Companies(PIC)s ideal Private Investment Companies(PIC)s ideal for laundering moneyfor laundering money

Payable Through AccountPayable Through Account

Payable through accounts also known as Payable through accounts also known as pass through or pass by accounts are pass through or pass by accounts are marketed to foreign banks wanting to offer marketed to foreign banks wanting to offer their customers access to another their customers access to another countries banking system.countries banking system.

Payable Through AccountsPayable Through Accounts

Foreign banks provide checks to sub Foreign banks provide checks to sub account holders to draw on foreign banks account holders to draw on foreign banks accounts at US or other country banks.accounts at US or other country banks.

Thereby providing anonymity.Thereby providing anonymity.

LendingLending

Launderers often:Launderers often:

use cash or certificates of deposits as use cash or certificates of deposits as collateral for loanscollateral for loans

Payoff loans earlyPayoff loans early

Default and leave collateralDefault and leave collateral

Donot use proceeds for loan purposeDonot use proceeds for loan purpose

(This often involves bank collusion)(This often involves bank collusion)

LendingLending

Possible money laundered loans are:Possible money laundered loans are:

Request to borrower against assets held by Request to borrower against assets held by the bank or a third party, where the origin of the bank or a third party, where the origin of the assets is known or the assets are the assets is known or the assets are inconsistent with the customer’s standing.inconsistent with the customer’s standing.

Loans made on the strength of a borrower’s Loans made on the strength of a borrower’s financial statement which reflects major financial statement which reflects major investment in and income from businesses investment in and income from businesses incorporated in bank secrecy haven countriesincorporated in bank secrecy haven countries

Suspicious LendingSuspicious Lending

Request for loans to offshore commercial Request for loans to offshore commercial companies, or loans secured by obligations companies, or loans secured by obligations of offshore banksof offshore banks

Loan proceeds are unexpectedly channeled Loan proceeds are unexpectedly channeled offshoreoffshore

Third parties, unknown to the bank, who Third parties, unknown to the bank, who provide collateral without any discernable, provide collateral without any discernable, plausible reason and have no close plausible reason and have no close relationship with the customerrelationship with the customer

Letters of CreditLetters of Credit

Launderers use:Launderers use:

bogus letters of creditbogus letters of credit

Letters of credit for bogus servicesLetters of credit for bogus services

Letters of credit for over invoicingLetters of credit for over invoicing

Letters of credit for under invoicingLetters of credit for under invoicing

Discount brokerage, Securities Discount brokerage, Securities and Investmentand Investment

Larger or unusual settlements of security Larger or unusual settlements of security with no discernable purpose or in with no discernable purpose or in circumstances which appear unusualcircumstances which appear unusual

Purchasing of securities to be held by the Purchasing of securities to be held by the bank in safe custody, where this does not bank in safe custody, where this does not appear appropriate given the customers appear appropriate given the customers apparent standing.apparent standing.

SecuritiesSecuritiesRequest by Customer for investment Request by Customer for investment management services(either foreign currency or management services(either foreign currency or securities) where the source of the funds is securities) where the source of the funds is unclear or not consistent with the customer’s unclear or not consistent with the customer’s apparent standingapparent standing

Larger or usual settlements of securities in cash Larger or usual settlements of securities in cash formform

Buying and selling of a security with no Buying and selling of a security with no discernable purpose or in circumstances which discernable purpose or in circumstances which appear unusualappear unusual

SecuritiesSecurities

Derivatives trading using two accounts Derivatives trading using two accounts which take from one account and pass the which take from one account and pass the proceeds to second accountproceeds to second account

InsuranceInsuranceLaunderers purchase for quick turnaroundLaunderers purchase for quick turnaround

Arrange payment to a third partyArrange payment to a third party

Cancel policies earlyCancel policies early

Make fraudulent Insurance claimsMake fraudulent Insurance claims

Take out policies unrelated to businessTake out policies unrelated to business

Assign policies to apparent unrelated Assign policies to apparent unrelated partiesparties

Bank InvolvementBank Involvement

Examiners and bank management must Examiners and bank management must be aware of this extremely sensitive area.be aware of this extremely sensitive area.

Nevertheless, there have been numerous Nevertheless, there have been numerous successful cases against staff, and a successful cases against staff, and a review of money laundering cases brought review of money laundering cases brought by the authorities in a number of countries by the authorities in a number of countries suggest strongly, that staff are involved suggest strongly, that staff are involved either passively or activelyeither passively or actively

LeasingLeasing

ExamplesExamples

Credit cardCredit card

Loading up cardLoading up card

InternetInternet

Funds transfersFunds transfers

Bank Employees and AgentsBank Employees and Agents

Lavish lifestyle which cannot be supported Lavish lifestyle which cannot be supported by an employees salaryby an employees salary

Absence of conformity with recognized Absence of conformity with recognized systems and controls, particularly in systems and controls, particularly in private bankingprivate banking

Reluctance to take a vacationReluctance to take a vacation

Lavish LifestyleLavish Lifestyle

Appearance that doesn't fit the normAppearance that doesn't fit the norm

designer clothes, expensive watches, designer clothes, expensive watches, expensive automobilesexpensive automobiles

ButBut

Could be innocent because employee may Could be innocent because employee may benefit from second job,benefit from second job,– Inheritance, lottery or rich spouseInheritance, lottery or rich spouse

Systems and ControlsSystems and Controls

Particular staff having a history of failing to Particular staff having a history of failing to obtain necessary approvals, or over-riding obtain necessary approvals, or over-riding controls and authority levelscontrols and authority levels

For example is three evidence of staff For example is three evidence of staff exaggerating the credentials of a exaggerating the credentials of a prospective customer, inflating a prospective customer, inflating a customers financial ability or resources?customers financial ability or resources?

New Money Laundering New Money Laundering SchemesSchemes

Each Year the Financial Action Task ForceEach Year the Financial Action Task Force

Shares information on new money Shares information on new money Laundering schemes.Laundering schemes.

New schemes include:New schemes include:– internet banking, trustinternet banking, trust– growth in the use of professional service growth in the use of professional service

providers such as accountants, solicitors, providers such as accountants, solicitors, company formation agents associated with more company formation agents associated with more complex money laundering.complex money laundering.

SecuritiesSecurities

dealers, managers and other dealers, managers and other markets markets

Multiple entitiesMultiple entities

brokers dealers, funds managers, marketsbrokers dealers, funds managers, markets

For example introducing broker and For example introducing broker and clearing broker clearing broker

Markets vs. regulatorsMarkets vs. regulators

Approach is same as bankingApproach is same as banking

Regulations and inspectionsRegulations and inspections

Compliance program for entitiesCompliance program for entities

Layering and Integration phaseLayering and Integration phase

Most entities don’t deal in cashMost entities don’t deal in cash– Use bank transfersUse bank transfers

Cash sometimes usedCash sometimes used– Loosely regulated countriesLoosely regulated countries– in margin accountsin margin accounts

Securities Commission InspectionsSecurities Commission Inspections

Money laundering inspections conducted Money laundering inspections conducted in concert with inspections for violations of in concert with inspections for violations of regulations or fraudregulations or fraud

Usually small inspection forceUsually small inspection force

Focus on high risk often based on Focus on high risk often based on complainscomplains

Risk AreasRisk Areas

Account openingAccount opening

Cash handlingCash handling

Wire transfer operationsWire transfer operations

Margin accountsMargin accounts

Advantages for money launderersAdvantages for money launderers

Launder moneyLaunder money

Make a profitMake a profit

Commit other securities fraudCommit other securities fraud

Money laundering examplesMoney laundering examples

Purchase of securities for short period of Purchase of securities for short period of time with no discernable purpose. Selling time with no discernable purpose. Selling outout

Wash trades match buys and sells in Wash trades match buys and sells in particular securitiesparticular securities

Transactions involving penny stocks, Transactions involving penny stocks, Regulation S stocks and bearer bondsRegulation S stocks and bearer bonds

InsuranceInsurance

products, agents and products, agents and companiescompanies

Product Distribution makes for Product Distribution makes for difficult regulation and compliancedifficult regulation and compliance

Direct marketingDirect marketing

IntermediariesIntermediaries– IndependentsIndependents– Associated with companiesAssociated with companies

Risk AreasRisk Areas

Customer identification and salesCustomer identification and sales

Pay out on policiesPay out on policies

Same approachSame approach

Regulation Regulation

Compliance programCompliance program

ExamplesExamples

Purchase of insurancePurchase of insurance– Life insurance and annuitiesLife insurance and annuities– Some business casualty insuranceSome business casualty insurance

– Purchase of Insurance Companies and Purchase of Insurance Companies and Reinsurance CompaniesReinsurance Companies