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Study Guide for the

Certification
Examination
Fifth Edition

ACAMS.org
ACAMS.org/español
ACAMSToday.org
MoneyLaundering.com

Study Guide for the

Certification
Examination
Fifth Edition

a publication of the association of certified anti-money laundering specialists

Study Guide for the

Certification
Examination
Fifth Edition

Executive Vice President
John J. Byrne, CAMS
Editor
Robert S. Pasley, CAMS
Co-Editor
Kevin M. Anderson, CAMS
Contributors
Joyce Broome, CAMS
Heather Brown, CAMS
Aub Chapman, CAMS
Vasilios Chrisos, CAMS
David Clark, CAMS
Jurgen Egberink, CAMS
Michael D. Kelsey, CAMS
Saskia Rietbroek, CAMS
Nancy J. Saur, CAMS
Mansoor Siddiqi, CAMS
Daniel Soto, CAMS
Timothy White CAMS
Production Assistant
Catalina Martinez
We would like acknowledge the following individuals for their contributions to the
CAMS Exam, and the Online and Live Preparation Seminars:
Kevin M. Anderson, CAMS
Joyce Broome, CAMS
Aub Chapman, CAMS
David Clark, CAMS
Josue Garcia, CAMS
Hoi Luk, CAMS
Ira Morales Mickunas, CAMS
Robert S. Pasley, CAMS
Karim Rajwani, CAMS
Mansoor Siddiqi, CAMS
Saskia Rietbroek, CAMS

Ed Rodriguez, CAMS
Nancy J. Saur, CAMS
Wendy Steichen, CAMS
Brian J. Stoeckert, CAMS
Charles Taylor, CAMS
Will Voorhees, CAMS
Natalie Ware, CAMS
Peter Warrack, CAMS
Amy Wotapka, CAMS
Crispin Yuen, CAMS

Copyright © 2012 by the Association of Certified Anti-Money Laundering Specialists (ACAMS). Miami, USA.
All rights reserved. No part of this publication may be reproduced or distributed, and may not be made available in any electronic format, without the prior written permission of ACAMS. ISBN: 978-0-9777495-2-2

Table of Contents

Table of Contents

Study and Test-Taking
Tips and Techniques.....................................XIII
Understanding How You Learn................................................................................... xiv
Learning How to Learn................................................................................................. xiv
Establishing a Good Framework for Studying.......................................................... xvi
Ensuring Good Study Habits........................................................................................xx
Taking the Examination.............................................................................................. xxii
Tips for Succeeding in Multiple-Choice Tests......................................................... xxiii
Coping with Test Anxiety............................................................................................ xxv

Chapter 1: Introduction.................................... 1
About the Association of Certified
Anti-Money Laundering Specialists.............................................................................. 1 n The Mission of the Association of Certified
Anti-Money Laundering Specialists.................................................................... 2 n Objectives........................................................................................................... 3 n Membership ....................................................................................................... 3
CAMS—A Unique Certification...................................................................................... 4 n Why CAMS......................................................................................................... 4 n Purpose of Certification...................................................................................... 5

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Study Guide for the CAMS Certification Examination

n CAMS Certification Provides Career Benefits.................................................... 6 n Who May Take The CAMS Certification Examination?....................................... 7 n CAMS Recertification.......................................................................................... 8 n How Is The CAMS Examination Developed?..................................................... 9 n Content of the CAMS Examination................................................................... 10 n The CAMS Candidate Handbook and the Process for Applying for the
Certification Examination.................................................................................. 10
Study Guide for the Certification Examination...........................................................11 n Purpose of the Study Guide...............................................................................11 n Organization of The Study Guide.......................................................................11 n Audience........................................................................................................... 12 n Conclusion........................................................................................................ 12

Chapter 2: Risks and Methods of Money
Laundering and Terrorist Financing............. 13
What is Money Laundering?........................................................................................ 13
Three Stages in the Money Laundering Cycle........................................................... 15
The Economic and Social Consequences of Money Laundering............................ 18
Methods of Money Laundering................................................................................... 25 n Banks and Other Depository Institutions.......................................................... 25 q Electronic Transfers of Funds............................................................... 26 q Correspondent Banking........................................................................ 27 q Payable-Through Accounts ................................................................. 32 q Concentration Accounts........................................................................ 34 q Private Banking.................................................................................... 35 q Structuring............................................................................................ 39

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Table of Contents

q Bank Complicity.................................................................................... 45 q Credit Unions or Building Societies...................................................... 46 n Non-Bank Financial Institutions ....................................................................... 47 q Credit Card Industry............................................................................. 47 q Money Remitters and Money Exchange Houses................................. 48 q Insurance Companies........................................................................... 51 q Securities Broker-Dealers..................................................................... 55 n Non-Financial Businesses and Professions .................................................... 58 q Casinos and Other Businesses Associated with Gambling.................. 58 q Dealers in High-Value Items (Precious Metals, Jewelry, Art, etc.)............ 60 q Travel Agencies.................................................................................... 64 q Vehicle Sellers...................................................................................... 65 q Gatekeepers: Notaries, Accountants, Auditors, Lawyers...................... 66 q Investment and Commodity Advisors................................................... 69 q Trust and Company Service Providers................................................. 72 q Real Estate Industry ............................................................................ 74 q Manipulation of Prices in Import and Export Transactions .................. 76 q Black Market Peso Exchange............................................................... 78
Money Laundering Risks Associated with New Technologies................................................................................................ 80 n Online or Internet Banking................................................................................ 81 n Internet Casinos................................................................................................ 83 n Prepaid Cards and E-Cash............................................................................... 86
Money Laundering Risks of Structures
Designed to Hide Beneficial Ownership..................................................................... 88 n Shell Companies............................................................................................... 88 n Trusts................................................................................................................ 95

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Study Guide for the CAMS Certification Examination

n Bearer Bonds and Securities............................................................................ 96
Terrorist Financing....................................................................................................... 97 n Differences and Similarities Between Terrorist
Financing and Money Laundering.................................................................... 97 n Detecting Terrorist Financing............................................................................ 98 n Hawala and Other Informal Value Transfer Systems ..................................... 103 n Charities or Non-Profit Organizations............................................................. 106
Summary..................................................................................................................... 107
Review Questions....................................................................................................... 109

Chapter 3: Compliance Standards for
Anti-Money Laundering and Combating the
Financing of Terrorism..................................111
Financial Action Task Force....................................................................................... 111 n Members and Observers.................................................................................112 n Objectives........................................................................................................114 n Financial Action Task Force 40 Recommendations.........................................117 n Non-Cooperative Countries............................................................................ 127
The Basel Committee on Banking Supervision....................................................... 130
European Union Directives on Money Laundering................................................. 137 q First Directive ..................................................................................... 137 q Second Directive................................................................................ 138 q Third Directive.................................................................................... 139
Regional and Other International Initiatives............................................................ 142 n Regional FATF-Style Bodies and FATF Associate Members ......................... 142

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Table of Contents

q Asia/Pacific Group on Money Laundering ......................................... 143 q Caribbean Financial Action Task Force.............................................. 145 q Financial Action Task Force on Money Laundering in
South America (GAFISUD) — Grupo de Acción Financiera de Sudamérica................................................................................... 147 q Middle East and North Africa Financial Action Task Force................. 148 q Eurasian Group on Combating Money
Laundering and Terrorist Financing.................................................... 150 q Eastern and South African Anti-Money Laundering Group ................ 150 n Other Anti-Money Laundering Initiatives......................................................... 151 q Organization of American States – Inter-American
Drug Abuse Control Commission (CICAD)......................................... 151 q Egmont Group of Financial Intelligence Units ................................... 154 q The Wolfsberg Group ........................................................................ 155 q The World Bank and International Monetary Fund............................. 161 n Other International Organizations................................................................... 163
Key U.S. Legislative and Regulatory Initiatives
Applied to Transactions Internationally................................................................... 164 n USA Patriot Act............................................................................................... 164 n The Reach of the U.S. Criminal Money Laundering and Civil Forfeiture Laws................................................................................ 171 n Office of Foreign Assets Control..................................................................... 172
Summary..................................................................................................................... 173
Review Questions....................................................................................................... 179

Chapter 4: Anti-Money Laundering
Compliance Program................................... 181
Introduction................................................................................................................. 181
Assessing Risk and Developing a Risk Scoring Model.......................................... 182

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Study Guide for the CAMS Certification Examination

n Introduction..................................................................................................... 182 q Factors to Determine Risk.................................................................. 184 n What Risks Do Your Customers Pose?.......................................................... 184 q Levels of Risk..................................................................................... 184 q Geographical Location........................................................................ 186 q Customer Type................................................................................... 188 n What Risks Do Your Products or Services Pose? ......................................... 189
The Elements of an AML Program............................................................................ 191 n Internal Policies, Procedures and Controls..................................................... 191 n Compliance Officer......................................................................................... 195 n Training........................................................................................................... 197 q Who to Train....................................................................................... 197 q What to Train On................................................................................ 199 q How to Train....................................................................................... 200 q When to Train..................................................................................... 201 q Where to Train ................................................................................... 202 n Audit................................................................................................................ 202
Compliance Culture and Senior Management’s Role............................................. 205
Customer Due Diligence............................................................................................ 209 n Main Elements of a CDD Program................................................................. 209 n Account Opening, Customer Identification and Verification............................ 210 q Name Checking Lists.......................................................................... 216 q Consolidated CDD.............................................................................. 218
Know Your Employee................................................................................................. 219
Suspicious or Unusual Transaction Monitoring and Reporting............................ 222

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Table of Contents

Red Flags or Indicators of Money Laundering........................................................ 224 n Suspicious Customer Behavior....................................................................... 227 n Suspicious Customer Identification Circumstances........................................ 228 n Suspicious Cash Transactions........................................................................ 229 n Suspicious Non-Cash Deposits...................................................................... 231 n Suspicious Wire Transfer Transactions.......................................................... 231 n Suspicious Safe Deposit Box Activity............................................................. 232 n Suspicious Activity in Credit Transactions...................................................... 232 n Suspicious Commercial Account Activity ....................................................... 233 n Suspicious Trade Financing Transactions...................................................... 234 n Suspicious Investment Activity........................................................................ 235 n Suspicious Employee Activity......................................................................... 235 n Suspicious Activity in a Money Remitter/Currency
Exchange House Setting................................................................................ 236 n Suspicious Activity in an Insurance Company Setting.................................... 236 n Suspicious Activity in a Broker-Dealer Setting................................................ 237 n Suspicious Activity Indicators of Black Market Peso
Exchange Money Laundering Method............................................................ 238
Electronic Anti-Money Laundering Solutions.......................................................... 239
Summary..................................................................................................................... 244
Review Questions....................................................................................................... 245

Chapter 5: Conducting or Supporting the
Investigation Process.................................. 247
Introduction................................................................................................................. 247
Law Enforcement Investigations.............................................................................. 247

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Study Guide for the CAMS Certification Examination

n Decision to Prosecute..................................................................................... 249
Responding to Law Enforcement Investigations.................................................... 250 n Summonses and Subpoenas.......................................................................... 251 n Search Warrants............................................................................................. 252 n Orders to Restrain or Freeze Accounts or Assets........................................... 253 n Monitoring the Institution’s Response to Law Enforcement Investigations..... 253 n Dealing with Investigators and Prosecutors.................................................... 254 n Obtaining Counsel for the Investigation.......................................................... 254 n Notices to Employees..................................................................................... 255 n Media Relations.............................................................................................. 256
Internal Investigations............................................................................................... 256 n Closing the Account........................................................................................ 258 n Filing an STR.................................................................................................. 258
Conducting the Investigation.................................................................................... 258 n Documents...................................................................................................... 259 q The Importance of Gathering and Producing Documents.................. 259 q Finding and Reviewing the Documents.............................................. 261 q Organization of Documents................................................................ 261 n Interviewing Employees.................................................................................. 262 n Attorney-Client Issues..................................................................................... 262 q Attorney-Client Privilege, Applied to Entities and Individuals............. 262 q Dissemination of a Written Report by Counsel................................... 263
Exploiting the Internet for Money Laundering Investigations................................ 263 n Too Much Money............................................................................................ 264 n Unknown Business......................................................................................... 264 n Weird Wires.................................................................................................... 266

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Table of Contents

n The Final Word............................................................................................... 268
AML Cooperation Between Countries...................................................................... 268 n Mutual Legal Assistance Treaties................................................................... 269 n Financial Intelligence Units............................................................................. 270 n The Supervisory Channel............................................................................... 276 n FATF Recommendations on Cooperation Between Countries....................... 277 n Summary........................................................................................................ 277
Review Questions....................................................................................................... 278

Chapter 6: Glossary of
Anti-Money Laundering Terms.................... 279
Chapter 7: Practice Questions for Certification Examination...................... 345
Chapter 8: Guidance Documents and
Reference Materials...................................... 399
Guidance Documents and Reference Materials..........................................400
Other Websites with Helpful AML Material...................................................405
AML-Related Periodicals...............................................................................406

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G

lancing through this Study Guide may stir up feelings similar to those you had when you were studying for examinations in school. You may be reflecting on the value of investing time and effort to attain one of the most important credentials in the antimoney laundering field: the CAMS certification. Attaining this credential requires that you be well prepared before sitting for the CAMS examination.
How do you do it? You need to allocate and manage your time wisely and juggle your personal, professional, community and family commitments. Time management is just one of the many hurdles you need to overcome before you begin focusing your efforts and enthusiasm on preparing for the CAMS examination.
You may need to review your study habits, revisit your learning style (how you best study and learn) and understand how to study for this particular examination. In this section, we offer a collection of topics which may help you address these issues and prepare for the CAMS examination. The general strategies and suggestions detailed in this section originate from a vast body of research on adult learning, test-taking and test anxiety management. xiii

Study Guide for the CAMS Certification Examination

Understanding How You Learn
Individuals who join programs designed to enhance their knowledge and advance their careers are already committed to building up and improving their knowledge. Beyond this commitment, it is natural to wonder how to start. The responsibility is on you to manage your own learning process. Not only can studying be frustrating and difficult, managing your own learning process can be a challenging undertaking that needs proper discipline. Moreover, because on-going training is generally required for professional advancement, it is imperative that you understand your own learning process.
It may have been awhile (usually years) since most adult students, such as you, made a commitment to formal learning.

Learning How To Learn
Part of being a good learner involves understanding how you learn best. Adults have special needs and requirements as learners.
Despite the increasing number of adult students, the subject is still relatively new to both adult students and educational researchers.
So how much do you know about the abilities and skills you will need to succeed in learning? Recognizing and learning about the most common characteristics of adult students may help you identify and address areas that need improvement. Here are some of those characteristics for your review:
 Autonomous and Self-Directed — You need, and are expected, to be more actively involved in your learning by understanding your points of view and ideas about various topics and working on projects that reflect your interests.
For instance, in the Examination Preparation Seminar, the instructor becomes your facilitator as opposed to a professor

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or teacher. The facilitator will direct you towards learning about the anti-money laundering (AML) field based on your own knowledge, and will help you prepare for the CAMS examination and reach your goals.
 Life Experiences and Knowledge — The amount of knowledge and experience (personal and professional) you have accumulated through life will help you to learn new things.
Whether you attend an Examination Preparation Seminar or not, you are asked to connect the topic being presented with your own experiences, knowledge and new learning, and then to assimilate them.
 Goal-Oriented — Adult learners have a clearer idea about where they stand and where they would like to go. This is defined as having goals. As a result, recognizing and pursuing those goals should be a priority. Practice setting and classifying clear, attainable and measurable goals for completing your studies in sufficient time to confidently take your CAMS examination.  Relevancy-Oriented — You know how important it is to have a reason to learn things and to understand their value. While the task of presenting relevant content belongs to ACAMS, your task during your independent studies or during an Examination
Preparation Seminar is to understand and value new concepts in the context of your own experiences and knowledge. An open-minded approach to learning helps you unlock this skill.
 Practical — If you are like most adult learners, you probably want to make use of the newly acquired knowledge now.
Learning for the sake of learning might not be appealing to you, particularly if it pertains to your job. Keep in mind, however, that rewards may only eventually come from what may now seem as difficult or time-consuming learning.

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Establishing A Good
Framework for Studying
To prepare for the CAMS examination, you must set time aside to review the Examination Preparation Guide, attend the Examination
Preparation Seminar and practice exam-style questions. You may need to improve your study skills and exam-taking technique, and this requires discipline, dedication and practice. Setting up and sticking to a study schedule can be a daunting task, particularly when you have been in the office all day or on business trips or when you have family or social commitments. Hence, it is important that you identify those factors that might prevent you from developing effective and efficient study tactics. This section highlights effective study techniques. Soon you will discover that you have identified and mastered your study skills and have settled into a work/study routine that fits your life and learning style.
 Prioritize — Most students do not know where to begin and quickly become overwhelmed and frustrated with studying. To avoid falling into this trap, prepare a learning schedule with a list of tasks that are both manageable and realistic, from the easiest to the most complex. Plan and begin studying well in advance, increasing study time gradually. If you are tired, do not attempt to study complex topics, but ensure you are sufficiently rested to tackle such topics with awareness and determination.  Manage Your Time — Set attainable study goals and organize your study materials, assigning specific times for each section with due dates. If you need more time to understand certain areas that were difficult to grasp, highlight or summarize those areas and allocate additional time with a new due date. The most important strategy in managing your study time is to maintain your focus.

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 Stick to the Plan — If you find the material boring or feel you are not grasping the concept after reading it several times, stop reading, take a short break and start taking notes. Shifting your attention to a new learning activity (e.g., note-taking) will help you stay on task and on schedule. If superfluous thoughts
(e.g., work, bills or sports) are causing distraction and mental fatigue, stop studying, take a short break, think about your goals, reassess your priorities and, if necessary, sketch out a new study schedule to address your worries. Then go back to studying!  From Mechanical to Practical — Many students take a mechanical approach to studying. That is, they read and memorize. This learning strategy (rote learning) may improve short–term memory, but it is ineffective in the acquisition and integration of new knowledge. A more effective method is to make learning a practical exercise. Integrate the new information into concepts that are familiar to you, using reallife examples or situations where this new knowledge could be used. Here is a technique that will help you develop such skills:
 Chunking: Summarize the information using simple, familiar language, so that the concept is relevant to you.
Take each “chunk” of information and attempt to link it to another “chunk” using words to connect the two concepts.
If you cannot find a connection with one concept, try connecting it to another concept. Chances are you will find a connection, which will make the material relevant, thus, helping you learn the concept.
 Test Yourself — This is one of the most important exercises to prepare for the CAMS examination. While we recommend that you use the sample test questions in this guide, you should also test your knowledge by creating your own review questions as you study each of the sections of the guide.
Keep in mind what has been stressed in the Examination
Preparation Seminar, the Examination Preparation Guide and the recommended reading, and examine the relationships between concepts and sections. Often, simply by changing section headings you can generate effective questions. For

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example, a section titled “Money Laundering Methods” might be changed into questions such as, “What are the three most common money laundering methods?”; “How are they carried out?”; and “What can be done to prevent them?”
 Get Organized — Arrange the learning materials and select the study method according to a learning style that best suits your needs. To recall and retrieve information more accurately and systematically, it is recommended that you organize the information in an outline format. Recommended techniques include:  Outline topics and review notes and identify relationships between sections of the outline.
 Use categories and hierarchies to create clusters of information. This will accelerate learning by facilitating content “chunking.”
 Use “Concept Maps” — write the main concept of the subject you are learning and draw a new inter-related concept from it by drawing a line and using connecting words. For example, if you were trying to understand the “Investigative Process,” you could make a chart listing all the major factors involved in an investigation across the top, and then list the important issues, steps and responsibilities down the side. Next, in the boxes in between, you could describe the impact each issue or step has on the process as a whole.
 Practice Recalling Information — At the end of each study session, take a short break, set aside all learning materials, and try to recall the information contained in it. Also, recall some of the questions from sample test questions found in this guide or from your own pool of questions, and try to answer them. Make a note or highlight the sections that you had difficulty recalling and set a time and due date on your study schedule to review them. The more you study, the more you will be able to recall, the more the content will become more relevant and useful, and the more you will learn.

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 Set Adequate Learning Conditions — Learning is an activity that requires having the right elements (e.g., environment, mental, physical and emotional state) and these conditions should be similar to what they will be during the actual examination. Although you may feel you learn better while music plays in the background, be aware that these conditions will not be replicated during the examination; so you may need to adjust your learning environment. The greater the similarities between your learning conditions and the examination, the greater the probability that the material you study will be recalled more easily during the examination.
 Start Studying Now — It is important that you make studying a priority and that you abide by your study schedule. Cramming a couple of days before the examination may seem like a good idea, but it may actually cause confusion and anxiety, which can set you up for failure. Taking charge of your study schedule and assuming responsibility for your own learning will not only help you assimilate new knowledge, but will help you build confidence in your ability to succeed on the examination.
 Practice “Mental Hygiene” — Your brain invests a significant amount of energy for cognitive processing and, therefore, it also needs rest. “Mental hygiene” is the practice of allocating time for mental relaxation. Failure to incorporate this practice into your daily routine may lead to mental exhaustion. So how do you rest the brain?
 For each study-hour, allocate 10-15 minutes for mental and physical relaxation.
 Stop studying 24 hours before the examination to avoid stress and to lessen test anxiety.
 Follow a healthy diet, include an exercise routine, and practice good eating and sleeping habits.

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Study Guide for the CAMS Certification Examination

Ensuring Good Study Habits
It is important that you develop good study habits so you can improve the efficiency of the time spent preparing for the CAMS examination. Here are some suggestions that may help you develop good study habits:
 Set Timeframes — Before you begin, assign timeframes to each section of the Examination Preparation Guide. Stick to those timeframes and, if needed, schedule new timeframes to review more complex topics.
 Don’t Procrastinate — If you are well rested, start with the most difficult subject. Doing so will help you build confidence about your ability to master the content. Starting with content that you already know may cause you to delay studying the more difficult subjects.
 Find Your Space — There is a time and a place for everything, and studying is no different. Pick a special place (i.e., with good lighting, minimum noise, comfortable chair, etc.) and a time where you will be less distracted, and turn it into your “learning sanctuary.” Plan and prepare in advance, so you are not tempted to interrupt your study time with other activities. Also, let others know about your “study sanctuary” and learning time, and ask them to respect it.
 Keep a “Study Log” — Cramming leads to rote learning: a practice that affects the ability to grasp concepts and impairs knowledge acquisition. Using a timer, set your study times in one-hour intervals, with 10- to 15-minute breaks. Keeping healthy snacks and drinks readily available, and stretching and relaxing during each break will reduce stress and will help you to stay focused.
 Schedule Separate Times for Learning Concepts and
Learning Tasks — When studying, list new or difficult concepts on one column and old or familiar concepts on another column. For each new concept, find the relationship

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with concepts that you already know by tracing a line and thinking about examples that help you understand them.
Allocate longer periods of time to prepare the material and to review and learn the concepts. Allow shorter periods for other tasks, such as reviewing and taking a practice test. Whenever you are outside your “learning sanctuary” (e.g., at lunch time, while taking a shower, walking in the park), do a mental review of your notes and the material you learned.
 Know When to Stop — Studying too long or when mentally exhausted can be counterproductive. If you feel tired or have difficulty concentrating, even after resting for a few minutes, you are no longer productive. Stop and go back to studying later.  Get a “Study Buddy”— Whenever possible, find another
CAMS candidate who has similar study habits to yours, possibly a co-worker, and study together. Use this strategy to ask questions of each other, compare notes and motivate each other. If you and your “study buddy” cannot get together physically but are technologically savvy, try chatting over the
Internet. Note that this technique does not work well when the two buddies have different study schedules, motivation and determination.  Re-write and Summarize — A good review strategy is to rewrite your notes and to summarize, in your own words and without looking at your notes, each of the concepts learned.
Creating an outline facilitates this task.
 Create a Final Review — Schedule the last days before the examination for review only (and not new learning). Attempting to learn new material two or three days before the examination may cause stress and may increase test anxiety. Focus on the following areas in your review:
 If you attend an Examination Preparation Seminar, take notes and study the subjects highlighted by the instructor.
 Review questions in the Examination Preparation Guide, practice tests and summaries at the end of sections.

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Study Guide for the CAMS Certification Examination

Taking the Examination
Don’t expect to be emotionally, physically and intellectually ready if you did not plan and prepare for the examination well in advance. But do not dwell on how ready you feel to take the examination. Feeling ready and being ready are two different things. Feeling ready brings in an emotional factor that could be counterproductive. That is, because the feeling of readiness cannot be measured accurately and objectively, attempting to assess your feeling of readiness could in fact increase stress and anxiety levels. Conversely, being ready means recognizing that you have honestly done your very best by planning and preparing in advance
(i.e., drafting and following your learning schedule). Focusing your attention on being ready rather than feeling ready will help you to cope best with stress and test anxiety. Here are other tips to help you stay cool, calm and collected:
 Stay away from other test-takers right before the examination.
Many, particularly those who do not feel ready for the test, may channel their stress and anxiety at others and the last thing you need is for someone to infect you with negative thoughts.
 Focus on what you know. After all, that is what you did when reviewing for the examination. So, work on reinforcing your strengths and minimizing your weaknesses.
 Get enough rest the night before the test, eat wellbalanced meals, and exercise regularly. Optimum performance comes from maintaining strong physical, emotional and intellectual condition.
 Whenever possible, avoid excessive caffeine and be extra careful with prescription drugs as these may impact memory retention and mental or physical fatigue.
 Wear comfortable clothing, bring a sweater or light jacket in case of changes in temperature in the room, arrive early at the test center, and pick a comfortable test-taking space.

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 Stay calm but alert. If you are prone to distraction, select a seating area where your view of other test-takers is minimal.

Tips For Succeeding in
Multiple-Choice Tests
There are eight basic types of examinations (assessment instruments). Although multiple-choice examinations may seem easier than other types (e.g., essay tests), a professionallyconstructed and psychometrically-measured multiple-choice examination may match or exceed other types of examinations in measuring learning accurately. Thus, multiple-choice examinations may be highly complex and can often be very challenging to answer. The following suggestions may help you improve your multiple-choice test-taking skills.
 Read All Choices — Once you understand the question, take time to read each choice. Do not stop at the second or third choices even if you are sure that you have found the correct answer. Keep in mind that your job is to pick the best available answer.  Use Logic and Common Sense — It is sometimes possible to reason out the correct answer even if you are unfamiliar with the topic. Through logic and common sense, it is possible to eliminate some choices, thus, narrowing your answer to fewer choices. Pick the choice that offers the stronger, more substantial explanation.
 Identify Items That Are Very Similar — To help you recognize the right answer, try expressing each item in your own words to see if, and to what extent, they differ.
 Eliminate Distractions from the Question — Some multiple-choice tests have questions asking you to analyze a

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Study Guide for the CAMS Certification Examination

hypothetical situation. Approach such questions by deleting
— to the extent you can — all unconnected or seemingly unnecessary information (such as adjectives and adverbs or phrases which, if removed, do not appear to change the meaning of the question) which can distract you. This may help you understand a question better.
 Make a List of Key Issues — If the question asks for specific steps in a process or sequence of events, ignore the choices.
Then, using the margin or scrap paper, list the steps or sequence of events the way you think they should be, and select the choice that best matches what you wrote.
 Work With Familiar or Recognizable Choices — If you have studied well, the correct answer should be discernible.
However, in eliminating incorrect answers, remember that some answers may seem unfamiliar or strange to you for the simple reason that they are incorrect.
 Keep On Moving — Don’t get stuck on any of the questions and, in particular, don’t get stuck trying to guess based on hypothetical circumstances (e.g., what if…). A good practice would be to stick to the “one minute per question” rule. This rule suggests that, if you feel you cannot answer the question after one minute has elapsed, move to the next question and come back to it later; you may recall the information later on.
Once you make your selection, however, do not change it unless you are absolutely sure that your new selection is the right one.
 Review your answers — if you have time after you’ve entered your answers, go back and review the questions and confirm that you have entered the correct response. This is a good practice, as you the additional questions you’ve answered may jog your memory and provided some additional information you may have forgotten the first time you answered the question.
There is no reward for finishing early, so take your time and be sure you’ve answered the questions to the best of your ability.

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Coping with Test Anxiety
Feeling anxious before taking an examination is normal, and you should not let that upset you. It should be of concern if your anxiety level reaches the point where it is affecting your daily life
(i.e., causing difficulty sleeping or concentrating, lack of appetite, headache, upset stomach, etc.). A sensible approach is to make anxiety work for you by, for example, channeling it into enhancing your performance. Of course, this is not always easy. Nevertheless, it is possible and you can make it happen by changing your attitude towards the examination, following the steps laid out above, believing in your ability and relaxing. If after practicing these techniques you still feel unduly anxious before or during the examination, here are a few tips:
 Take a few deep and slow breaths.
 Tense your shoulders, clench your fists, close your eyes and take a deep breath. Hold it for five seconds. Exhale, open your eyes and relax your muscles.
 Go to the bathroom and wash your face with cool water.
 Get a drink of water.

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xxvi

Introduction

Chapter

1

About the Association of Certified
Anti-Money Laundering Specialists

W

e now live in an era of international money laundering controls.
The terrorist attacks of September 11, 2001 revolutionized the
Anti-Money Laundering (AML) field and brought into stark relief the threat of the movement and disguising of funds destined for the support of terrorism throughout the world, introducing a whole new effort to combating the financing of terrorism
(CFT). As a result of the governmental reaction in virtually all countries, banks, non-bank financial institutions and nonfinancial businesses face tougher national and international legal requirements and harsher penalties than ever before.
By the same token, the regulators of those businesses and the law enforcement agents and prosecutors who enforce the criminal laws also face greater challenges and responsibilities in their work.
As a result of all this, the jobs of the professionals who strive to ensure that their organizations are protected from being used

1

Study Guide for the CAMS Certification Examination

for money laundering and terrorist financing are now much more demanding and the job pressures more severe.
As AML rules in most countries grow in complexity and number, the demand for certifiably qualified and knowledgeable AML compliance and reporting officers has grown dramatically. At the same time, the importance of ensuring that they have the essential skills for the job continues to grow.
The Association of Certified Anti-Money Laundering Specialists
(ACAMS) was created in response to the present and growing need for certification of specialized knowledge, career development and networking opportunities for professionals in the AML field.
The founding sponsor, Alert Global Media Inc. — one of the world’s leading independent authorities on money laundering and publisher of Money Laundering Alert, Alerta de Lavado de Dinero and www. moneylaundering.com — established ACAMS in mid-2001. As laws proliferate and the expectations of financial institutions, regulators and governments rise, the number of people worldwide who devote their careers to the prevention, detection and control of money laundering grows. ACAMS is dedicated, and its operations are devoted, to certifying AML professionals in their specialized knowledge and giving them an array of learning and continuing education benefits that will help them in their work and careers.
ACAMS advances the fight against money laundering by supporting the professional development of AML personnel in multiple areas. It provides high quality, industry-relevant education and benefits for its members and is the leading professional membership organization that offers specialized AML certification.

The Mission of the Association of Certified
Anti-Money Laundering Specialists
The mission of ACAMS is to advance the professional knowledge, skills and experience of those dedicated to the detection and prevention of money laundering around the world, and to promote the

2

Introduction

development and implementation of sound anti-money laundering policies and procedures. ACAMS achieves its mission through:
 Promoting international standards for the detection and prevention of money laundering and terrorist financing;
 Educating professionals in private and government organizations about these standards and the strategies and practices required to meet them;
 Certifying the achievements of its members; and
 Providing networking platforms through which AML/CFT professionals can collaborate with their peers throughout the world.

Objectives
ACAMS sets professional standards for AML practitioners worldwide and offers them career development and networking opportunities. In particular, ACAMS seeks to:
 Help AML professionals with career enhancement through cutting-edge education, certification and training. ACAMS acts as a forum where professionals can exchange strategies and ideas.
 Assist practitioners in developing, implementing and upholding proven, sound AML practices and procedures.
 Help financial and non-financial institutions identify and locate Certified Anti-Money Laundering Specialists (CAMS) designated individuals in the rapidly expanding AML field.

Membership
ACAMS is an international membership organization that provides career development and networking opportunities for individuals who have an active interest in the prevention and detection of money laundering.
Since its inauguration in February 2002, ACAMS membership has grown significantly and continues to grow at an increasing rate each year.

3

Study Guide for the CAMS Certification Examination

ACAMS’ members are a select group of knowledgeable, talented and skilled AML practitioners. As of 2010, the ACAMS membership base represents more than 140 countries and includes:













Anti-Money Laundering Officers;
Compliance Officers;
Government Regulators;
Law Enforcement/Intelligence Agents;
Internal and External Auditors;
Intelligence Officers;
Risk Management Specialists;
Attorneys;
Accountants and Certified Public Accountants;
Investment Advisors;
Real Estate Compliance Specialists; and
Consultants

From the following sectors:











Banking;
Government;
Securities Broker/Dealers;
Money Services Businesses;
Insurance;
Accounting and Law Firms;
Gaming Organizations;
Credit, Debit and Pre-Paid Card Companies;
Real Estate Agencies; and
Jewelry and Precious Metals Dealers

CAMS – A Unique Certification
Why CAMS
In the last few years, money laundering and terrorist financing controls have become increasingly important. As money laundering and terrorist financing threaten financial and non-financial

4

Introduction

institutions and even societies, the challenge and the need to develop AML experts intensifies. There has been much discussion about how governments and businesses can help employees keep up with the widening array of rules and approaches to battling financial wrongdoing. From all this, the fundamental question remains: what should the public and private sectors do to curb money laundering, terrorist financing and corruption?
In response to the great resourcefulness of money launderers, terrorists and corrupt politicians, organizations are urgently seeking competent AML practitioners. ACAMS is the global leader in responding to that need, having helped standardize AML expertise by creating the CAMS designation. It is a designation that is only given to candidates who pass a rigorous examination that is produced by an independent company of psychometricians with
AML content guidance and advice from a worldwide group of AML experts. Professionals whose responsibilities include identifying and preventing money laundering and terrorist financing may certify their knowledge by earning the CAMS designation. The crucial task of employing certifiably knowledgeable AML specialists motivates hundreds of organizations to reach out to ACAMS to certify their pertinent employees.
Practitioners, corporations, businesses and governments face constant change in AML compliance and regulatory requirements.
The AML professional’s role and responsibilities have become more varied, creating a highly competitive professional environment. In order to stand out among their peers and to better meet the expectations of their organizations, AML practitioners from all over the world seek the CAMS designation.

Purpose of Certification
The CAMS designation has become the most sought-after and prestigious credential in the AML field and is a crucial asset in the advancement of careers and professional standing. One of the key goals of the CAMS certification program is to set the standard for the AML profession. The CAMS credential denotes proven knowledge in the detection and prevention of money laundering.

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Study Guide for the CAMS Certification Examination

CAMS-designated individuals are widely recognized as trained and credentialed specialists.

T

hose who need the services of a compliance officer or anti-money laundering specialist are now more vigilant and demanding, as legal responsibilities and government expectations have grown and become more complicated and demanding.

Career opportunities abound for AML specialists and continue to grow each day in all financial industries and regulatory government agencies. The days when anyone could fill AML positions and receive
“on-the-job” training are over. Those who need the services of a compliance officer or
AML specialist are now more vigilant and demanding as the legal requirements and government expectations have grown and have become more complicated. Significant improvement in career growth requires enhanced knowledge, skills and abilities. The
CAMS certification provides evidence of this advanced knowledge and ability.

The CAMS certification is a internationally-recognized credential that identifies persons who earn it as possessing specialized AML knowledge. AML professionals who earn the CAMS designation position themselves to be leaders in the industry and to experience professional growth.

CAMS Certification Provides Career Benefits
Certified AML professionals enjoy a wide range of personal and professional benefits that can result in positive career changes.
Here are some of the advantages of the CAMS designation:


CAMS helps you excel in your current position, makes you more productive and valuable – Studying for the examination and maintaining the required continuing education credits for recertification enhances your current knowledge and keeps you on top of the latest developments in the field.



CAMS provides professional growth opportunities and will position you as a leader in the AML community – In job

6

Introduction

postings, CAMS is listed as “preferred” and even “required” for many of the top spots.


CAMS certified professionals make more money –
According to a recent ACAMS AML Compensation survey,
CAMS-certified AML professionals out-earned their noncertified peers by as much as 14 percent.



CAMS demonstrates to examiners that your department has specialized, concentrated knowledge in the AML field
– CAMS is recognized as the benchmark of AML certifications by regulatory agencies and throughout the financial services industry. 

CAMS can help your company minimize risk – Having a CAMS-certified team ensures that your people share and maintain a common level of AML knowledge. Studying for the examination also offers guidance in designing and implementing tailored AML programs.



CAMS helps meet training requirements – Preparing for the exam and the continuing education required to maintain the credential helps departments meet AML training requirements mandated by most AML laws and regulations around the world.

Who May Take The CAMS Certification Examination?
CAMS-certified professionals belong to a privileged group of individuals recognized as specialists in the AML field.
The number of persons with the CAMS designation continues to rise as members discover the career-enhancing potential of the certification. Candidates wishing to sit for the CAMS
Examination must:
 Document a minimum of 40 qualifying credits based on education, other professional certification and professional experience in the field.
 Submit supporting documents.
 Provide three professional references.
 Complete the Background Verification Authorization Form.
ACAMS will conduct a background check, including a criminal

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Study Guide for the CAMS Certification Examination

records check, on all people wishing to take the CAMS
Examination.
Candidates who pass the CAMS Examination must remain active ACAMS members to maintain, use and display the
CAMS credential.
The CAMS Candidate Handbook contains information on the necessary qualifications for registering for the CAMS examination, including eligibility requirements and policies, an outline of the content of the examination and an application form and instructions.
CAMS certification candidates should keep the candidate handbook for reference until after completing the examination. A copy of the candidate handbook may be downloaded from the ACAMS website at ACAMS.org. Generally, examination registration should be completed (and all fees processed) two months or more before the date of the examination. Please check ACAMS.org for application deadlines and other information.
For additional information on applying for the CAMS examination, application requirements, scheduling your examination, admission to the test center, or other eligibility requirements or administration aspects of the examination, please e-mail info@acams.org or visit www.ACAMS.org or call us at +1.305.373.0020 or +1.866.459.CAMS.

CAMS Recertification
The purpose of the CAMS recertification requirements is to ensure that Certified Anti-Money Laundering Specialists continue to maintain and enhance their anti-money laundering expertise.
Therefore, CAMS-designated professionals are required to earn continuing education credits through training, education and other professional development activities (such as attending approved conferences and seminars). Go to ACAMS.org for full information on recertification or contact ACAMS directly at +1.305-373-0020.

8

Introduction

How Is The CAMS Certification
Examination Developed?
ACAMS contracted with an independent company of professional psychometricians to design and conduct a study to create a valid and impartial international certification examination based on universal money laundering control principles, international standards, guidance from international AML groups and its own members’ expertise. No specific laws of any nation or region serve as the basis for the examination.
The first step in developing a valid examination was to identify precisely what AML specialists do and to compile a Job Task
Analysis, which specifies in detail the practitioner’s duties and requirements and the relative importance of each for a given job.
The result was a careful description of a profession, in this case the
“AML specialist.”
ACAMS then formed a task force of AML practitioners drawn from different countries and specialty areas who are intimately familiar with the job duties of AML specialists.
As a result of the task force’s efforts and the work of the independent company, ACAMS issued in 2002 and 2006 a Job Task Study and
Analysis identifying the AML professional’s basic job components.
This study formed the basis for the first CAMS examination conducted from 2003-2006. The 2006 Job Task Study and Analysis found four major content areas and 72 tasks applicable to the AML professional. The four main competency areas identified in the 2006 study are:


Risk and Methods of Money Laundering and
Terrorist Financing



Compliance Standards for Anti-Money Laundering and Combating the Financing of Terrorism



Anti-Money Laundering Compliance Program



Conducting or Supporting the Investigation Process

Subsequent studies confirm these main competencies as the core of the AML specialty practice. Thus they are the foundation

9

Study Guide for the CAMS Certification Examination

of the CAMS certification examination and the Study Guide for the Certification Examination. ACAMS continues to study the role of the AML professional and will update this guide and the examination when appropriate.

Content of the CAMS Examination
The certification examination is based on the core areas of essential
AML expertise identified and prioritized by the Job Task Analysis that was described above. International principles, references and documents, including those of the Financial Action Task Force
(FATF), the Wolfsberg Group, the Basel Committee, the Egmont
Group, the European Union and other bodies, provide the framework for AML controls in the public and private sectors and are designed to be of global and universal significance, utility and relevance.
The CAMS examination contains 120 multiple-choice and multiple-select questions. The examination is designed to assess a candidate’s understanding and application of international standards and commonly accepted AML principles.

The CAMS Candidate Handbook and the Process for
Applying for the Certification Examination
The candidate handbook contains information on the necessary qualifications needed to register for the CAMS examination, including eligibility requirements and policies, an outline of the content of the examination, and the examination application form and instructions. CAMS certification candidates should keep the candidate handbook for reference until after completing the examination. A copy of the candidate handbook may be downloaded from the ACAMS website at www.ACAMS.org. You may also check the website for application deadlines and other useful information.

10

Introduction

Study Guide for the
Certification Examination
Purpose of The Study Guide
The Study Guide for the CAMS Certification Examination is intended to provide candidates for the CAMS examination with a tool for refreshing their familiarity with regard to AML concepts and principles. This Guide provides a comprehensive, self-paced preparation aid for the CAMS certification examination.

Organization of The Study Guide
The Study Guide contains six sections:


Introduction: Provides background information on ACAMS, including its mission, objectives, membership and the CAMS certification program.



Core competency areas of the CAMS certification examination: Breaks down the competency areas identified by the latest Job Task Analysis into distinct chapters.



Sample questions: Introduces candidates to the format and question types used in the actual examination.



Glossary: Defines key terms in the AML/CFT field.



Study and Test-Taking Tips and Techniques: Explains testtaking and preparation strategies that will help candidates prepare for the CAMS examination.



Reference Materials: Lists reference materials and pertinent websites to assist candidates with their preparation.

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Study Guide for the CAMS Certification Examination

Audience
The Study Guide was developed for diverse individuals in many different fields. Candidates who pursue the CAMS designation may be experienced AML practitioners or other specialists and professionals who are interested in entering the AML field.
Applicants preparing for the CAMS examination will find the guide especially valuable when used as a companion to the
Examination Preparation Seminar that is offered by ACAMS. The
Study Guide is also very useful for professionals who are already
CAMS designated, as well as those who are not seeking a CAMS certification, but are seeking to advance their knowledge of AML subjects and content.
Regardless of a person’s objectives, The Study Guide’s format and style make it an excellent reference resource for anyone who works in or follows the AML field. As such, it serves the learning needs of both the novice and the expert AML professional from any industry or government agency anywhere in the world.

Conclusion
Congratulations on your decision to pursue the most respected and widely recognized international credential in the AML field.
We welcome and invite you to embark on a journey that may lead you to career advancement, international recognition and respect among peers and superiors. The Study Guide for the Certification
Examination is a vital tool on the way to becoming an AML specialist. Read on, study hard and good luck!

12

Chapter

2

Risks and Methods of Money Laundering and Terrorist Financing

M

What is Money Laundering? oney laundering involves taking criminal proceeds and disguising their illegal source in anticipation of ultimately using the criminal proceeds to perform legal and illegal activities.
Simply put, money laundering is the process of making dirty money look clean.
The Financial Action Task Force (FATF) is a Paris-based multinational or inter-governmental body formed in 1989 by the
Group of Seven industrialized nations to foster international action against money laundering. According to FATF, crimes such as illegal arms sales, narcotics trafficking, smuggling and other activities of organized crime can generate huge amounts of proceeds. Embezzlement, insider trading, bribery and computer fraud schemes can also produce large profits, creating the incentive to “legitimize” the ill-gotten gains through money laundering.1
When a criminal activity generates substantial profits, the individual or group involved must find a way to use the funds without drawing attention to the underlying activity or persons involved in generating such profits. Criminals do this by
1

http://www.fatf-gafi.org/pages/faq/moneylaundering/

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Study Guide for the CAMS Certification Examination

disguising the sources, changing the form or moving the money to a place where it is less likely to attract attention.
The United Nations 2000 Convention Against Transnational
Organized Crime, also known as the “Palermo Convention,” defines money laundering as:2
 The conversion or transfer of property, knowing it is derived from a criminal offense, for the purpose of concealing or disguising its illicit origin or of assisting any person who is involved in the commission of the crime to evade the legal consequences of his actions.
 The concealment or disguising of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property knowing that it is derived from a criminal offense.  The acquisition, possession or use of property, knowing at the time of its receipt that it was derived from a criminal offense or from participation in a crime.
One of FATF’s early accomplishments was to dispel the notion that money laundering is only about cash transactions. Through its several money laundering “typologies” exercises, FATF has shown that money laundering can be achieved through virtually every medium, financial institution or business.
Another important concept in the definition of money laundering is “knowledge.” In all three of the bullet points mentioned above, we see the phrase “…knowing that it is derived from a criminal offense.” Generally, a broad explanation of “knowledge” is used for the definition of money laundering. FATF’s 40 Recommendations on Money Laundering and Terrorist Financing and the 3rd
European Union Directive on the Prevention of the Use of the
Financial System for the Purpose of Money Laundering and
Terrorist Financing state that the intent and knowledge required to prove the offense of money laundering includes the concept that such a mental state may be inferred from “objective factual
2 Article 6, UN Convention Against Transnational Organized Crime, 15 November 2000, http://www.unodc.org/unodc/en/treaties/CTOC/index.html. 14

Risks and Methods of Money Laundering and terrorist financing

circumstances.” In a number of jurisdictions, the term “willful blindness” is a legal principle that operates in money laundering cases. Courts define “willful blindness” as the “deliberate avoidance of knowledge of the facts” or “purposeful indifference.” Courts have held that willful blindness is the equivalent of actual knowledge of the illegal source of funds or of the intentions of a customer in a money laundering transaction.
In October 2001, FATF expanded its mandate to cover the financing of terrorism. Whereas funds destined for money laundering are, by definition, derived from criminal activities, such as drug trafficking and fraud, terrorist financing may include funds from perfectly legitimate sources used to finance acts of terrorism.
Concealment of funds used for terrorism is primarily designed to hide the “purpose” for which these funds are used, rather than their source. Terrorist funds may be used for operating expenses, including such things as paying for food, and rent, as well as for the actual terrorist acts. Terrorists, similar to criminal enterprises, covet secrecy of transactions and access to funds.
Both terrorists and money launderers use the same methods to move their money in ways to avoid detection, such as structuring payments to avoid reporting and underground banking, such as the ancient system of hawala.
We will discuss terrorist financing later in this chapter.

Three Stages in the
Money Laundering Cycle
Money laundering often involves a complex series of transactions that are usually difficult to separate. However, we generally consider three phases of money laundering:
 Step One: Placement — The physical disposal of cash or other assets derived from criminal activity.

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Study Guide for the CAMS Certification Examination

During this initial phase, the money launderer introduces the illegal proceeds into the financial system. Often, this is accomplished by placing the funds into circulation through financial institutions, casinos, shops and other businesses, both domestic and international. This phase can involve transactions such as:
 Breaking up large amounts of cash into smaller sums and depositing them directly into a bank account.
 Transporting cash across borders to deposit in foreign financial institutions, or to buy high-value goods — such as artwork, antiques, and precious metals and stones — that can then be resold for payment by check or bank transfer.

 Step Two: Layering — The separation of illicit proceeds from their source by layers of financial transactions intended to conceal the origin of the proceeds.

This second stage involves converting the proceeds of the crime into another form and creating complex layers of financial transactions to disguise the audit trail, source and ownership of funds.

This phase can involve transactions such as:
 Sending wire transfers of funds from one account to another, sometimes to or from other institutions or jurisdictions.  Converting deposited cash into monetary instruments (e.g. traveler’s checks).
 Reselling high-value goods and prepaid access/stored value products.
 Investing in real estate and legitimate businesses.
 Placing money in investments such as stocks, bonds or life insurance 16

17

Source: United Nations Office on Drugs and Crime

Purchases of Luxury Assets,
Financial Investments,
Commercial/Industrial Investments

Collection of Dirty Money

Integration

Placement

Loan to
Company “Y”

Y

Payment by
Company “Y” of
False Invoice to
Company “X”

Offshore Bank

X

Wire
Transfer

Transfer on the Bank
Account of
Company “X”

Layering

Dirty Money Integrates into the Financial System

Bank

A Typical Money Laundering Scheme
Risks and Methods of Money Laundering and terrorist financing

Study Guide for the CAMS Certification Examination

 Using shell companies or other structures whose primary intended business purpose is to obscure the ownership of assets.  Step Three: Integration — Supplying apparent legitimacy to illicit wealth through the re-entry of the funds into the economy in what appears to be normal business or personal transactions. This stage entails using laundered proceeds in seemingly normal transactions to create the perception of legitimacy. The launderer, for instance, might choose to invest the funds in real estate, financial ventures or luxury assets. By the integration stage, it is exceedingly difficult to distinguish between legal and illegal wealth. This stage provides a launderer the opportunity to increase his wealth with the proceeds of crime. Integration is generally difficult to spot unless there are great disparities between a person’s or company’s legitimate employment, business or investment ventures and a person’s wealth or a company’s income or assets.

The Economic and
Social Consequences of Money Laundering
The following section contains excerpts from “The consequences of money laundering and financial crime,” by John McDowell and Gary Novis, which appeared in the U.S. State Department publication “Economic Perspectives” in May 2001, and from the
World Bank and International Monetary Fund’s “Reference Guide to Anti-Money Laundering (AML) and Combating the Financing of
Terrorism (CFT).” issued in January 2007.
Money laundering and terrorism financing can have potentially devastating economic, security and social consequences. While these crimes can occur in any country, they have particularly significant economic and social consequences for developing

18

Risks and Methods of Money Laundering and terrorist financing

countries, emerging markets and countries with fragile financial systems. The negative impacts of money laundering tend to be magnified in these markets because they tend to have less stable financial systems, a lack of banking regulations and effective law enforcement, and, therefore, are more susceptible to disruption from criminal or terrorism influences.
Some of the effects of money laundering and terrorist financing are:
 Increased Crime and Corruption: Successful money laundering helps enhance the profitable aspects of criminal activity. When a country is seen as a haven for money laundering, it will attract people who commit crime. Typically, havens for money laundering and terrorist financing have:
 Limited number of predicate crimes for money laundering.
 Limited types of institutions and persons covered by money laundering laws and regulations.
 Little to no enforcement of the laws, weak penalties, or provisions that make it difficult to confiscate or freeze assets related to money laundering.
If money laundering is prevalent, there is likely to be more corruption. Criminals may try to bribe government officials, lawyers and employees of financial or non-financial institutions so that they can continue to run their criminal businesses.
 Undermining the Legitimate Private Sector: One of the most serious microeconomic effects of money laundering is felt in the private sector. Money launderers are known to use front companies, or businesses that appear legitimate and engage in legitimate business, but are in fact controlled by criminals who commingle the proceeds of illicit activity with legitimate funds to hide the ill-gotten gains.

These front companies have access to substantial illicit funds, allowing them to subsidize front company products and services at levels well below market rates. Thus, front companies have a competitive advantage over legitimate firms that draw capital funds from financial markets. This

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Study Guide for the CAMS Certification Examination

makes it difficult for legitimate business to compete against front companies. Clearly, the management principles of these criminal enterprises are not consistent with traditional free market principles of legitimate business; thus resulting in further negative macroeconomic effects.

Finally, by using front companies and other investments in legitimate companies, money laundering proceeds can be used to control whole industries or sectors of the economy of certain countries. This increases the potential for monetary and economic instability due to the misallocation of resources from artificial distortions in asset and commodity prices. It also provides a vehicle for evading taxation, thus depriving the country of revenue.

 Weakening Financial Institutions: Money laundering and terrorist financing can harm the soundness of a country’s financial sector. They can negatively affect the stability of individual banks or other financial institutions, such as securities firms and insurance companies. Indeed, criminal activity has been associated with a number of bank failures around the globe, including the failure of the first Internet bank, the European Union Bank, as well as Riggs Bank.
Furthermore, some financial crises of the 1990s — such as the fraud and money laundering scandal at the Bank of Credit and Commerce International (BCCI) and the 1995 collapse of
Barings Bank as a risky derivatives scheme carried out by a trader at a subsidiary unit unraveled — had significant criminal or fraud components. The failures in Riggs Bank’s anti-money laundering controls contributed to its demise — due in large part to the manner in which Riggs Bank staff administered the accounts of, among others, Augusto Pinochet, the former
President of Chile and Teodoro Obiang, the President of
Equatorial Guinea.

Financial institutions that rely on the proceeds of crime have additional challenges in adequately managing their assets, liabilities and operations. The adverse consequences of money laundering are generally described as reputational, operational, legal and concentration risks. They are interrelated, and each has financial consequences, such as:

20

Risks and Methods of Money Laundering and terrorist financing

 Loss of profitable business
 Liquidity problems through withdrawal of funds
 Termination of correspondent banking facilities
 Investigation costs and fines
 Asset seizures
 Loan losses
 Reduced stock value of financial institutions

F

Reputational risk is described as the potential that adverse publicity regarding an organization’s business practices and inancial institutions that associations, whether accurate or not, will rely on the proceeds of crime cause a loss of public confidence in the have additional challenges in integrity of the organization. As an example, adequately managing their assets, for a bank, reputational risk represents the liabilities and operations. potential that borrowers, depositors and investors might stop doing business with the bank because of a money laundering scandal involving the bank. The loss of high-quality borrowers reduces profitable loans and increases the risk of the overall loan portfolio.
Depositors may withdraw their funds. Moreover, funds placed on deposit with a bank may not be able to be relied upon as a source of funding once depositors learn that a bank may not be stable. Depositors may be more willing to incur large penalties rather than leaving their funds in a questionable bank, resulting in unanticipated withdrawals, causing potential liquidity problems.
Operational risk is described as the potential for loss resulting from inadequate internal processes, personnel or systems or from external events. Such losses occur when institutions incur reduced or terminated inter-bank or correspondent banking services or an increased cost for these services. Increased borrowing or funding costs are also a component of operational risk.
Legal risk is the potential for lawsuits, adverse judgments, unenforceable contracts, fines and penalties generating losses, increased expenses for an organization, or even the closure of

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Study Guide for the CAMS Certification Examination

the organization. For instance, legitimate customers may become victims of a financial crime, lose money and sue the organization for reimbursement. There may be investigations conducted by regulators and/or law enforcement authorities, resulting in increased costs, as well as fines and other penalties. Also, certain contracts may be unenforceable due to fraud on the part of the criminal customer.
Concentration risk is the potential for loss resulting from too much credit or loan exposure to one borrower or group of borrowers.
Regulations usually restrict a bank’s exposure to a single borrower or group of related borrowers. Lack of knowledge about a particular customer or who is behind the customer, or what the customer’s relationship is to other borrowers, can place a bank at risk in this regard. This is particularly a concern where there are related counter-parties, connected borrowers, and a common source of income or assets for repayment. Loan losses can also result, of course, from unenforceable contracts and contracts made with fictitious persons.
For these reasons, the Basel Committee on Banking Supervision has issued statements such as the 2001 Customer Due Diligence for Banks Paper on the prevention of the criminal use of their members’ banking systems by money launderers.
McDowell and Novis indicate that money laundering is critical in the effective operation of transnational and organized crime.
Money laundering not only affects the Institution providing financial servicesXYZ, but also a country’s economy, government and social well-being. The economic effects of money laundering include:
 Loss of control of, or mistakes in, decisions regarding economic policy: Due to the large amounts of money involved in the money laundering process, in some emerging market countries these illicit proceeds may dwarf government budgets, resulting in a loss of control of economic policy by governments or policy mistakes due to measurement errors in macroeconomic statistics arising from money laundering.

Money laundering can adversely affect currencies and interest rates as launderers reinvest funds where their schemes are less likely to be detected, rather than where rates of return

22

Risks and Methods of Money Laundering and terrorist financing

are higher. Volatility in exchange and interest rates due to unanticipated cross-border transfers of funds can also be seen. To the extent that money demand appears to shift from one country to another because of money laundering — resulting in misleading monetary data — it will have adverse consequences for interest and exchange rate volatility, particularly in economies based on the US dollar, as the tracking of monetary aggregates becomes more uncertain.
Last, money laundering can increase the threat of monetary instability due to the misallocation of resources from artificial distortions in asset and commodity prices.
 Economic Distortion and Instability: Money launderers are not primarily interested in profit generation from their investments, but, rather, in protecting their proceeds and hiding the illegal origin of the funds. Thus, they “invest” their money in activities that are not necessarily economically beneficial to the country where the funds are located. Furthermore, to the extent that money laundering and financial crime redirect funds from sound investments to low-quality investments that hide their origin, economic growth can suffer. In some countries, entire industries, such as construction and hotels, have been financed not because of actual demand, but because of the short-term interests of money launderers. When these industries no longer suit the needs of the money launderers, they abandon them, causing a collapse of these sectors and immense damage to economies that could ill-afford these losses.
 Loss of Tax Revenue: Of the underlying forms of illegal activity, tax evasion is, perhaps, the one with the most obvious macroeconomic impact. Money laundering diminishes government tax revenue and, therefore, indirectly harms honest taxpayers. It also makes government tax collection more difficult. This loss of revenue generally means higher tax rates than would normally be the case.

A government revenue deficit is at the center of economic difficulties in many countries, and correcting it is the primary focus of most economic stabilization programs. The
International Monetary Fund (IMF) has been involved in efforts to improve the tax collection capabilities of its member countries and the Organisaton for Economic Cooperation and

23

Study Guide for the CAMS Certification Examination

Development (OECD) has been instrumental in moving many jurisdictions towards tax transparency.
 Risks to Privatization Efforts: Money laundering threatens the efforts of many states trying to introduce reforms into their economies through privatization. Criminal organizations can outbid legitimate purchasers for formerly state-owned enterprises. Furthermore, while privatization initiatives are often economically beneficial, they can also serve as a vehicle to launder funds. In the past, criminals have been able to purchase marinas, resorts, casinos and other businesses to hide their illicit proceeds and to further their criminal activities.
 Reputation Risk for the Country: A reputation as a money laundering or terrorist financing haven could cause negative effects for development and economic growth in a country.
It diminishes legitimate global opportunities because foreign financial institutions may decide to limit their transactions with institutions located in money laundering havens because the necessary extra scrutiny will make them more expensive.
Legitimate businesses located in money laundering havens may suffer from reduced access to world markets (or may have to pay more to have access) due to extra scrutiny of ownership and control systems. Once a country’s financial reputation is damaged, reviving it is very difficult and requires significant resources to rectify a problem that could have been prevented with proper anti-money laundering controls. Other effects include specific counter-measures that can be taken by international organizations and other countries, and reduced eligibility for governmental assistance.
 Social Costs: Significant social costs and risks are associated with money laundering. Money laundering is integral to maintaining the profitability of crime. It also enables drug traffickers, smugglers and other criminals to expand their operations. This drives up the cost of government expenses and budgets due to the need for increased law enforcement and other expenditures (for example, increased health care costs for treating drug addicts) to combat the serious consequences that result.

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Risks and Methods of Money Laundering and terrorist financing

Methods of
Money Laundering
Money laundering is an evolving activity, and must be continuously monitored in all its various forms in order for measures against it to be timely and effective. Illicit money can move through numerous different commercial channels, including checking, savings and brokerage accounts; offshore entities and trusts; wire transfers: hawalas; securities dealers; banks; money services businesses and car dealers. As many governments around the world have implemented anti-money laundering obligations for the banking sector, there has been a shift in laundering activity from the more traditional banking sector to the non-bank financial sector and to non-financial businesses and professions.
FATF uses its annual typologies exercise to “monitor changes and better understand the underlying mechanisms of money laundering and terrorist financing.” The objective is to report on some of the
“key methods and trends in these areas” and to also make certain that the FATF 40 Recommendations remain effective and relevant.
In this chapter, we will refer often to these typologies because they give good examples of how money can be laundered through different methods and in different settings.

Banks and Other
Depository Institutions
Banks have historically been, and continue to be, an important mechanism for the disposal of criminal proceeds. Here are some special areas of interest and concern for money laundering through banks and other depository institutions:

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Electronic Transfers of Funds
An electronic transfer of funds is any transfer of funds that is initiated by electronic means, such as an automated clearinghouse (ACH), computer, automated teller machine (ATM), electronic terminal, mobile phone, telephone or magnetic tape. Typically, when someone wants to rapidly move money from one bank account to another, he or she sends a wire or electronic transfer of funds. It can happen within a country or across borders, and trillions of dollars are transferred in millions of transactions each day.
Electronic funds transfer systems offer money launderers a fast conduit for moving money between countries and accounts. Illicit fund transfers are easily hidden among the millions of legitimate transfers that occur each day. Systems like Fedwire, SWIFT and
CHIPS move millions of wires or transfer messages on a daily basis. Money launderers may initiate unauthorized electronic transfers of funds — such as ACH debits or by making cash advances on a stolen credit card — and place the funds into an account established to receive the transfers. This could also include stealing credit cards and using the funds to purchase merchandise, which could be sold to provide the criminal with cash.
Money launderers also use electronic transfers of funds in the second phase of the laundering process, the layering cycle. The goal is to move the funds from one account to another, from one bank to another, from one jurisdiction to another, so that it becomes more difficult for law enforcement or investigative agencies to trace the origin of the funds.
To avoid detection, the money launderer may take basic precautions, such as varying the amounts sent, keeping them relatively small and, where possible, using reputable organizations.
The processes in place to verify the electronic transfer of funds, however, have been tightened. Many software providers have sophisticated algorithms to detect money laundering and other suspicious activity using electronic transfers of funds.
Some indicators of money laundering using electronic transfers of funds include:

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Risks and Methods of Money Laundering and terrorist financing

 Funds transfers that occur to or from a financial secrecy haven, or to or from a high-risk geographic location without an apparent business reason, or when the activity is inconsistent with the customer’s business or history.
 Large, incoming funds transfers that are received on behalf of a foreign client, with little or no explanation or apparent reason.
 Many small, incoming transfers of funds that are received, or deposits that are made using checks and money orders. Almost immediately, all or most of the transfers or deposits are wired to another account in a different city or country in a manner inconsistent with the customer’s business or history.
 Funds activity that is unexplained, repetitive or shows unusual patterns.
 Payments or receipts are received that have no apparent link to legitimate contracts, goods or services.
 Funds transfers that are sent or received from the same person to or from different accounts.

Correspondent Banking
The Bank of New York (BONY) scandal, which erupted in
August 1999 and exposed money laundering through Russian correspondent accounts at BONY, was an early instance of laundering abuses through correspondent banking. A 305-page report, “Correspondent Banking: A Gateway to Money Laundering,” issued by the United States Senate Permanent Subcommittee on Investigations, found that some large U.S. and foreign banks facilitated, through carelessness and lax procedures, the movement of diverse criminal proceeds into the U.S.
Similarly, in its Report on Money Laundering Typologies 20012002, FATF stated:

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Correspondent banking is the provision of banking services by one bank (the “correspondent bank”) to another bank (the “respondent bank’”). By establishing multiple correspondent relationships globally, banks can undertake international financial transactions for themselves and for their customers in jurisdictions where they have no physical presence. Large international banks typically act as correspondents for thousands of other banks around the world. Respondent banks obtain a wide range of service through the correspondent relationship, including cash management (for example, interest bearing accounts in a variety of currencies), international wire transfers of funds, check clearing, payable-through accounts and foreign exchange services. The services offered by a correspondent bank to smaller, less well-known banks may be restricted to non-credit, cash management services. Those respondent banks judged to be sound credit risks, however, may be offered a number of credit related products (for example, letters of credit and business accounts for credit card transactions).
Correspondent banking is vulnerable to money laundering for two main reasons:
1.  y their nature, correspondent banking relationships
B
create a situation in which a financial institution carries out financial transactions on behalf of customers of another institution. This indirect relationship means that the correspondent bank provides services for individuals or entities for which it has neither verified the identities nor obtained any first-hand knowledge.
2.  he amount of money that flows through correspondent
T
accounts can pose a significant threat to financial institutions, as they process large volumes of transactions for their customers’ customer. This makes it more difficult to identify the suspect transactions, as the financial institution generally does not have the information on the actual parties conducting the transaction to know whether they are unusual.

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Risks and Methods of Money Laundering and terrorist financing

Additional risks incurred by the correspondent bank include the following issues:
 While the correspondent bank may be able to learn what laws govern the respondent bank, determining the degree and effectiveness of the supervisory regime to which the respondent is subject may be much more difficult.  Determining the effectiveness of the respondent bank's AML controls can also be a challenge. While requesting compliance questionnaires will provide some comfort, the correspondent bank is still very reliant on the respondent doing some due diligence on the customers it allows to use the correspondent account.  Some banks offering correspondent facilities may not ask their respondents about the extent to which they offer such facilities to other institutions (“nesting”). This adds another layer and means the correspondent bank is even further removed from knowing the identities or business activity of these sub-respondents, or even the types of financial services provided.
After decades of relatively unexamined relationships, the
USA Patriot (United and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism) Act of 2001 was passed which contains several provisions concerning due diligence U.S. financial institutions needed to perform for relationships with foreign correspondent banking customers. They include:  Section 312, which underscores the importance of money laundering control standards for correspondent accounts maintained for certain foreign banks.
Pursuant to this section, institutions must set up riskbased due diligence to mitigate the money laundering risks posed by foreign financial institutions. In addition, for a correspondent account maintained for a foreign bank operating under an offshore license or a license

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granted by a jurisdiction designated as being of concern for money laundering, a financial institution must take reasonable steps to identify the owners of the foreign bank, to conduct enhanced scrutiny of the correspondent account to guard against money laundering, and to ascertain whether the foreign bank provides correspondent accounts to other foreign banks and, if so, to conduct appropriate related due diligence.
 Section 313, which prohibits U.S. financial institutions from opening or maintaining correspondent accounts for foreign shell banks and requires them to take
“reasonable steps” to ensure that a correspondent account of a foreign bank is not being used indirectly to provide banking services to a shell bank. A shell bank is a bank that has no physical presence in any country
(a physical presence Is a place of business where the institution has at least one full-time employee, maintains operating records related to its banking activities, is subject to inspection by the banking authority that licensed it to conduct banking activities) and is not a regulated affiliate of a legitimate bank. The
Senate Subcommittee report identified several cases of shell banks that facilitated millions of dollars worth of fraud schemes. In most cases, the shell banks were subject to no regulatory oversight whatsoever. As a result of the report, most countries now prohibit shell banks from operating and also prohibit their institutions from establishing relationships with shell banks.
 Section 319 which requires U.S. financial institutions to maintain records with the names and contact information of the owners of foreign banks for which they maintain correspondent accounts. The rule also stipulates that U.S. financial institutions must keep the name and address of an agent in the U.S. designated to accept service of legal process from the U.S. government for the foreign bank’s records regarding the correspondent account. For more on the

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Risks and Methods of Money Laundering and terrorist financing

USA Patriot Act see the chapter that deals with U.S. regulatory initiatives with international ramifications.
Before establishing correspondent accounts, banks should be able to answer basic questions about the respondent bank, including who its owners are and the nature of its regulatory oversight.
Example

A lawsuit filed by a Hong Kong investor group in
2004 accused the New York branch of ABN Amro of allowing First Merchant Bank, of the Turkish Republic of Northern Cyprus, to defraud the group.

According to the lawsuit, ABN Amro ignored several warnings on six correspondent accounts it opened for
First Merchant Bank at its New York branch in 1998.
Soon after, the branch received two warning letters, including one from the Central Bank of Cyprus, which advised the bank of the financial and reputational risks of doing business with entities that included First
Merchant. More warning letters came later, but the bank did not close the First Merchant accounts until spring 2000.

The lawsuit claimed that ABN Amro failed to conduct proper due diligence on First Merchant and its accounts and ignored a number of red flags, including:
 First Merchant held only an offshore license from Northern Cyprus;
 The bank had no physical offices except a small office in Northern Cyprus;
 It had no banking or securities licenses in
New York; and
 Its chairman and managing director,
Hakki Yaman Namli, was sought by Italian authorities in connection with allegedly laundering $50 million.

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The bank also entered into a written agreement with the Federal Reserve, which ordered it to tighten anti-money laundering controls in its New York correspondent account and clearing service divisions.

Payable-Through Accounts
In some correspondent relationships, the respondent bank’s own customers are permitted to conduct their own transactions
— including sending wire transfers, making and withdrawing deposits and maintaining checking accounts — through the respondent bank’s correspondent account without needing to clear the transactions through the respondent bank. Those arrangements are called payable-through accounts (PTAs). PTAs differ from normal correspondent accounts in that the foreign bank’s customers have the ability to directly control funds at the correspondent bank. This is different from the traditional correspondent relationship, where the respondent bank will take orders from their customers and pass them on to the correspondent bank. In these cases, the respondent bank has the ability to perform some level of oversight prior to executing the transaction. PTAs can have a virtually unlimited number of sub-account holders, including individuals, commercial businesses, finance companies, exchange houses or casas de cambio, and even other foreign banks. The services offered to the “subaccount holders” and the terms of the PTAs are specified in the agreement signed by the correspondent and the respondent banks.
PTA accounts held in the names of respondent banks often involve checks encoded with that bank’s account number and a numeric code to identify the sub-account, which is the account of the respondent bank’s customer. Sometimes the sub-account holders are not identified to the correspondent bank.
Elements of a PTA relationship that can threaten the correspondent bank’s money laundering defenses include:

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Risks and Methods of Money Laundering and terrorist financing

 PTAs with foreign institutions licensed in offshore financial services sectors with weak or absent bank supervision and weak licensing laws.
 PTA arrangements where the correspondent bank regards the respondent bank as its sole customer and fails to apply its Customer Due Diligence policies and procedures to the customers of the respondent bank.
 PTA arrangements in which sub-account holders have currency deposit and withdrawal privileges.
 PTAs used in conjunction with a subsidiary, representative or other office of the respondent bank, which may enable the respondent bank to offer the same services as a branch without being subject to supervision. Example

Lombard Bank — a bank licensed by the South
Pacific island of Vanuatu, which is considered by many experts as a tax and money laundering haven
— opened a payable-through account at American
Express Bank International (AEBI) in Miami. The
Vanuatu bank offered its Central American customers virtually full banking services through its payablethrough account at AEBI. The customers were given checkbooks allowing them to deposit and withdraw funds from Lombard’s payable-through account.
Lombard was permitted to have multiple authorized signatures on the account. The Lombard customers had no relationship with AEBI. The sub-account holders would bring cash deposits to Lombard representatives in four Central American countries.
Lombard couriers would transport the cash to its
Miami affiliate, Lombard Credit Corporation, for deposit in the payable-through account at AEBI. Lombard customers also brought cash to the Lombard office in Miami, which was located in the same building as
AEBI. That cash also was deposited in the payable-

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through account at AEBI. Over two years, ending June
1993, as much as $200,000 in cash was received by
Lombard’s Miami affiliate on 104 occasions.

Concentration Accounts
Concentration accounts are internal accounts established to facilitate the processing and settlement of multiple or individual customer transactions within the bank, usually on the same day. These accounts are also known as special-use, omnibus, settlement, suspense, intraday, sweep or collection accounts.
Concentration accounts are frequently used to facilitate transactions for private banking, trust and custody accounts, funds transfers and international affiliates.
Example

Vladimiro Montesinos, former spymaster and henchman of Peruvian ex-President Alberto Fujimori, held at least two accounts, including a “concentration” account, in his own name at the Bank of New York, which he used to funnel money to recipients of his corrupt largesse while he served as Peru’s intelligence chief.

Money laundering risks can arise in concentration accounts if the customer-identifying information, such as name, transaction amount and account number, is separated from the financial transaction. If separation occurs, the audit trail is lost, and accounts may be misused or administered improperly. Banks that use concentration accounts should implement adequate policies, procedures and processes covering operation and recordkeeping for these accounts.
Here are some anti-money laundering practices for these accounts.
 Requiring dual signatures on general ledger tickets.
 Prohibiting direct customer access to concentration accounts. 34

Risks and Methods of Money Laundering and terrorist financing

 Capturing customer transactions in the customer’s account statements.
 Prohibiting customers' knowledge of concentration accounts or their ability to direct employees to conduct transactions through the accounts.
 Retaining appropriate transaction and customer identifying information.
 Reconciling accounts frequently by an individual who is independent from the transactions.
 Establishing a timely discrepancy resolution process.
 Identifying and monitoring recurring customer names.

Private Banking
Private banking is an extremely lucrative, competitive and worldwide industry and is an important issue when discussing the money laundering field. In the early 1990s, private banking received unwanted publicity from the scandal surrounding the movement of hundreds of millions of dollars of purportedly ill-gotten money belonging to Raul Salinas, the brother of former Mexican
President Carlos Salinas. His fortune, in large measure, was handled by private bankers employed by Citibank in Mexico City,
New York, London and Geneva.
Private banking provides highly personalized and confidential products and services to well-heeled clients at fees that are often based on “assets under management.” Private banking often operates semi-autonomously from other parts of a bank and caters to wealthy customers who seek confidentiality and personalized service.
Fierce competition among private bankers for the high net-worth individuals who are their main clientele has given rise to the need for tighter government controls worldwide. Competition brings increased pressures on the relationship managers and the marketing officers to obtain new clients, to increase their assets under management, and to contribute a greater percentage to the

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net income of their organizations. Plus, the compensation paid to most “relationship managers” in private banking is based largely on the assets under management that they bring to their institutions.
Examples

In the United States, in the case of American Express
Bank International (AEBI), two private bankers formerly employed by AEBI were convicted of money laundering. They cited the competitive nature of the field, the method of compensation and “the pressure on international bankers to recruit new clients and the concomitant professional and monetary success that comes to those who are able to produce.”

In the United States, Riggs Bank maintained a close relationship with Augusto Pinochet, the former
President of Chile. This relationship with Pinochet, included flying to and from Chile on his private jet and taking hundreds of thousands of dollars worth of cashiers checks to Pinochet, which later were found to be the proceeds of corruption. Riggs also facilitated the movement of money through real estate transactions that appeared to be structured in such a way as to avoid linking them to Pinochet. Riggs Bank, which was a well-respected bank founded in the 1800s, was fined millions of dollars for violations of the U.S. Bank
Secrecy Act.

The following factors may contribute to the vulnerabilities of private banking with regard to money laundering:
 Perceived high profitability.
 Intense competition.
 Powerful clientele.
 The high level of confidentiality associated with private banking. 36

Risks and Methods of Money Laundering and terrorist financing

 The close relationship of trust developed between relationship managers and their clients.
 Commission-based compensation for relationship managers.  A culture of secrecy and discretion developed by the relationship managers for their clients.
 The relationship managers becoming client advocates to protect their clients.
Often, private banking customers are “non-resident aliens” meaning they are conducting their banking in a country outside the one in which they reside. Their assets may move overseas where they are held in the name of corporations established in secrecy havens. Private investment companies (PICs), which have been an element of many high-profile laundering cases in recent years, are excellent laundering vehicles. PICs are corporations established by individual bank customers and others in offshore jurisdictions to hold assets. They are “shell companies” formed to maintain clients’ confidentiality and for various tax- or trust-related reasons.
The secrecy laws of the offshore havens where PICs are often established can conceal the true identity of their beneficial owners.
As an additional layer of secrecy, some PICs will be established with nominal owners, who hold title to the company for the benefit of individuals who remain undisclosed and sometimes subject to an attorney-client privilege or other similar legal safeguards. Many private banks establish PICs for their clients, often through an affiliated trust company in an offshore secrecy haven.
Another area of concern with regard to private banking includes corrupt “Politically Exposed Persons” (PEPs). PEPs have been the source of problems for some financial institutions, as set forth in the examples below.
Examples
 Mario Villanueva, the corrupt governor of the Mexican state of Quintana Roo, according to the U.S. Drug
Enforcement Agency, facilitated the smuggling of 200

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tons of cocaine into the U.S. For five years, until 2001, he maintained private banking accounts at Lehman
Brothers containing approximately $20 million that the
DEA alleged he had received as bribes from Mexican drug traffickers.
 The Riggs Bank case revealed a web of transactions, involving hundreds of millions of dollars, that the bank had facilitated over many years for dictators on two continents, including Augusto Pinochet of Chile and
Teodoro Obiang of Equatorial Guinea. The accounts formed part of the embassy banking portfolio that was the bank’s specialty product for decades.
 Vladimiro Montesinos, the former head of Peru's
Intelligence Service, and chief advisor of former
Peruvian president Alberto Fujimori, had accounts at The Bank of New York, in New York City, which held his substantial bribes from drug traffickers.
Other institutions, such as American Express Bank
International, Bank of America, Barclays and UBS AG, in New York, also held accounts for Montesinos.
 Arnoldo Aleman and Byron Jerez, the former president and tax commissioner, respectively, of Nicaragua, maintained accounts at Terrabank N.A. in Miami, through which they bought millions of dollars of certificates of deposit and condominiums in South
Florida, allegedly with the proceeds of corruption.
 Pavel Lazarenko, the former prime minister of Ukraine, had accounts in San Francisco at Bank of America,
Commercial Bank, Pacific Bank, WestAmerica Bank, and various securities firms, including Fleet Boston,
Robertson & Stephens, Hambrecht & Quist and Merrill
Lynch, where millions of dollars he allegedly extorted as head of state of Ukraine were held.
 Colonel Victor Venero Garrido, a Peruvian army officer, whom the U.S. FBI described as the “most trusted bag/straw man” of Vladimiro Montesinos, maintained

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Risks and Methods of Money Laundering and terrorist financing

accounts at Citibank in Miami and Northern Trust in
California that allegedly held more than $15 million in bribes and extortion proceeds.
 Mario Ruiz Massieu, the former deputy attorney general of Mexico in charge of drug trafficking prosecutions maintained a private banking account at
Texas Commerce Bank in Houston in the mid-1990s, where he deposited drug traffickers’ bribes of $9 million in currency over a 13-month period.

Structuring
Designing a transaction to evade triggering a reporting or recordkeeping requirement is called “structuring.” Structuring is possibly the most commonly known money laundering method.
It is a crime in many countries, and must be reported by filing a suspicious transaction report. The individuals engaged in structuring are runners, hired by the launderers. These individuals go from bank to bank depositing cash and purchasing monetary instruments in amounts under the reporting threshold.
Structuring can be done in many settings or industries, including banking, money services businessess and casinos.
Examples
 A customer breaks a large transaction into two or more smaller ones.

Henri wants to conduct a transaction involving €18,000 in cash. However, knowing that depositing it all at once would exceed the cash reporting threshold and would trigger the filing of a report, he goes to three different banks and deposits €6,000 in each.

 A large transaction is broken into two or more smaller transactions conducted by two or more people. 39

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Jennifer wants to send a €5,000 money transfer, but knowing that, in her country, there is a threshold of
€3,000 for recording of funds transfers which would be triggered, she sends a €2,500 money transfer and asks her friend to send another €2,500 money transfer.

 Real-life case: Isaac Kattan was a travel agent and businessman. Kattan allegedly laundered an estimated
$500 million per year in drug money, all of it in cash.
Couriers from a number of cities would visit him in his apartment, leaving boxes and suitcases full of money. The bagmen were messengers from narcotics distributors. The money was payment to their suppliers in Colombia. One of Kattan’s favorite places for making deposits was The Great American Bank of Dade
County. Officials in the bank were bribed to accept his massive deposits without filing currency transaction reports (CTRs). Hernan Botero, another individual, allegedly had a similar operation which was smaller than Kattan’s. He laundered only about $100 million per year out of his home near Palm Beach. The Botero group used offshore corporations to invest in Florida real estate as another way to launder money from cocaine deals. Botero was indicted in the United States and testimony in federal court showed he had bribed officers and employees of the Landmark Bank in
Plantation, Florida, to accept his deposits. The money was brought in almost daily by Botero front companies.
From Landmark, the money was transferred to the
Miami accounts of Colombian banks. From there, it was a simple matter to wire the money to banks in
Colombia. By the early 1980s, the federal Operation
Greenback had arrested Kattan, Botero, and others.
Kattan and Botero were sentenced to 30-year terms in federal prison.
Here is how foreign “money brokers” conduct what is called structuring: 40

Risks and Methods of Money Laundering and terrorist financing

 A structurer, who is acting for a foreign money broker, opens numerous checking accounts in Country A using real and fictitious names. Sometimes the structurer uses identification documents of dead people supplied by the money brokers.
 With funds supplied by the money brokers, the structurer opens the accounts with inconspicuous amounts, usually in the low four-figures.
 To allay bank suspicions, the money brokers sometimes deposit extra funds to cover living expenses and to give the accounts an air of legitimacy.
 Once the accounts are opened, the structurer signs the newly-issued checks in blank, leaving the payee, date and amount lines blank.
 He sends the signed blank checks to the money broker in country B, usually by courier.
 A structurer may open as many as two dozen checking accounts in this fashion. It is not uncommon for brokers to have more than 20 of these checking accounts in
Country A available at any given time.
 The checking accounts usually accumulate only a few thousand dollars before they are cleared out by checks drawn by the money brokers to pay for exports from
Country A to Country B’s money brokerage customers.
 The availability of hundreds of these accounts to
Country B’s money brokers leaves open the possibility that tens of millions of dollars could be passing through them each year.
In 2005, FATF added a new term to the vast money laundering lexicon – “cuckoo smurfing.”

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The term, mentioned in the organization’s 2005 Typologies
Report, refers to a form of money laundering linked to alternative remittance systems, in which criminal funds are transferred through the accounts of unwitting persons who are expecting genuine funds or payments from overseas. The term cuckoo smurfing first originated in investigations in the United Kingdom, where it is a significant money laundering technique.
The cuckoo is a European bird that is a parasite because it lays its eggs in the nests of other birds, which hatch them and rear the offspring. The main difference between traditional structurer and cuckoo smurfing is that in the latter the third parties who hold the bank accounts being used are not aware of the fact that illicit money is being deposited into their accounts.
Cuckoo smurfing requires the work of an insider within a financial institution and is generally a four step process:
 The first step occurs when a customer provides funds to an alternative remitter for transfer to a beneficiary, generally in another country.
 The next step involves the insider, who will provide the transaction details (beneficiary name, bank, account number and amount) of the transfer to an associate in the foreign country where the beneficiary of the transfer is located. The associate in the foreign country will have cash that needs to be placed into the financial system.  The associate in the foreign country will then deposit cash into the bank account of the intended beneficiary.
The beneficiary will receive the full amount of the transfer and the associate in the foreign country will be able to place some of its cash into the financial system.
 The associate in the foreign country then arranges to get the funds from the alternate remitter, using one of the methods by which alternate remitters transfer funds. In this case, the associate in the foreign country will have laundered the funds and will have legitimate funds to replace the criminally derived ones deposited into the beneficiary’s account.

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Risks and Methods of Money Laundering and terrorist financing

 To combat cuckoo smurfing, FATF recommends that banks have controls in place to identify depositors who pay cash into third-party accounts. Also, banks should monitor for unusual cash deposits that are structured or placed in branches other than where the customer’s account is held.

Sample Cuckoo Smurfing Transaction

Genuine Turkish
Electronic Firm

Payment of
₤106,230+

Instanbul

Proforma
Invoice and
Supply of
750 Nokia
Phones

Order for Phones

UK Mobile Phone
Supplier
London

Turkish
Money Exchange

Payment to
Criminals

Controller
Iran

Smurfed
Cash
Deposits

UK Collector

Drugs Money

Source: Financial Action Task Force Report on Money Laundering Typologies 2004 - 2005

According to FATF, the following should be kept in mind when dealing with possible cuckoo smurfing activity:
 The existence of these deposits is not necessarily grounds to reconsider the relationship with a customer.
 It could be the indicator of laundering, therefore it should be examined carefully.

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 Law enforcement will need information on the depositor, so banks should seek to identify cash deposits made by third parties and should retain surveillance footage.
Another form of placing large amounts of cash into the financial system is called microstructuring. Microstructuring is essentially the same as structuring, except that it is done at a much smaller level.
Instead of taking $18,000 and breaking it into two deposits, the microstructurer might break it into 20 deposits of approximately $900 each. This level of structuring makes it extremely difficult to detect.
In the case of a Colombian drug cartel, the cash proceeds of U.S. drug sales are deposited into accounts in New York. These accounts have an ATM card linked to them. The card is provided to associates in Colombia. The deposits are made on a regular schedule, which is communicated by the U.S. microstructurer to the Colombian associates. The Colombian associates withdraw the funds, as they are deposited, in Colombian pesos and provide them to the drug lords. In one case in New York, an individual was trailed by law enforcement authorities as he went from bank to bank in Manhattan.
When they stopped him, he had $165,000 in cash.
A few means of detecting microstructuring include:
 Use of counter deposit slips as opposed to preprinted deposit slips.
 Frequent activity in an account immediately following the opening of the account with only preliminary and incomplete documentation.
 Frequent visits to make cash deposits of nominal amounts that are inconsistent with typical business or personal banking activity.
 Cash deposits followed by ATM withdrawals, particularly in higher risk countries.
 Cash deposits made into business accounts by third parties with no apparent connection to the company.

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Bank Complicity
A criminally co-opted bank employee might facilitate money laundering. Institutions and businesses have learned that an insider can pose the same money laundering threat as a customer.
It has become part of the mantra in the anti-money laundering field that it is essential to maintain co-equal programs to know your customer and to know your employee.
In an effort to identify and anticipate trouble before it costs time, money and reputation, companies are developing programs to look closely at the people working inside their own four walls. Knowing your employee is as crucial to a company’s security as knowing customers and other “outsiders.” (See also the section on AML
Compliance Programs.)
Example

In 2000, Lucy Edwards, a former vice president of
Bank of New York’s Eastern European Division, and her husband, Peter Berlin, pled guilty in New York federal court to a money laundering conspiracy linked to facilitating the movement of hundreds of millions of dollars of dubious origin from Russia through corporate accounts Berlin had opened at the bank.

While background screening of prospective and current employees, especially for criminal history, can keep unwanted employees out and can identify those to be removed, institutions need ongoing controls to help identify those employees who may be actively committing crimes against their employers. In this case, it is critical to have solid internal controls, such as ensuring that Customer Due Diligence files are complete, having suspicious activity monitoring alerts carefully reviewed when they continue to arise in the portfolio of a particular account officer, and understanding customer and employee relationships.
(Peter Berlin, Lucy Edwards’ husband, was one of her largest clients - a conflict of interest such as this should trigger a closer review of the relationship.)

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Credit Unions or Building Societies
The United Kingdom’s Joint Money Laundering Steering Group
(JMLSG) stated in a November 2006 guidance that, although credit unions pose a low money laundering risk, they are still vulnerable to money laundering and terrorist financing schemes. In the 2007 update, the JMLSG included credit unions and building societies in the scope of its recommendations to have AML programs in place.
On the plus side, their relatively small size, compared to banks and other financial institutions, makes it harder for criminals to launder illicit cash because suspicious activity can be more easily discovered within a smaller volume of transactions, the JMLSG report found.
Not surprisingly, the more financial services a credit union offers, the higher the potential risk for money laundering, as these credit unions tend to contain a larger clientele and offer potential criminals a larger range of possible ways to conceal their illicit funds. Overall, though, credit unions contain “high levels of cash transactions,” which increases the risk of money laundering and terrorist financing.
The group concluded that other high-risk transactions include: money transfers to third parties, third parties paying in cash for someone else and reluctance to provide identity information when opening an account.
The JMLSG even advised credit unions to watch for unusual activity in the accounts of children because parents could be trying to use those funds for illicit purposes, thinking such transactions would draw less attention.

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Non-Bank Financial Institutions
Credit Card Industry
The credit card industry includes:
 Credit card associations, such as American Express,
MasterCard and Visa, which license member banks to issue bankcards, authorize merchants to accept those cards, or both
 Issuing banks, which solicit potential customers and issue the credit cards.
 Acquiring banks, which process transactions for merchants who accept credit cards.
 Third-party processors, which contract with issuing or acquiring banks to provide transaction processing and other credit card–related services for the banks.
Credit card accounts are not likely to be used in the initial placement stage of money laundering because the industry generally restricts cash payments. They are more likely to be used in the layering or integration stages.
Example

Money launderer Josh prepays his credit card using illicit funds that he has already introduced into the banking system, creating a credit balance on his account. Josh then requests a credit refund, which enables him to further obscure the origin of the funds, which constitutes layering. Josh then uses the illicit money he placed in his bank account and the credit card refund to pay for a new kitchen that he bought.
Through these steps he has integrated his illicit funds into the financial system.

A money launderer could put ill-gotten funds in accounts at banks offshore and then access these funds using credit and debit

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cards associated with the offshore account. Alternatively, he could smuggle the cash out of one country into an offshore jurisdiction with lax regulatory oversight, place the cash in offshore banks and
— again — access the illicit funds using credit or debit cards.
In a 2002 Report called “Extent of Money Laundering through
Credit Cards Is Unknown,” the U.S. Government Accountability
Office, the Congressional watchdog of the United States, offered hypothetical money laundering scenarios using credit cards. One example was: “[Money launderers establish a legitimate business in the U.S. as a ‘front’ for their illicit activity. They establish a bank account with a U.S.-based bank and obtain credit cards and ATM cards under the name of the ‘front business.’ Funds from their illicit activities are deposited into the bank account in the United
States. While in another country, where their U.S.-based bank has affiliates, they make withdrawals from their U.S. bank account, using credit cards and ATM cards. Money is deposited by one of their cohorts in the U.S. and is transferred to pay off the credit card loan or even prepay the credit card. The bank’s online services make it possible to transfer funds between checking and credit card accounts.”

Money Remitters and Money Exchange Houses
Money remitters transfer funds for their customers. They receive cash from their clients which is transferred to designated beneficiaries against payment of a commission. These businesses provide a valid and legitimate financial service.
The industry is popular with many individuals who do not have real access to formal banking services and because money remitters often charge lower commission rates than banks for transferring money abroad. Funds are often transferred to the least advanced regions of the world, where no formal banking services exist.
In its report on money laundering typologies of 1996-1997, FATF stated that this industry operated in a variety of ways, but most commonly a money remitter receives cash which it transfers through the banking system to another account held by an

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associated company in the foreign jurisdiction, where the money is made available to the ultimate recipient.
The different operations can be classified as follows:
 Funds transfer companies possessing separate networks (Western Union and Money Gram).
 Money transfer systems connected with informal banking channels or underground banking. (This type of banking will be described in greater detail in the section on terrorist financing.)
 Money transfers by way of the collection accounts of foreign banks (accounts opened with subsidiaries or branches, or even representative offices of foreign banks, which transfer the earnings of immigrant or visiting workers to their countries of origin).
 International money orders.
Like banks, remittance services have been widely used for money laundering. The risks of laundering are not confined to the informal funds transfer networks; they may also apply to official networks like those of the government postal service. The 19971998 FATF report on money laundering typologies stated that the authorities of a Scandinavian country had noticed a steep increase in international money orders to the countries of the former
Yugoslavia. In a FATF member country, the mail was reported to have been used to send packages containing large cash sums and drugs anonymously.
The biggest misconception about this industry is that there is minimal oversight. In fact, many are subject to a variety of national and/or local regulators and often have extremely tight compliance programs in place. The scrutiny to which money remitters are subject can vary greatly, in large part due to the ease with which some money transmitters can set up their business and not be subject to any regulation. This is why one of the most important aspects of due diligence for a bank when establishing a relationship with a money transmitter is to confirm that the customer is properly licensed.

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Another technique commonly used by money launderers using money remitters and currency exchanges is for the broker to make the funds available to the criminal organization at the destination country in the local currency. The launderer/broker then sells the criminal dollars to foreign businessmen wishing to make legitimate purchases of goods for export. This correspondent type operation resembles certain aspects of “underground remittance services,” which will be discussed more in the section on terrorist financing.
Cash proceeds from criminal activities can also transit through the money exchange sector. Here is an example from the 19971998 FATF Report on Money Laundering Typologies of suspicious activity in a money exchange setting:
Example

A bureau de change (“The Counter”) had been doing business in a small town near the German border for a number of years before exchange offices became regulated within the country and transactions became subject to reporting obligations to prevent money laundering. The Counter often had a surplus of high denomination bank notes. The owner (Peter) knew these notes were not popular and, therefore, had them exchanged into smaller denomination notes at a nearby bank. Before the legislation took effect, persons acting on behalf of The Counter regularly exchanged amounts in excess of US$ 50,000 in value, but immediately after the legislation took effect, the transactions were reduced to amounts of US$
15,000 to US$ 30,000 per transaction in an attempt to structure the exchanges so that they were under the transaction reporting threshold. The employees of the bank branch regarded the exchanges, which did not have any sound economic reason, as dubious and reported the transactions.

Peter had a record with the police related to fencing stolen property and dealing in drugs, and because of this he transferred ownership of The Counter to a new owner named Andre with no police record. Andre registered The Counter with the Central Bank as an

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A

exchange office and was accepted on a temporary basis. The financial intelligence unit consulted various police files and established that the police had been observing this exchange office for some time. The suspect transactions were passed on to the crime squad in the town where The Counter had its office, and the crime squad started an investigation. A few months later, the crime squad arrested Andre, house searches were conducted, resulting in the seizure of expensive objects and an amount equivalent to more than US$ 250,000 in cash. The records of The Counter showed that many transactions were not recorded in the official books and records. For example, over a period of thirteen months, The Counter changed the equivalent of more than US$ 50 million at a foreign bank without registering these exchange transactions in the official books and records. The investigation showed that The Counter and its owners were working with a group of drug traffickers, who used the exchange office to launder their proceeds, and this formed a substantial part of the turnover of the business.

nother technique commonly used by money remitters and currency exchanges is for the broker to make the funds available to the criminal organization at the destination country in the local currency. This case underscored the need for banks and large, legitimate bureaux de change to pay attention to their business relations with smaller bureaux, particularly when supplying or exchanging currency.

Insurance Companies
In its 2002-2003 typologies report, FATF experts submitted case examples that showed the vulnerabilities of the insurance sector to money laundering. The primary emphasis in the examples was on the investment aspect of life insurance policies. Most significant laundering and terrorist financing risks in the insurance industry are found in life insurance and annuities products. While many life insurance policies are generally structured to pay a certain sum upon the death of the insured, others have an investment value which can create a cash value if the policyholder wishes to cancel the policy. Life insurance policies that have an investment feature, which can increase the death benefit as well as the cash value of the policy, are often referred to as whole life or permanent life.

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M

Annuities are another type of insurance policy that has a cash value. An annuity is an investment that provides a defined series of payments in the future ost significant in exchange for an up-front sum of money. Annuity laundering and terrorist contracts may allow criminals to exchange illicit financing risks in the funds for an immediate or deferred income stream, insurance industry are which usually arrives in the form of monthly found in life insurance payments starting on a specified date. One and annuities products. indicator of possible money laundering is when a potential policyholder is more interested in a policy’s cancellation terms than its benefits. In both cases, a policyholder can place a large sum of money into a policy with the expectation that it will grow based on the underlying investment, which can be fixed or variable. In a number of ways, the sector’s susceptibility to money laundering is similar to that of the securities sector. For example, in some jurisdictions, life insurance policies are viewed as an investment vehicle similar to securities. We will discuss the securities industry in the next section.
In contrast to life insurance and annuities, policies for property insurance, casualty, title or health insurance typically do not offer investment features, cash build-ups, the option of transferring funds from one to another, or other means of hiding or moving money.
Vulnerabilities in the insurance sector include:
 Lack of oversight/controls over intermediaries:
Insurance brokers have a great deal of control and freedom regarding policies.
 Decentralized oversight over aspects of the sales force: Insurance companies may have employees
(captive agents) who are subject to the full control of the insurance company. Non-captive agents, those who offer an insurance company’s products, but are not employed by an insurance company (i.e., the noncaptive agent will often work with several insurance companies to find the best mix of products for their clients) may fall between the cracks of multiple insurance companies or may work to find the company with the weakest AML oversight if they are complicit with the money launderer.

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 Sales-driven objectives: The focus of brokers is on selling the insurance products and, thus, they often overlook signs of money laundering, such as a lack of explanation for wealth or unusual methods for paying insurance premiums. 
Examples of how money can be laundered through the insurance industry include:
 Certain insurance policies operate in the same manner as unit trusts or mutual funds. The customer can overfund the policy and move funds into and out of the policy while paying early withdrawal penalties. When such funds are reimbursed by the insurance company (by check, for example), the launderer has successfully obscured the link between the crime and the generated funds.
 The purchase and redemption of single premium insurance bonds are key laundering vehicles. The bonds can be purchased from insurance companies and then redeemed prior to their full term at a discount.
In such cases, the balance of the bond is paid to a launderer in the form of a “sanitized” check from the insurance company.
 Use of the free-look period: A free-look period is a feature that allows investors, for a short period of time after the policy is signed and the premium paid, to back out of a policy without penalty. This process allows the money launderer to get an insurance check, which represents cleaned funds. However, as more insurance companies are subject to AML program requirements, this type of money laundering is more readily detected and reported.
 Early redemption: One indicator of possible money laundering is when a potential policyholder is more interested in the cancellation terms of a policy than the benefits of the policy. The launderer buys a policy with illicit money and then tells the insurance company that he has changed his mind and does not need the policy. After paying a penalty, the launderer redeems the policy and receives a clean check from a respected insurer.

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Real-Life Example

During a long-term drug trafficking investigation in the
1990s, agents from the U.S. Immigration and Customs
Enforcement (ICE) in Miami learned that Colombian drug cartels were laundering large sums of money through the purchase of life insurance policies in
Europe, the United States and offshore jurisdictions.
Based on this information, ICE launched Operation
Capstone in 2000. The probe found that Colombian cartels, using a small number of insurance brokers, were buying investment-grade life insurance policies with cartel associates as beneficiaries. The policies were purchased with drug proceeds sent to the insurance companies via wire transfers and checks by third parties around the globe. The investigation revealed that the cartels were then cashing out these policies after short periods of time, despite the financial penalties invoked for early liquidation. The cartel beneficiaries would then receive a check or wire transfer from the insurance company that appeared to be legitimate insurance/investment proceeds. The cartels could then use these “clean” funds. Agents determined that the cartels had used this scheme to purchase at least 250 life insurance policies and launder some $80 million in drug proceeds. In
December 2002, ICE announced the seizure of nearly
$30 million, the arrest of nine individuals, and charges against five additional individuals as a result of this joint probe by authorities in the United States, the Isle of Man, the United Kingdom, Colombia and Panama.

When a company assesses laundering and terrorist financing risks, it must consider whether it permits customers to:
 Use cash or cash equivalents to purchase insurance products.  Purchase an insurance product with a single premium or lump-sum payment.
 Borrow money against an insurance product’s value.

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U.S. Department of Homeland Security
Example of Money Laundering
Through Insurance Policies

Source: United States Department of Homeland Security

Securities Broker-Dealers
FATF has urged money laundering controls for the securities field since 1992, in conjunction with the Montreal-based International
Organization of Securities Commissions (IOSCO), a global association of governmental bodies that regulate the securities and futures markets. Recognizing that other financial sectors have increased their defenses against money laundering, IOSCO said that it is important to “ensure that securities and futures markets do not become a comparatively more attractive alternative for money launderers.” The difficulty in dealing with laundering in the securities field is that, usually, little currency is involved. It is an industry that runs by computer transfers and paper. Its use in the money laundering process is generally after launderers have disposed of their cash through other methods.

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Aspects of the industry that increase its exposure to laundering are:
 Its international nature.
 The speed of the transactions.
 The ease of conversion of holdings to cash without significant loss of principal.
 The routine use of wire transfers from, to or through multiple jurisdictions.
 The competitive, commission-driven environment, which, like private banking, provides ample incentive to disregard the source of client funds.
 The practice of brokerage firms of maintaining securities accounts as nominees or trustees, thus permitting concealment of the identities of the true beneficiaries. The illicit money laundered through the securities sector can be generated by illegal activities both from outside and from within the sector. For illegal funds originating outside the sector, securities transactions for the creation of legal entities may be used to conceal or obscure the source of these funds (layering). In the case of illegal activities within the securities market itself — for example embezzlement, insider trading, securities fraud, market manipulation — the transactions or manipulations generate illegal funds that must then be laundered. In both cases, the securities sector offers the launderer the potential for a double advantage: allowing him to launder illegal funds and to acquire additional profit from the related securities fraud.
Money laundering can occur in the securities industry in customer accounts that are used only to hold funds and not for trading. That allows launderers to avoid banking channels with more stringent money laundering controls. Other indications of money laundering are what are known as “wash trading” or offsetting transactions.
These transactions involve the entry of matching buys and sells in particular securities, which creates the illusion of trading. Wash trading through multiple accounts generates offsetting profits and

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losses and transfers of positions between accounts that do not appear to be commonly controlled.
Example

Josh opens a securities account at two brokerage firms with money that he made through drug trafficking. In one account, he takes a long position for a Eurodollar futures contract and, in the other account, he takes a short position for a Eurodollar futures contract.
Whatever the market does, the losses and profits will offset each other, and he can request the proceeds of his activity in the form of a check from a reputable brokerage firm. This enables him to launder his money with minimal expenses, outside the costs of the transactions, without risking his principal, and, by using accounts at multiple firms, he decreases the likelihood of being detected.

Retail broker-dealers are the industry’s frontline defense — and its most vulnerable access point. They are under constant management pressure to expand their client base and to manage more assets. The more assets in a client’s account, the more commissions will be generated. A money launderer can potentially use this to his advantage by promising a large or steady commission stream.
Banks remain an important mechanism for the disposal of criminal proceeds. In this chapter, we described some special vulnerabilities for money laundering through banks and other depository institutions, such as electronic funds transfers, correspondent bank accounts, PTAs and private banking. The fact that other industries, such as car dealers, money remittance businesses, securities and insurance firms, have similar vulnerabilities to money laundering and criminal misuse provide ample evidence as to why they too have AML compliance program obligations.

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Non-Financial
Businesses and Professions
Casinos and Other Businesses Associated with Gambling
Casinos are among the most proficient cash-generating businesses.
High rollers, big profits, credit facilities and a variety of other factors combine to create a glittering amount of cash that flows from the house to the players and back. Where it is legally permitted, billions of dollars readily flow between the customer and casino.
Casinos and other businesses associated with gambling, such as bookmaking, lotteries and horse racing, continue to be associated with money laundering because they provide a ready made excuse for recently acquired wealth with no apparent legitimate source. The services offered by casinos will vary depending on the jurisdiction in which they are located and the measures taken in that jurisdiction to control money laundering.
Money laundering through casinos generally occurs in the placement stage, i.e., converting the funds to be laundered from cash to checks. A launderer can buy chips with cash generated from a crime and then request repayment by a check drawn on the casino’s account. Often, rather than requesting repayment by check in the casino where the chips were purchased with cash, the gambler says that he will be traveling to another country in which the casino chain has an establishment, asks for his credit to be made available there and withdraws it in the form of a check in the other jurisdiction.
In its 1997-1998 typologies report, FATF says that gaming businesses and lotteries were being used increasingly by launderers. In its report, FATF gave examples of gambling transactions that enabled drug dealers to launder their money through casinos and other gambling establishments. One laundering technique connected with horse-racing and gaming is

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when the person will actually gamble the money to be laundered, but in such a way as to be reasonably sure of ultimately recovering his stake in the form of checks issued by the gambling or betting agency and reflecting verifiable winnings from gaming. This method makes it more difficult to prove the money laundering because the person has actually received proceeds from gambling
Real-Life Example

On October 20, 1988, Waldemar Ratzlaf, a high-stakes gambler from Portland, Oregon, United States, lost
$160,000 playing blackjack at the High Sierra casino in Reno, Nevada. He had been playing on a credit line extended by the casino which gave him one week to pay back the amount he lost. Seven days later he returned with $160,000 in cash to pay his debt to the casino. He asked the casino to refrain from reporting the cash transaction to the government, but was rebuffed. The casino vice-president told Ratzlaf that cashier’s checks would be gladly accepted. To facilitate the process, the casino provided a limousine and driver to assist in the banking transactions. The next day, accompanied by a casino employee, Ratzlaf and his wife went to various banks in Nevada and neighboring California and purchased several cashier’s checks, each for less than $10,000. They also asked several friends to purchase similar cashier’s checks with cash they provided. By those means, the Ratzlafs were able to obtain enough individual cashier’s checks with which to pay off their casino debt. In November
1990, the gambler and the casino employee who had accompanied him on their banking sojourn were indicted by a federal grand jury for, among other things, structuring cash transactions to prevent the filing of currency transaction reports.

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Dealers in High-Value Items
(Precious Metals, Jewelry, Art, etc.)
The European Directive on money laundering provides a common framework for including trade in gold, diamonds and other highvalue items within anti-money laundering monitoring systems.
Effective January 2006, the USA Patriot Act required certain dealers in covered and finished goods, including precious metals, stones and jewels, to establish an anti-money laundering program.
However, in many other jurisdictions these industries are yet to be regulated for money laundering control purposes.
Gold is attractive to money launderers. As set forth by FATF in its 2002-2003 typology report, gold has high intrinsic value in a relatively compact form, which is easy to transport. It can be bought and sold easily and often with anonymity for currency in most areas of the world. It is more readily accepted than precious stones, especially since it can be melted down into many different forms. It holds its value regardless of the form it takes — whether as bullion or as a finished piece of jewelry — and is thus often sought after as a way of facilitating the transfer of wealth. For some societies, gold carries an important cultural or religious significance that adds to its demand.
FATF provided the following example:
Example

An asset management company was responsible for managing the bank portfolios of two individuals active in gold purchases in Africa. The purchased African gold was sold to a gold working company in Country
F, which, in turn, forwarded its payments to the sellers’ accounts. Transfers were regularly made from these accounts to accounts in a European country. Wishing to verify the use of the funds, the asset management company asked its clients for a description of the channels used to pay for the gold in Africa. The information received permitted the company to identify an intermediary residing in Europe who was responsible for paying the suppliers in Country F. The

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individual in question was described as being closely associated with a corrupt regime in Africa. Based on this information, the asset management company reported the case to the FIU and blocked the accounts.
Information exchanged with foreign counterparts permitted this illegal trade to be linked to an ongoing foreign investigation, which targeted the same individual for arms trafficking.
In certain instances, some of the transactions in a particular scheme do not take place at all, but are represented with false invoicing. The paperwork is then used to justify transferring funds to pay for the shipments. The false invoicing scheme, whether over-billing or under-billing for the reputed goods or services provided, is a common money laundering technique.
The following transactions are also vulnerable, and require additional attention:
 Payments or returns to persons other than the owner — If one person delivers precious metal for refining and asserts ownership of the metal and authority to sell it, but directs payments to be made to another person, that transaction may be questionable.
The “dealer in precious metal” is being used to transfer an asset not only from one form into another — e.g., unrefined gold to refined gold or money within the international finance system — but also from one person to another.
 Precious metal pool accounts — These accounts are maintained by a small number of large and sophisticated precious metal companies and have world-wide scope. They receive and hold precious metal credits for a customer, which can be drawn on by that customer. The customer can request the return of the precious metals, the sale and return of monetary proceeds, or the delivery of precious metal to another person. Thus, a refining customer in one country can deliver gold scrap for refining, establish a gold credit in the refiner’s pool account system, and subsequently

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have delivery made by the refiner to another person, based upon that credit.
Real-Life Case

On June 5, 2003, U.S. Immigration and Customs
Enforcement (ICE) agents arrested 11 individuals at seven jewelry stores in Manhattan’s diamond district on charges of participating in an international money laundering scheme. The agents had received information that Colombian drug cartels were laundering money through the purchase, smuggling and resale of diamonds and gold. The cartels were instructing their U.S. employees to buy precious stones in New York with drug proceeds and then to smuggle them to Colombia, where they were resold to refiners for “clean” pesos that the traffickers could use risk-free. Based on this information, ICE agents launched an investigation in 1999 into several New
York jewelers alleged to be involved in the money laundering. According to the charges, the jewelers were approached by undercover agents posing as drug dealers. The agents told the jewelers they were looking to buy gold and diamonds with illicit funds so they could smuggle these precious metals to Colombia and then resell them to refiners for “clean” cash. According to the charges, the jewelers willingly accepted $1 million in drug funds from the undercover agents. The jewelers offered to smelt the gold into small objects, such as belt buckles, screws and wrenches, to facilitate smuggling the transfer into Colombia.

Illegal trade in diamonds has become an important factor in armed conflict in certain areas of the world, and terrorist groups may be using diamonds from these regions to finance their activities.
Individuals and entities in the diamond sector have also been involved in complex diamond-related money laundering cases. As with gold, the simplest typology involving diamonds consists of the direct purchase of the gems with ill-gotten money.

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With regard to casinos and dealers in high-value items, FATF says that the more common types of laundering activity include retail foreign exchange transactions, the purchasing of gaming chips at casinos, forged or fraudulent invoicing, commingling of legitimate and illicit proceeds in the accounts of diamond trading companies, and, in particular, international funds transfers among these accounts. Some of the detected schemes were covers for laundering the proceeds of illicit diamond trafficking. In others, diamond trading was used as a method for laundering proceeds generated by other criminal activity.
The multi-million-dollar fine art industry can also serve as a convenient money laundering vehicle. Anonymous agents at art auction houses bid millions of dollars for priceless works. Payment is later wired to the auction house by the agents’ principals from accounts in offshore havens. It is an ideal mechanism for the money launderer.
Real-Life Case

One famous case was Operation Dinero, a 1992 joint
DEA and IRS operation. The agencies operated a fake bank in Anguilla targeting the financial networks of international drug traffickers. Several undercover companies were established by law enforcement in different jurisdictions as fronts designed to supply laundering services to the traffickers. Members of the
Cali cartel engaged in transactions with the “bank” to sell three masterpieces by Picasso, Rubens and
Reynolds that had a combined value of $15 million.
The works were later seized by the U.S.

Art and antiques dealers and auctioneers should follow these tips to lessen their money laundering risks:
 Require all art vendors to provide names and addresses. Ask that they sign and date a form that states that the item was not stolen and that they are authorized to sell it.

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 Verify the identities and addresses of new vendors and customers. Be suspicious of any item whose asking price is not commensurate with its market value.
 If there is reason to believe an item might be stolen, immediately contact the Art Loss Register (www. artloss.com), the world’s largest private database of stolen art. The database contains more than 100,000 items reported by enforcement agencies, insurers and individuals as being stolen.
 Look critically when a customer asks to pay in cash.
Avoid accepting cash payments unless there is a strong and reputable reason.
 Be aware of money laundering regulations.
 Appoint a senior staff member to whom employees can report suspicious activities.

Travel Agencies
Travel agencies can also be used as a means for money launderers to mix illegal funds with clean money to make the illegal funds look legitimate, by providing a reason to purchase highpriced airline tickets, hotels and other vacation related expenses.
Real-Life Case

Operation Chimborazo, named for the famous
Ecuadorean mountain, was a large multinational effort in the mid-1990s aimed at businesses suspected of laundering drug proceeds. The operation focused on the money laundering organization of Hugo Cuevas
Gamboa, a reputed principal launderer for the Cali
Cartel. In 1994, law enforcement teams cracked down on several businesses in Latin American countries, which included travel agencies. During a raid in
Argentina, the authorities arrested the owners of a

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travel agency that was part of an organization that laundered $50 million per week in drug proceeds from
22 countries.
Ways money laundering can occur in travel agencies include:
 Purchasing an expensive airline ticket for another person who then asks for a refund.
 Structuring wire transfers in small amounts to avoid recordkeeping requirements, especially when the wires are from foreign countries.

Vehicle Sellers
This industry includes sellers and brokers of new vehicles, such as automobiles, trucks, and motorcycles; new aircraft, including fixedwing airplanes and helicopters; new boats and ships, and used vehicles. Laundering risks and ways laundering can occur through vehicle sellers include:
 Structuring cash deposits below the reporting threshold, or purchasing vehicles with sequentially numbered checks or money orders.
 Trading in vehicles and conducting successive transactions of buying and selling new and used vehicles to produce complex layers of transactions.
 Accepting third-party payments, particularly from jurisdictions with ineffective money laundering controls.
Most money laundering cases dealing with vehicle dealers have one common element: the unreported use of currency to pay for the automobiles.
There have also been cases where authorities have charged that a car dealer laundered money by allowing a drug dealer to trade in his cars for cheaper models and to be paid in checks, not cash, for the

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difference. In one such “down-trading” money laundering scheme, a drug dealer traded in his $37,000 Porsche for a $17,000 Ford Bronco and the car dealer allowed the down-trade, knowing that the customer was a drug dealer, in violation of the anti-money laundering law.

Gatekeepers: Notaries, Accountants,
Auditors, Lawyers
Countries around the world have been putting responsibilities on professionals, such as lawyers, accountants, company formation agents, auditors and other financial intermediaries, who have the ability to either block or facilitate the entry of illegitimate money into the financial system.
The responsibilities of such gatekeepers include requiring them to identify clients, to conduct due diligence on their clients, to maintain records about their clients and to report “suspicious” client activities. Some of these rules also prohibit gatekeepers from informing or “tipping off” clients who are the subject of the suspicious transaction reports. Violations may subject gatekeepers to prosecution, fines and even imprisonment.
In the European Union and several other countries, mandatory antimoney laundering duties already apply to “gatekeepers.” The FATF
40 Recommendations also cover independent legal professionals
(see next chapter about the FATF 40 Recommendations), including lawyers and legal professionals, and other “gatekeepers.”
In its typology report of 2000-2001, FATF says that the following functions provided by lawyers, notaries, accountants and other professionals are the most useful to a potential money launderer:
 Creating corporate vehicles or other complex legal arrangements, such as trusts. Such arrangements may serve to confuse the links between the proceeds of a crime and the perpetrator.
 Buying or selling property. Property transfers serve as either the cover for transfers of illegal funds (layering stage) or the final investment of proceeds after they

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pass through the initial laundering process (integration stage).  Performing financial transactions. Sometimes these professionals may carry out various financial operations on behalf of the client (for example, issuing and cashing checks, making deposits, withdrawing funds from accounts, engaging in retail foreign exchange operations, buying and selling stock, and sending and receiving international funds transfers).
 Providing financial and tax advice. Criminals with large amounts of money to invest may pose as individuals hoping to minimize tax liabilities or seeking to place assets out of reach in order to avoid future liabilities.
 Providing introductions to financial institutions.
FATF cites the following example in its typologies report of how a lawyer may help set up a complex laundering scheme:
Example

This case involved 19 individuals in the medical service industry, along with a lawyer who was also an accountant. The prosecution alleged 123 violations involving conspiracy, false claims, wire fraud and money laundering and resulted in both primary defendants forfeiting property and millions of dollars and serving prison terms. The false claims involved fictitious patient claims and false service claims.

The two primary subjects employed the lawyer’s services to set up related shell corporations to generate fictitious health care service records reflecting home therapy and nursing care. Health care providers, including therapists, registered nurses and physicians, operated the shell corporations. To keep the health care billing, tax return filings and bank account records synchronized, the two main subjects relied on the lawyer/accountant defendant.

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More than $4 million was laundered through bank accounts in cities in the north and southeast of the country and through suspected offshore accounts.
Numerous accounts were created at four or five separate banks for the purpose of amassing and moving these funds. Cashier’s checks were often purchased and even negotiated through the lawyer/accountant’s trust account for concealment of property acquisition.

The issue of requiring attorneys to be gatekeepers in the antimoney laundering area has been controversial due to the fact that attorneys have a confidential relationship with their clients. Various alternatives have been discussed and debated, including:
 Deferring regulation until adequate education is conducted.  Imposing internal controls and due diligence duties on lawyers with regard to non-privileged communications.
 Using a joint government-private sector body to regulate lawyers who engage in financial activities, requiring registration with and regulation by an agency such as the Financial Services Commission of the
Channel Islands.
 Devising a new “hybrid” approach, such as through
“guidance notes” or best practices standards from FATF.
Gatekeeper issues in the U.S. are focused on the scope of the requirements, particularly the definition of the financial transactions to which reporting requirements would apply. Many regulators within the U.S. want the scope to coincide with the European
Union Directive, which requires EU members to ensure that the obligations are imposed on a wide range of professionals, including auditors, attorneys, tax advisers, real estate agents and notaries.
Even if the U.S. does not adopt gatekeeper standards like those of the EU and the UK, the extraterritorial reach of several existing initiatives already subject lawyers who conduct international transactions to various requirements.

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Investment and Commodity Advisers
Commodity futures and options accounts are vehicles that could be used to launder illicit funds. What are they?
 Commodities: Goods such as food, grains and metals that are usually traded in large amounts on a commodities exchange, usually through futures contracts.
 Commodity pools: Combines funds from various members and uses them to trade in futures or options contracts.  Futures/futures contracts: Contracts to buy or sell a quantity of a commodity at a future date at a set price.
 Omnibus accounts: Accounts held by one futures commission merchant (FCM) for another. Transactions of multiple account holders are combined and their identities are unknown to the holding FCM.
 Options/options contracts: Contracts that create the right, but not the obligation, to buy or sell a set amount of something, such as a share or commodity, at a set price after a set expiration date.
Commodity trading advisers are persons who engage in the business of advising others, either directly or indirectly, as to the value or advisability of trading futures contracts or commodity options, or issue analyses or reports concerning trading futures or commodity options. Due to the fact that they direct such accounts, advisers are in a unique position to observe activity that may suggest money laundering. As such, they need to be aware of what types of activity may indicate potential laundering or terrorist financing and need to implement a compliance program to detect and deter such activity.
Others with similar responsibilities are:
 Commodity pool operator: Operator or solicitor of funds for a commodity pool, which combines funds from members and trades futures or options contracts.

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 Commodity trading adviser: Direct or indirect adviser on buying and selling futures or commodity options.
 Futures commission merchant (FCM): A firm or person that solicits or accepts orders on futures contracts or commodity options and accepts funds for their execution.  Introducing broker-dealers in commodities (IB-Cs):
A firm or person that solicits and accepts commodity futures orders from customers but does not accept funds. There are two types of IB-Cs, guaranteed and independent.  Guaranteed introducing broker: An introducing brokerdealer with an exclusive written agreement with a futures commission merchant that obligates the FCM to assume responsibility for the introducing broker’s performance.  Investment adviser: Persons who provide advice on securities and investments and manage client assets.
Here are several ways this industry is susceptible to money laundering:  Withdrawal of assets through transfers to unrelated accounts or to high-risk countries.
 Frequent additions to or withdrawals from accounts.
 Checks drawn on, or wire transfers from, accounts of third parties with no relation to the client.
 Clients who request custodial arrangements that allow them to remain anonymous.
 Transfers of funds to the adviser for management followed by transfers to accounts at other institutions in a layering scheme.
 Investing illegal proceeds for a client.
 Movement of funds to disguise their origin.

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The revelations of massive money laundering through Capcom, a
Chicago-based commodity trading firm and subsidiary of Londonbased Capcom Financial Services Ltd., show how this industry can be used to launder money.
Real-Life Case

The shareholders of Capcom Futures Inc. of Chicago were the same wealthy Middle Eastern sheiks who invested in BCCI in the mid-1980s. The goals of
Capcom were allegedly the misappropriation of
BCCI assets for personal enrichment. This entailed laundering billions of dollars from the Middle East to the U.S. and siphoning assets from BCCI to create a safe haven outside the official BCCI financial empire.
BCCI auditors said that when the commodities investments and huge trading losses were initially uncovered, they were duped into believing that BCCI had discontinued speculative trading. But BCCI surreptitiously continued its commodities trading activity by transferring funds to Capcom through a
Panamanian shell corporation established for this purpose. Futures trading losses were disguised to deceive auditors. The commodities market was a natural fit for BCCI because of its minimal regulation and supervision, compared with the regulation of the banking and securities industries. Capcom took advantage of that regulatory atmosphere by engaging in substantial trading in speculative futures contracts. Profits were allocated to accounts of the firm’s shareholders and the offsetting losses to
BCCI accounts. The millions of dollars in trading commissions were allocated to accounts of Capcom’s managers and officers. The Saudi investors were able to recoup their investment in BCCI by diverting funds through Capcom into their personal accounts.
BCCI’s losses from the Capcom operation exceeded
$400 million, a leading cause of BCCI’s insolvency.
Investigations of Capcom uncovered widespread money laundering on behalf of BCCI involving

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investments from Manuel Noriega, Lebanese drug proceeds, and West German Ponzi scheme proceeds.
BCCI paid hush money of more than $30 million to one of its officials, fugitive Ali Akbar. The funds were deposited into a Capcom account and a paper loss on commodity trades was generated to offset the deposits.

Trust and Company Service Providers
Trust and company service providers (TCSP) include those persons and entities that, on a professional basis, participate in the creation, administration or management of corporate vehicles.
They refer to any person or business that provides any of the following services to third parties:
 Acting as a formation agent of legal persons.
 Acting as (or arranging for another person to act as) a director or secretary of a company, a partner of a partnership, or a similar position in relation to other legal persons.
 Providing a registered office, business address or correspondence for a company, a partnership or any other legal person or arrangement.
 Acting as (or arranging for another person to act as) a trustee of an express trust.
 Acting as (or arranging for another person to act as) a nominee shareholder for another person.
In an October 2006 report called “The Misuse of Corporate
Vehicles, Including Trust and Company Service Providers,” FATF stated that, in many jurisdictions, the existence of TCSPs is not recognized. However, trust and company services may well be provided by lawyers and other professionals. For example, in most, if not all, jurisdictions, lawyers will be engaged in the formation of foreign companies for clients to hold assets (e.g., a yacht, a

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residential or commercial property, etc) outside of that client’s jurisdiction. FATF noted that some TCSPs are required to afford confidentiality privileges to a client, which can conflict with AML reporting requirements.
Although the vast majority of companies and trusts are used for legitimate purposes, legal entities or other types of legal relationships formed by these professionals remain common to money laundering schemes.
According to Transparency International, the reason to focus on service providers, rather than the company or trust, is that the latter are merely the tools through which the launderers operate.
A company owned by criminals cannot protect itself, but service providers can, through diligence, reduce the risk of abusing the vehicles with which they have a relationship.
That is why it is important that countries regulate service providers.
Regulations should stipulate how the service provider is to conduct its business, including how directors selected by the provider are to meet their obligations as trustees or trusteeships.
In its 2004 report, Transparency International said that the first jurisdiction to bring these activities under regulatory control was
Gibraltar, which enacted legislation in 1989. Some other offshore jurisdictions have either introduced some form of regulatory control or will in the future. Regulations are not uniform; they range from a simple minimum capitalization requirement to full regulatory oversight. Often, the scope of the legislation is limited, excluding certain types of activities. Sometimes, the legislation bars regulators from gaining access to client files without client permission (or a court order), thereby making checks on the adequacy of the license-holder’s Customer Due Diligence
(CDD) provisions virtually impossible. Furthermore, while some jurisdictions include service providers within their anti-money laundering regulations — for example, by making compliance with the regulations a condition of licensing — many do not, leaving service providers free of any anti-money laundering duties beyond those imposed upon the general public. As a result of these differing standards, it is easy for a person seeking to use

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a company or trust for criminal purposes to select a jurisdiction that either lacks requirements or has only inadequate ones, said
Transparency International.

Real Estate Industry
The real estate sector is frequently used in money laundering activities. The laundering cases that have involved the use of criminal proceeds in real estate transactions support the need for this sector to be under the anti-money laundering regulatory umbrella.
Investing illicit capital in real estate is a classic method of laundering dirty money, particularly in countries with political, economic and monetary stability. According to the March 2004 report, “Money Laundering in Canada: An Analysis of Royal
Canadian Mounted Police (RCMP) Cases,” nearly 56 percent of money laundering or proceeds of crime cases investigated by the
RCMP involved real estate. The report said that deposit institutions and real estate firms constituted the “most significant sectors in laundering when measured by frequency of use, as well as the volume of criminal proceeds that enter the legitimate economy.”
The report suggests this practice is likely because real property provides housing and shelter for criminals, and rural properties are ideal for growing and storing drugs. Also, proceeds of crimes can be readily funneled through the property using such transactions as deposits, down payments, mortgages, lawyers’ trust accounts and even construction costs. The use of nominees, who hide the identity of the true beneficial owner, was found to exist in 46.3 percent of the cases, making it a popular laundering technique.
Laundering may be accomplished either by way of buying and selling real estate to hide the illicit source of funds (the layering phase), or by investment in, for example, tourist or holiday complexes that lend an appearance of legality (the integration phase).
In its 1997-1998 typology report, FATF cited a Scandinavian case involving a previously convicted drug trafficker who had made several investments in real estate and was planning to buy a hotel.
An assessment of his financial situation did not reveal the source of

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his income. Following his arrest and further investigations, he was sentenced for drug trafficking and money laundering to seven and a half years’ imprisonment; about $4.4 million was confiscated.
Countless real estate and business deals are closed every day using escrow funds. Escrow accounts, generally maintained by real estate agents and brokers and other fiduciaries, are designed to hold funds entrusted to someone for protection and proper disbursement. They are attractive to money launderers because of the large number of diverse transactions that can pass through them in any deal. Escrow accounts are sometimes used as “middlemen” to complicate paper trails. Even a small
U.S. title insurance agency will receive and disburse more than a million dollars a month from its escrow account. Nearly every real estate transaction requires the deposit of a large check from the mortgagee, as well as checks and cash required from the buyer at closing. A money laundering title insurance agent can make multiple deposits of cash on a given day at several banks in amounts under the currency reporting threshold, credited to different, non-existent closings. The deposits appear to be normal business activities, but they could very well represent the steady accumulation of funds for the purchase of real property by a person wishing to hide the origin of his funds. The monies ultimately may simply be paid outright by the escrow agent as cashier’s checks obtained by him, as wire transfers, or as corporate or escrow checks to strawmen or shell corporations. Each closing entails numerous routine disbursements for things such as the payment of the proceeds to the seller, payoff of the mortgage, real estate commissions, taxes, satisfaction of liens and other payments.
To a bank and other observers, the disbursement of funds at a closing may appear to be all one legitimate set of transactions.
Money laundering can be easily hidden because the size and volume of routine escrow account activity smoothes out the
“spikes” (which describe sudden ups and downs in an account) or multiple deposits associated with money laundering. Escrow accounts can facilitate the movement of funds by cashier’s checks, wire transfers or company checks to seemingly legitimate individuals or companies. Few financial institutions have policies or procedures concerning escrow accounts. Most banks treat them

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like any other business account. Because of the large balances escrow accounts often maintain, banks are tempted to handle them gingerly. In some cases, they allow escrow account overdrafts and payments against uncollected funds with few penalties. Financial institutions are well advised to focus attention on them lest they be caught in the web of “willful blindness.” Specific policies, procedures and controls to monitor escrow accounts are prudent things to implement.
In this industry we also see the “reverse flip.” A money launderer might find a cooperative property seller who agrees to a reported purchase price well below the actual value of the property and then accepts the difference “under the table.” This way, the launderer can purchase a $2 million dollar property for $1 million, secretly passing the balance to the cooperative seller. After holding the property for a time, the launderer sells it for its true value of $2 million. In the “loan back” money laundering method, a criminal provides an associate with a specific amount of illegitimate money. The associate then provides a “loan or mortgage” back to the trafficker for the same amount with all the necessary “loan and/or mortgage” documentation. This creates an illusion that the trafficker’s funds are legitimate. The scheme is reinforced through “legitimately” scheduled payments made on the loan by the traffickers.

Manipulation of Prices in Import and Export Transactions
When men’s briefs and women’s underwear enter a country at prices of $739 per dozen, missile and rocket launchers export for only $52 each, and full toilets ship out for less than $2 each, one should notice the red flags. These manipulated trade prices represent money laundering, tax evasion and/or terrorist financing.
John Zdanowicz, of Florida International University, and Simon
Pak, at Pennsylvania State University, reported that in 2001 the
U.S. lost about $53.1 billion in tax revenues caused by fraudulent transfer pricing schemes between U.S. companies and collusive foreign trading partners.

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Using filtering software they created, professors Zdanowicz and
Pak conducted seminal research into the manipulation of prices in international trade since 1991. Using data purchased from the U.S.
Commerce Department, the software can detect abnormal pricing schemes involving every commodity that leaves or enters the U.S.
They found that over-pricing or under-pricing imports and exports facilitates tax evasion, money laundering and terrorist financing.
The professors concluded that the most popular fraudulent pricing scheme is to under-value exports instead of over-pricing imports.
The government watches imports closely because of the revenues generated by import duties, but little attention is paid to the pricing of exports, leaving that avenue open to exploitation.
In a June 2006 report, called “Trade-Based Money Laundering,”
FATF defined trade-based money laundering as the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimize their illicit origins.
In practice, this can be achieved through the misrepresentation of the price, quantity or quality of imports or exports. Moreover, trade-based money laundering techniques vary in complexity and are frequently used in combination with other money laundering techniques to further obscure the money trail.
Money launderers can move money out of one country by simply using their illicit funds to purchase high-valued products, and then exporting them at very low prices to a colluding foreign partner, who then sells them in the open market at their true value. To give the transactions an air of legitimacy, the partners may use a financial institution for trade financing, which often entails letters of credit and other documentation.
The 2006 FATF study concluded that trade-based money laundering represents an important channel of criminal activity and, given the growth of world trade, an increasingly important money laundering and terrorist financing vulnerability. Moreover, as the standards applied to other money laundering techniques become increasingly effective, the use of trade-based money laundering can be expected to become increasingly attractive.

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Black Market Peso Exchange
The Black Market Peso Exchange (BMPE) is a process by which money in the U.S. (could also be in another country, for example, countries in Europe) derived from illegal activity is purchased by
Colombian (and other countries’) “peso brokers” and deposited in U.S. bank accounts that the brokers have established. The brokers sell checks and wire transfers drawn on those accounts to legitimate businesses, which use them to purchase goods and services in the U.S.
Colombian importers created the BMPE in the 1950s as a mechanism for buying U.S. dollars on the black market to avoid domestic taxes and duties on the official purchase of U.S. dollars and on imported goods purchased with dollars. In the 1970s,
Colombian drug cartels began using the BMPE to convert drug dollars earned in the U.S. to pesos in Colombia. Why? It reduced their risk of losing their money through seizures and they got their money faster, even though they paid a premium to the peso broker.
Today, the BMPE facilitates the money laundering operations of the cartels and the illegal import of U.S. goods by Colombian firms.
The Financial Crimes Enforcement Network (FinCEN) has issued advisories to U.S. financial institutions and corporations seeking help in combating this billion-dollar currency exchange and money laundering network.

M

oney launderers can move money out of one country by simply using their illicit funds to purchase high-valued products, and then exporting them at very low prices to a colluding foreign partner, who then sells them in the open market at their true value.

For financial institutions to detect and prevent laundering by peso brokers, they must be familiar with the common laundering methods used by the brokers. The most common scheme involves multiple checking accounts opened at U.S. banks by foreign nationals.
Banks must also be aware of increases in the movement of dollars through correspondent accounts of foreign banks.

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Real-Life Case

In 1997, U.S. Immigration and Customs Enforcement
(ICE) agents launched an undercover investigation into a Colombian drug smuggling and money laundering organization. Over the next two years, undercover
ICE agents posed as money launderers for this organization. They routinely picked up drug cash from organization employees in various U.S. cities and deposited it into undercover bank accounts. The
Colombian organization then instructed the agents to wire the drug funds to specified accounts around the globe belonging to major U.S. companies. In one example, undercover agents were ordered by the Colombian organization to pick up a suitcase full of drug cash in New York. The next day, they were ordered to wire transfer $335,800 of the funds, in five separate payments, to an account belonging to a major
U.S. company. ICE agents later determined that the wire transfers of drug proceeds to the U.S. company constituted partial payment for a helicopter the company was exporting to Colombia. The investigation further revealed that this U.S. company had received a total of 31 different wire transfers from individuals completely unrelated to the buyer as payment for the
$1.5 million helicopter. In July 1999, ICE agents froze the funds they had wired to this company’s account, as well as funds they wired to the accounts of other U.S. companies, on the grounds that the monies constituted drug proceeds. The investigation revealed that many of the U.S. companies had been paid in drug money for products that they were exporting to Colombia.

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U.S. Department of Homeland Security
Example of Money Laundering
Through Global Trade
3
Broker takes cartel’s dollars in exchange for Colombian pesos. 4
Broker’s U.S. employees place the dollars in U.S. banking system.

5
Broker offers the dollars to a
Colombian
importer, in exchange for pesos. Colombia

1
Colombian
cartel sells drugs to U.S. market, for dollars. 2

6

To launder the dollars, cartel contacts intermediary, called peso broker. Importer uses the drug dollars to buy
U.S. goods, which are shipped to
Colombia.

Source: United States Department of Homeland Security

Money Laundering Risks
Associated With New Technologies
Well-financed and technologically savvy criminals can move large amounts of funds easily and quickly from one country to another using electronic means.

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Online or Internet Banking
Many financial institutions offer customers access to their accounts via the Internet, with the same 24-hour services as those offered over the counter. These include consultation, transfers, wholesale cash management, automated clearinghouse services, funds transfers, bill presentment and payment, balance inquiries, loan applications and investment services. Although some online banking is offered by “pure” Internet banks (that is, only offering services through the Internet), institutions offering transactional services are, for the most part, established, traditional institutions that have moved into online banking as an additional customer service.
In its 1997-1998 typologies report, FATF said that Internet or telephone banking helps create distance between banker and client, and hence lessens or even eliminates the physical contact on which traditional client identification rested. While these services clearly have practical advantages for clients in terms of convenience, they make it more difficult to detect laundering activities because some of the traditional methods of supervision cannot be applied.
A significant money laundering risk for a financial institution offering online customer services is that there is greater difficulty in matching the customer with the provided identification documentation. Other risks:
 The nature of online banking itself, with the elimination of face-to-face contact between customer and employee, necessarily makes it more difficult to know who is actually controlling the account.
 The ease of access through the Internet enables crossborder movements of funds from nearly every physical location.  The rapidity of electronic transactions enables the execution of multiple, complex transactions within very short timeframes.

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To combat cyberlaundering, FATF suggests that:
 Internet service providers establish log files with traffic data that produces Internet-protocol numbers of subscribers and telephone numbers used for server connections.  Information collected through the servers be shared with law enforcement agencies.
 Information collected be maintained for up to a year.
 Internet service providers keep records, including identification information, on those who transit through their servers.
Just like “brick and mortar” banks, organizations that offer online banking should have procedures, whether they are driven by software, humans or a mix of the two, which verify the identity of anyone who seeks to do business with the institution. This can be difficult for online banks that often rely on customers to confirm who they are through passwords given the fact that passwords can be stolen or otherwise compromised.
Online banking will attract money launderers because of its potential to aid them in the three classic areas of money laundering:  Placement — Launderers want to get their proceeds into legitimate repositories such as banks, securities or real estate, with as little trace of the source and beneficial ownership as possible. Often, cyberspace banks do not accept conventional deposits. However, cyberbanks could be organized to take custodial-like forms — holding, reconciling and transferring rights to assets held in different forms around the world. Money launderers can create their own systems shadowing traditional commercial banks in order to accept deposits, perhaps as warehouses for cash or other bulk commodities. Thus, cyberspace banks have the potential to offer highly secure, uncommonly private
“placement” vehicles for money launderers.

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 Layering — Electronic mail messages, aided by encryption and cyberspace banking transfers, enable launderers to transfer assets around the world many times a day.
 Integration — Once layered, cyberspace banking technologies may facilitate integration in two ways.
If cyberbanking permits person-to-person cash-like transfers, with no actual cash involvement, existing currency reporting regulations do not apply. Using
“super smart-card” technologies, money can be moved around the world through ATM transactions. These smart cards permit easy retrieval of the “account” balance by the use of an ATM card.

Internet Casinos
According to FATF, Internet gambling might be an ideal web-based
“service” to provide a cover for a money laundering scheme. There is evidence in some FATF jurisdictions that criminals are using
Internet gambling to launder criminal proceeds. Despite attempts to deal with the potential problems of Internet gambling through regulation, requiring operating licenses, or banning such services outright, a number of concerns remain. For example, transactions are primarily performed through credit cards, and the offshore location of many Internet gambling sites makes locating and prosecuting relevant parties difficult, if not impossible.
According to the U.S. State Department’s 2003 International
Narcotics Control Strategy Report (INCSR), the Internet enables criminals to transfer funds instantaneously and enables poorly regulated offshore centers to increase their customer base. Virtual casinos are also profitable for governments, which sell licenses for the sites and may share in the operators’ profits. Those governments exert inadequate controls, the report concludes, adding that the number of offshore financial centers with online gambling sites more than doubled between 2002 and 2003.

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Real-Life Case

In 2003, U.S. prosecutors in St. Louis, Missouri, alleged that, by processing payments for online gambling companies, PayPal, the big Internet payment service that facilitates the exchange of money via e-mail, violated the money laundering law prohibiting the international transmission of money derived from criminal activity. U.S. law makes it a crime to conduct a money transmitting business without a state license. This law was reinforced by the U.S.A. Patriot Act, which made it a crime for a licensed money transmitting company to send funds
“known … to have been derived from a criminal offense or … intended to be used to promote or support unlawful activity.” (Title 18, USC Sec. 1960.)
PayPal paid $200,000 in penalties and forfeited its profits related to online gambling. PayPal stopped processing payments for online gambling companies in November 2002, a month after it was acquired by the online giant auctioneer, eBay. Hearings by the U.S.
Senate Permanent Subcommittee on Investigations in
2001 disclosed that correspondent accounts of foreign banks at Bank of America and J.P. Morgan Chase had moved tens of millions of dollars in Internet gambling proceeds. Some credit card issuers no longer allow use of its credit cards for online gambling, thus decreasing the money laundering opportunities through cyberspace.
How does an institution know whether a credit card is used for online gambling? The card relies on codes that indicate types of transactions.
Many credit card statements list those category codes showing what customers spent on entertainment or travel, for example. The bank can thus block transactions coded for Internet gambling.
In a submission to FATF during its review of FATF’s 40
Recommendations, the Interactive Gaming Council (IGC) pointed out that online gambling, with a combination of regulatory oversight and use of technology — while facing the same threats as real-

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world gambling facilities — is in a good position to address these risks. “Online gambling does not lend itself to any form of cash movement because of the online nature of the business, specifically, there is no face-to-face contact in the business,” the
IGC stated. Whatever exposure the interactive gaming industry has to money laundering can be mitigated through rigorous regulation, the organization added.
Nevertheless, online gambling provides an excellent method of money laundering because transactions are conducted principally through credit or debit cards. Site operators are typically unregulated offshore firms. This can affect a financial institution because the Internet gambling sites often have accounts in offshore banks that, in turn, use reputable domestic correspondent banks. Tracing the source and ownership of illegal money that moves through these accounts can be difficult for enforcement and regulatory agencies.
Real-Life Case

In a joint Russian-British operation in 2004, Russian police charged three men with extorting money from
British online gambling companies by overwhelming their computers with huge amounts of e-mail and demanding money to relent. The gang members allegedly ran “a global protection racket netting hundreds of thousands of pounds from online sportsbooks,” according to Britain’s National Hi-Tech
Crime Unit (NHTCU). According to press reports, police had followed a money trail from London, to the Caribbean, Latvia and then to Russia. “The recent arrests help to substantiate that there is a criminal motive behind this,” and not just individual hackers, said Ken Dunham, director of malicious code intelligence at Virginia-based iDefense Inc., a security consultant to government and business. According to the NHTCU, the gang had extorted UK companies
“dozens of times” by bombarding their servers with messages from thousands of PCs at the same time.
The so-called denial-of-service attacks overwhelmed

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the companies’ computers, forcing them to shut down and costing the companies “millions of pounds in lost business.” Then the gang e-mailed demands for wired money – usually from €8,000 to €33,000 – in exchange for stopping the attacks.

Prepaid Cards and E-Cash
The following section contains excerpts from the 2006 New
Payment Methods Report and 1998 Typologies Report from the
Financial Action Task Force.
In October 2006, FATF published a report that examined the ways in which money can be laundered through the exploitation of new payment technologies (prepaid cards, Internet payment systems, mobile payments, and digital precious metals). The report found that, while there is a legitimate market demand for these payment methods, money laundering and terrorist financing vulnerabilities exist. Specifically, cross-border providers of new payment methods may pose more risk than providers operating just within a particular country. The report recommended continued vigilance to further assess the impact of evolving technologies on cross-border and domestic regulatory frameworks.
Pre-paid cards have the same characteristics that make cash attractive to criminals: they are portable, valuable, exchangeable and anonymous. The cards, many of which are branded by Visa or MasterCard, can be purchased and “loaded” with money by one person and used like regular debit cards by another person to make purchases or ATM withdrawals anywhere in the world.
Prepaid payment cards provide access to monetary funds that are paid in advance by the cardholder. While there are many different types of prepaid cards that are used in a variety of ways, the cards typically operate in the same way as a debit card and ultimately rely on access to an account. There may be an account for each card that is issued or, alternatively, there may be a pooled account that holds the funds prepaid for all cards issued. The cards may be issued by, and accounts may be held at, a depository institution or

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a non-bank organization; pooled accounts would be normally held by the issuer at a bank.
The report identified these potential risk factors:
 Anonymous card holders;
 Anonymous funding;
 Anonymous access to funds;
 High value limits and no limits on the number of cards individuals can acquire;
 Global access to cash through ATMs;
 Offshore card issuers that may not observe laws in all jurisdictions; and
 Substitute for bulk-cash smuggling.
The prepaid cards’ rapid proliferation and the absence of regulatory clarity in the U.S. prompted money services businesses to ask regulators to certify pre-paid card sellers, but regulations still do not exist. In Germany, however, adding value to a pre-paid card is considered the same as making a deposit. Therefore, pre-paid card issuers are considered credit institutions and must obtain full banking licenses and must follow the country’s anti-money laundering regulations.
Electronic purses (also called e-purses or stored-value cards) are cards that electronically store value on integrated circuit chips.
Unlike pre-paid credit cards with magnetic stripes that store account information, e-purses actually store funds on memory chips.
The use of these payment systems has declined considerably from
1996 to 2006, according to the 2006 FATF report. Only one, the
German GeldKarte, operates in multiple jurisdictions – Germany and Luxembourg – with a limit of €200 ($254).
Measures that might limit the vulnerability to money laundering associated with these payment technologies are:

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 Limiting the functions and capacity of smart cards
(including the maximum value and turnover limits, as well as the number of smart cards per customer).
 Linking new payment technology to financial institutions and bank accounts.
 Requiring standard documentation and recordkeeping procedures for these systems to facilitate their examination.  Allowing for the examination and seizure of relevant records by investigating authorities.
 Establishing international standards for these measures. The terms “pre-paid cards” and “stored-value cards” are often used interchangeably. These cards can be broadly categorized into open (or open loop systems), semi-open, closed and semi-closed systems. As illustrated in Table 1, monetary value can be stored either in the central computer system or on the cards.

Money Laundering
Risks of Structures Designed to Hide Beneficial Ownership
Shell Companies
The use of shell and shelf companies to facilitate money laundering is a well-documented typology, according to FATF.
FATF offers the following definitions:
Shelf company: A corporation that has had no activity. It has been created and put on the “shelf.” This corporation is then later usually

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Typically ‘branded’
(e.g., by American
Express), and connected to global debit and automated teller machine (ATM) networks, allow the cards to be used for multiple purposes and at multiple points of sale with participating merchants Generally have the same features as open system cards but cannot be used to access cash at
ATMs (also known as purchasing-only cards)

Limited to buying goods or services from the merchant issuing the card

Can be used at selected group of merchants or service providers Open system cards Semi-open system cards

Closed system cards

Semi-closed system cards

Proprietary store / retail gift cards such as David Jones Gift
Card(c)

FlyBuys(d) gift cardsd that can only be used at participating merchants Typically yes

Typically yes

Typically no, and sold at preset denominations, but some retail gift cards such as Starbucks gift cards are reloadable
Typically no, and sold at preset denominations Typically yes

NETS CashCard(b)
Typically yes — The value is stored on the cards, issuing merchants do not replace or refund stolen or misplaced cards Typically yes

Typically no -(similar in appearance to traditional debit cards, which are embossed with the cardholder’s name and the expiry date) Typically yes

Visa cash passport card(a), a reloadable pin-protected Visabranded prepaid card, which allows cardholders to withdraw cash from
Visa ATMs worldwide and use the cards at places where
Visa debit cards are accepted Typically no — transactions are authorized online and in real time

Typically yes (e.g., via regular deposit arrangement, Internet and at participating merchant outlets)

Examples

Typically no -(similar in appearance to traditional debit cards, which are embossed with the cardholder’s name and the expiry date) Monetary value stored on card?

Reloadable?

Anonymous?

Source: (a) Cash Passport (b) Network for Electronic Transfers (Singapore) Pte Ltd. (c) David Jones (d) Flybuys (Loyalty Pacific Pty Ltd.)

Description

Types

Table 1: Categories of stored value cards

Risks and Methods of Money Laundering and terrorist financing

Study Guide for the CAMS Certification Examination

sold to someone who would prefer to have a previously registered corporation than a new one.
Shell company/corporation: A company that at the time of incorporation has no significant assets or operations.
In October 2006, FATF issued a report called “The Misuse of Corporate Vehicles, Including Trust and Company Service
Providers.” In this report, FATF said that of particular concern was the ease with which corporate vehicles can be created and dissolved in some jurisdictions, which allows these vehicles to be used not only for legitimate purposes (such as business finance, mergers and acquisitions, or estate and tax planning), but also allows them to be misused by those involved in financial crime to conceal the sources of funds and their ownership of the corporate vehicles. Shell companies can be set up in onshore, as well as offshore locations, and their ownership structures can take several forms. Shares can be issued to a natural or legal person or in registered or bearer form. Some companies can be created for a single purpose or to hold a single asset. Others can be established as multipurpose entities.
When FATF reviewed the rules and practices that impair the effectiveness of money laundering prevention and detection systems, it found in particular that:
Shell corporations and nominees are widely used mechanisms to launder the proceeds from crime. The ability for competent authorities to obtain and share information regarding the identification of companies and their beneficial owner(s) is therefore essential for all the relevant authorities responsible for preventing and punishing money laundering. A 2001 report, “Money Laundering in Canada: An Analysis of
RCMP Cases,” offered four related reasons to establish or control a shell company for money laundering purposes:
1. Shell companies accomplish the objective of converting the cash proceeds of crime into alternative assets. 90

Risks and Methods of Money Laundering and terrorist financing

2. Through the use of shell companies, the launderer can create the perception that illicit funds have been generated from a legitimate source. Once a shell company is established, commercial accounts can be created at banks or other financial institutions.
Especially attractive to money launderers are businesses that customarily handle a high volume of cash transactions, such as retail stores, restaurants, bars, video arcades, gas stations, food markets, etc. Illicit revenues can then be deposited into bank accounts as legitimate revenue, either alone or commingled with revenue legitimately produced from the business. Companies also offer criminals legitimate sources of employment in the community, which in turn helps cultivate an image of respectability.
Example

A small pizza business gets only 10 customers per day. Suddenly, according to its records, it is serving hundreds of clients per day. In reality, it still only receives 10 customers per day, so nothing had really changed. Because the typical criminal does not like to spend money needlessly, in these types of front companies revenues have soared while expenses have remained the same. The pizzeria suddenly has hundreds of customers a day, but still books expenses (food, personnel, etc.) to serve only 10 clients.
Through this subterfuge, ill-gotten funds are funneled into a business, creating fake revenues consisting of illicit money. The illicit money is laundered by pretending it is revenue earned by these front companies. Generally, front companies have some legitimate revenue, but their total revenue can come more from money generated by crime.

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3. Once a shell company is established, a wide range of legitimate and/or bogus business transactions can be used to further the laundering process. These include lending money between criminally-controlled firms, paying out fictitious expenses or salaries, disguising the transfer of illicit funds under the guise of payment for goods or services, or purchasing real estate with the proceeds of crime or disguising payments for real estate as mortgages issued by a shell company. As a medium between criminal organizations and other laundering vehicles, shell companies are flexible and can be tailored to a launderer’s specific needs. For example, criminal organizations laundering money through real estate can incorporate real estate agencies, mortgage-brokerage firms and development or construction companies to facilitate access to real property. 4. Shell companies can also be effective in concealing criminal ownership. Nominees can be used as owners, directors, officers or shareholders. Companies in
Canada can also be incorporated as subsidiaries of corporations based in tax haven countries with strict secrecy and disclosure laws, thereby greatly inhibiting investigations into their ownership. Shell companies can also be used to hide criminal ownership in assets, by registering these assets, such as real estate, in the name of a company.
Shell companies are often legally incorporated and registered by the criminal organization, but have no legitimate business. Often purchased “off the shelf” from lawyers, accountants or secretarial companies, they are convenient vehicles to launder money. They conceal the identity of the beneficial owner of the funds; company records are often more difficult for law enforcement to access because they are offshore or are held by professionals who claim secrecy. In addition, few states in the United States ask for information about beneficial owners and even fewer attempt to verify any Information about beneficial owners.

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Criminal enterprises also use real businesses to launder illicit money.
These businesses differ from shell companies in that they operate legitimately, offering industrial, wholesale or retail goods or services.
While the vast majority of shell companies, or LLCs, are legitimate, once an illicit shell company is established, its primary objective is to claim the proceeds of crime as legitimate revenue and/or to commingle criminal proceeds with legitimate revenue.
The Canadian report mentions the following money laundering techniques used in conjunction with criminally controlled companies:
 Using Nominees as Owners or Directors — To distance a company from its criminal connections, nominees will be used as company owners, officers and directors. Nominees will often, but not necessarily, have no criminal record. Further, companies established by lawyers will often be registered in the lawyers’ name.
 Layering — In some cases, a number of companies were established, many of them connected through a complex hierarchy of ownership. This helps to conceal criminal ownership and facilitates the transfer of illicit funds between companies, muddying any paper trail.
 Loans — Proceeds of crime can be laundered by lending money between criminally-controlled companies. In one case, a drug trafficker had $500,000 in a bank account in the name of a shell company.
These funds were “lent” to restaurants in which the drug trafficker had invested. This seemingly legitimate use of the funds assisted in making it appear that the funds were being properly integrated into the economy.
The $500,000 was repaid with interest to avoid suspicion.  Fictitious business expenses/False invoicing —
Once a criminal enterprise controls corporate entities in different jurisdictions, it can employ a laundering technique known as “double invoicing.” An offshore

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corporation orders goods from its subsidiary in another country, and the payment is sent in full to the bank account of the subsidiary. Both companies are owned by the criminal enterprise and the “payment” for goods is actually a repatriation of illicit money previously spirited out of the country. Moreover, if the subsidiary has charged a high price for the goods, the books of the parent company will show a low level of profit, which means that the parent company will pay less in taxes. It can also work the other way around.
An offshore corporation buys goods from a parent company at price that is too high. The difference between the real price and the inflated price is then deposited in the subsidiary’s account.
 Sale of the business — When the criminal sells the business, he has a legitimate source of capital. The added benefit of selling a business through which illicit money circulates is that it will ostensibly exhibit significant cash flow and, as such, will be an attractive investment and will realize a high selling price.
 Buying a company already owned by the criminal enterprise — An effective laundering technique is to
“purchase” a company already owned by the criminal enterprise. This laundering method is most frequently used to repatriate illicit money that was previously secreted to foreign tax havens. Criminal proceeds from offshore are used to buy a company that is already owned by the criminal enterprise. In this way, the launderer successfully returns a large sum of money that had been secreted out of the country.
 Paying out fictitious salaries — In addition to claiming the proceeds of crime as legitimate business revenue, criminally-controlled companies also help make certain participants in a criminal conspiracy appear to be legitimate by providing them with salaries.
Sometimes, the stock of these shell corporations is issued in bearer shares, which means that whoever carries them is the

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purported owner. Tax haven countries and their strict secrecy laws can further conceal the true ownership of shell corporations.

Trusts
Exact definitions of the term trust can be found in local laws and regulations. Although these definitions (and applicable regulations on trusts) vary across different jurisdictions, the term is generally defined in FATF’s 2000-2001 typologies report as a legal relationship that is set up by a person (the “settlor”) where assets have been placed under the control of another person (the
“trustee”) for the benefit of one or more persons (the beneficiaries) or for a specified purpose.
The significance of a trust account — whether onshore or offshore
— in the context of money laundering cannot be understated: It can be used as part of the first step in converting illicit cash into less suspicious assets; it can help hide criminal ownership of funds or other assets; and it is often an essential link between different money laundering vehicles and techniques, such as real estate, shell and active companies, nominees and the deposit and transfer of criminal proceeds.
Given the private nature of trusts, in some jurisdictions they may be formed to take advantage of strict secrecy rules in order to conceal the identity of the true owner or beneficiary of the trust property.
They are also used to hide assets from legitimate creditors, to protect property from seizure under judicial action, or to mask the various links in the money flows associated with money laundering or tax evasion schemes.
Payments to the beneficiaries of a trust can also be used in the money laundering process, because these payments do not have to be justified as compensation or as a transfer of assets for services rendered.
Lawyers often serve as trustees by holding money or assets “in trust” for clients. This enables lawyers to conduct transactions and to administer the affairs of a client. Sometimes, the illicit money is placed in a law firm’s general trust account in a file set up in the

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name of the client, a nominee, or a company controlled by the client. Also, trust accounts are used as part of the normal course of a lawyer’s duties in collecting and disbursing payments for real property on behalf of clients.

Bearer Bonds and Securities
Bearer bonds and bearer stock certificates, or “bearer shares,” are prime money laundering vehicles because they belong, on the surface, to the “bearer.” When bearer securities are transferred, because there is no registry of owners, the transfer takes place by physically handing over the bonds or share certificates.
Bearer shares offer lots of opportunities to disguise their legitimate ownership. To prevent this from happening, FATF, in its 40 Recommendations, suggests that employees of financial institutions ask questions about the identity of beneficial owners before issuing, accepting or creating bearer shares and trusts.
Financial institutions should also keep registries of this information and share it appropriately with law enforcement agencies.
Several FATF members do allow the issuance of bearer shares and maintain that they have legitimate functions in facilitating the buying and selling of such securities through book entry transfers.
They also can be used, according to some sources, for concealing ownership for tax optimization purposes.

B

earer bonds and bearer stock certificates, or “bearer shares,” are prime money laundering vehicles because they belong, on the surface, to the “bearer.”

Bearer checks are unconditional orders (negotiable instruments) that, when presented to a financial institution, must be paid out to the holder of the instrument rather than to a payee specified on the order itself. Bearer checks are used in a number of countries. The financial institution is usually not obligated to verify the identity of the presenter of a bearer check according to international convention, unless the transaction exceeds a particular threshold.
A non-bearer check may become a bearer instrument, payable to the individual who presents it, when the original payee has endorsed it.

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Terrorist Financing
After the terrorist attacks of September 11, 2001, the finance ministers of the Group of Seven (G-7) industrialized nations met on October 7, 2001, in Washington, D.C., and urged all nations to freeze the assets of known terrorists. Since then, many countries have committed themselves to helping disrupt terrorist assets by alerting financial institutions about persons and organizations that authorities determine are linked to terrorism.
The G-7 nations marshaled FATF to hold an “extraordinary plenary session” on October 29, 2001, in Washington to address terrorist financing. As a result, FATF issued the first eight of its Special
Recommendations. (See Chapter 3 for more detail.)

Differences and Similarities
Between Terrorist Financing and Money Laundering
Money laundering and terrorist financing are often mentioned in the same breath, without much consideration to the critically important differences between the two. Many of the controls that businesses should implement are meant to serve the dual purposes of combating both money laundering and terrorist financing. The terrorist financing indicators listed in the Financial Action Task
Force’s 2002 “Guidance for Financial Institutions on Detecting
Terrorist Financing” were similar to those already established for combating money laundering.
But the two are separate crimes, and, while no one has been able to create a workable financial profile for operational terrorists, there are key distinctions that can help compliance officers understand the differences and can help distinguish suspicious terrorist financial activity from money laundering.
The most basic difference between terrorist financing and money laundering involves the origin of the funds. Terrorist financing uses funds for an illegal political purpose, but the money is not necessarily derived from illicit proceeds. On the other hand, money

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laundering always involves the proceeds of illegal activity. The purpose of laundering is to enable the money to be used legally.
In his presentation at Money Laundering Alert’s 10th annual international conference in March 2005, James Richards, former anti-money laundering operations executive at Bank of America, and now with Wells Fargo, explained some of those differences.
The fact that terrorist money often has a legal source raises an important legal problem as far as applying anti-money laundering measures to terrorist financing. In several countries, terrorist financing may not yet fall under the definition of money laundering, or serve as a predicate offense for money laundering, and it may be impossible, therefore, to apply preventive and repressive measures to combat this problem.
From a technical perspective, the laundering methods used by terrorists and other criminal organizations are similar. Although it would seem logical that funding from legitimate sources does not need to be laundered, there is a need for the terrorist group to disguise the link between it and its legitimate funding sources.
In doing so, the terrorists use methods similar to those of criminal organizations: cash smuggling, structuring, purchase of monetary instruments, wire transfers, and use of debit or credit cards. The hawala system also has played a role in moving terrorist related funds. In addition, money raised for terrorist groups is also used for mundane expenses like food and rent, and is not always strictly used for just the terrorist acts themselves.

Detecting Terrorist Financing
In its 2004 “Monograph on Terrorist Financing,” the National
Commission on Terrorist Attacks Upon the United States said that neither the September 11 hijackers nor their financial facilitators were experts in the use of the international financial system. The terrorists created a paper trail linking them to each other and their facilitators. Still, they were adept enough to blend into the vast international financial system without revealing themselves as criminals. The money laundering controls in place at the time were largely focused on drug trafficking and large-scale financial fraud

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Money
Laundering

Terrorist
Financing

Motivation

n Profit

n Ideological

Source of Funds

n Internally from within criminal organizations

n Internally from self-funding cells
(increasingly centered on criminal activity) n Externally from benefactors and fundraisers Conduits

n Favors formal financial system n Favors cash couriers or informal financial systems such as hawala and currency exchange firms

Detection Focus

n Suspicious transactions, such as deposits uncharacteristic of customer’s wealth or the expected activity

n Suspicious relationships, such as wire transfers between seemingly unrelated parties Transaction
Amounts

n Large amounts often structured to avoid reporting requirements

n Small amounts usually below reporting thresholds Financial Activity

n Complex web of transactions often involving shell or front companies, bearer shares, and offshore secrecy havens

n No workable financial profile of operational terrorists exists, according to U.S. 9/11
Commission

Money Trail

n Circular — money eventually ends up with person who generated it

n Linear — money generated is used to propagate terrorist group and activities

Source: James R. Richards

and were not sufficiently focused on the transactions engaged in by the hijackers.
Real-Life Case

The September 11 hijackers used U.S. and foreign financial institutions to hold, move and retrieve their

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money. They deposited money into U.S. accounts, primarily by wire transfers and deposits of cash or travelers checks brought from overseas. Several of them kept funds in foreign accounts, which they accessed in the United States through ATM and credit card transactions. The hijackers received funds from facilitators in Germany and the United Arab Emirates as they transited Pakistan before coming to the United
States. The plot cost al Qaeda somewhere in the range of $400,000–$500,000, of which approximately
$300,000 passed through the hijackers’ bank accounts in the United States. While in the United States, the hijackers spent money primarily for flight training, travel and living expenses.
Through reconstruction of available financial information, the
U.S. Internal Revenue Service and the U.S. Federal Bureau of
Investigation established how the hijackers responsible for the
Sept. 11 attacks received their money and how the money was moved into and out of their accounts.
The 19 hijackers opened 24 domestic bank accounts at four different banks. The following financial profiles were developed from the hijackers’ domestic accounts:
Account Profiles:
 Accounts were opened with cash/cash equivalents in the average amount of $3,000 to $5,000.
 Identification used to open the accounts were visas issued through foreign governments.
 Accounts were opened within 30 days after entry into the U.S.
 All accounts were normal checking accounts with debit cards.  Some of the accounts were joint accounts.

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 Addresses used usually were not permanent addresses, but rather were mail boxes and were changed frequently.
 The hijackers often used the same address/telephone numbers on the accounts.
 No savings accounts or safe deposit boxes were opened.  The hijackers opened their accounts at branches of large, well-known banks.
 Twelve hijackers opened accounts at the same bank.
Transaction profiles:
 Some accounts directly received/sent wire transfers of small amounts from/to foreign countries such as United
Arab Emirates (UAE), Saudi Arabia and Germany.
 The hijackers made numerous attempts to withdraw cash in excess of the limit of the debit card.
 A high percentage of withdrawals were from debit cards.  A low percentage of checks were written.
 Numerous balance inquiries were made.
 After a deposit was made, withdrawals occurred immediately.  There was no discernible pattern with regard to the timing of deposits/disbursements.
 Overall transactions were below reporting requirements.  Funding of the accounts was by cash and overseas wire transfers.

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 ATM transactions occurred with more than one hijacker present (creating a series of transactions involving several hijackers at the same ATM).
 Debit cards were used by hijackers who did not own the accounts.
International activity:
 Three of the hijackers supplemented their financing by opening foreign checking accounts and credit card accounts at banks located in the UAE.
 While in the U.S., two of the hijackers had deposits made on their behalf by unknown individuals.
 Hijackers on all four flights purchased traveler’s checks overseas and brought them into the U.S. Some of these traveler’s checks were deposited into their U.S. checking accounts.
 Three of the hijackers continued to maintain bank accounts in Germany after moving to the U.S.
 Two of the hijackers had credit cards issued by
German banks and maintained those cards after moving to the U.S.
 One of the hijackers received substantial funding through wire transfers into his German bank account in
1998 and 1999 from an individual.
 In 1999, this same hijacker opened an account in
UAE, giving a power of attorney over the account to the same individual who had been wiring money to his
German account.
 More than $100,000 was wired from the UAE account of the hijacker to the German account of the same hijacker in a 15-month period.
In an attempt clarify terrorist financing and offer recommendations to the global financial community, FATF has issued guidance to

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identify techniques and mechanisms used in financing terrorism.
The report, entitled “Guidance for Financial Institutions in Detecting
Terrorist Financing,” was published April 24, 2002, and describes the general characteristics of terrorist financing. Its objective is to help financial institutions determine whether a transaction merits additional scrutiny so that the institution is better able to identify, report (when appropriate) and ultimately avoid transactions involving the funds associated with terrorist activity. In the report,
FATF suggests that financial institutions exercise “reasonable judgment” in evaluating potential suspicious activity. To avoid becoming conduits for terrorist financing, institutions are told they can look at, among other things, the following factors:
 Use of an account as a front for a person with suspected terrorist links.
 Appearance of an accountholder’s name on a list of suspected terrorists.
 Frequent large cash deposits in accounts of non-profit organizations.  High volume of transactions in the account.
 Lack of a clear relationship between the banking activity and the nature of the accountholder’s business.
FATF suggests that, with these scenarios in mind, financial institutions should pay attention to some classic badges of money laundering, including dormant, low-sum accounts that suddenly receive wire transfer deposits followed by daily cash withdrawals that continue until the transferred sum is removed, and lack of cooperation by the client in providing required information.

Hawala and Other Informal Value Transfer Systems
Hawala, hundi or so-called “underground banking” are alternative remittance systems or informal value transfer systems that are often associated with ethnic groups from Africa, Asia and the
Middle East, and commonly involve the international transfer of

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value outside the legitimate banking system. These informal value transfer systems are based on trust.
Hawala was created centuries ago in India and China, before
Western financial systems were established, to facilitate the secure and convenient movement of funds. Merchant traders wishing to send funds to their homelands would deposit them with a hawala
“banker,” who normally owned a trading business. For a small fee, the banker would arrange for the funds to be made available for withdrawal from another “banker,” normally also a trader, in another country. The two bankers would settle accounts through the normal process of trade.
Today, the process works much the same way, with people in various parts of the world using their accounts to move money internationally for third parties. In this way, deposits and withdrawals are made through hawala bankers rather than traditional financial institutions. The third parties are normally immigrants or visiting workers who send small sums to their homelands to avoid bank fees for wire transfers. As anti-money laundering measures have proliferated around the world, the use of hawala, which operates without governmental supervision, is believed to have become more appealing to money launderers and terrorists. This method can be used to transfer both clean and dirty money. It is attractive for a launderer because it leaves little to no paper trail.
The details of the customers who will receive the funds are faxed between the brokers.
Below you can find a chart from Interpol that shows the basic sequence of communication and payment in an alternative remittance: Because hawala is a remittance system, it can be used at any phase of the money laundering cycle. It can provide an effective means of placement. When the hawalader receives cash, he can deposit the cash in bank accounts. He will justify these deposits to bank officials as the proceeds of legitimate business. He may also use some of the cash received to pay for his business expenses, reducing his need to deposit the cash into the bank account.

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Hawala
Foreign Country
(Asia/Pacific or Overseas)

Client/
Sender

1

Ethnic/
Banker

Client contacts local ethnic banker. Requests remittance to native country of US$10,000 in foreign currency equivalent. Client pays banker US$10,000, and receives a collection code. Banker profits from small commission or favorable rate of exchange to foreign country.

2

Amount of Remittance and Destination
Are Communicated

3

5

Collection Code is Communicated

Native Country
(Asia/Pacific)

Recipient

4

The US$10,000 debt stands between the bankers. It will be settled by future transactions or reciprocal remittance. Ethnic
Banker

Recipient gives collection code.
Native currency equivalent of
US$10,000 delivered to recipient from native ethnic banker’s private cash reserve.

Source: Interpol

A component of many layering schemes is transferring money from one account to another, while trying not to leave a paper trail. A basic hawala transfer leaves little if any paper trail. Hawala transfers can be layered to make following the money even more difficult. This can be done by using hawala brokers in several countries, and by distributing the transfers over time.
Hawala techniques are used to transform money into almost any form, offering many possibilities for establishing an appearance of legitimacy in the integration phase of the money laundering cycle. The money can be reinvested in a legitimate (or legitimate appearing) business. The hawalader can very easily arrange for the transfer of money from the United States to Pakistan, and then back to the United States, apparently as part of an investment in a business there.

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Hawalas are attractive to terrorist financiers because they, unlike formal financial institutions, are not subject to formal government oversight and do not keep detailed records in a standard form.
Although some hawaladars do keep ledgers, their records are often written in idiosyncratic shorthand and are maintained only briefly.
Al Qaeda moved much of its money by hawala before September
11, 2001. Al Qaeda used about a dozen trusted hawaladers, who almost certainly knew of the source and purpose of the money. Al Qaeda also used both unwitting hawalas who probably strongly suspected that they were dealing with al Qaeda, but were nevertheless willing to engage in the transactions.

Charities or Non-Profit Organizations
Knowingly or not, charitable organizations have served as vehicles for raising and laundering funds destined for terrorism. As a result, some charities, particularly those with Muslim connections, have seen a large drop in donations or have become targets of what they claim are unfair investigations or accusations.
Charities or non-profit organizations have the following characteristics that are particularly vulnerable to misuse for terrorist financing:  Enjoying the public trust.
 Having access to considerable sources of funds.
 Being cash-intensive.
 Frequently having a global presence, often in or next to those areas that are exposed to terrorist activity.
 Often being subject to little or no regulation and/or having few obstacles to their creation.
To help legitimate non-profit organizations avoid ties to terrorist related entities and to help them regain public trust, FATF first issued guidelines in 2002 on best practices for charities in

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combating the abuse of non-profit organizations. In 2012, FATF revised its Recommendations. The guidelines on best practice are now related to Recommendation 8. The practices cover all levels of a charity’s operation, from administration and accounting to opening and maintaining bank accounts and foreign offices. FATF recommends that non-profit organizations:
 Maintain and be able to present full program budgets that account for all expenses.
 Conduct independent internal audits and external field audits, the latter to ensure funds are being used for intended purposes.
FATF recommends that charities use formal bank accounts to store and transfer funds so that they are subject to the bank’s regulations and controls. The banks where the accounts are established, in turn, can treat non-profit organizations like other customers, apply their Know Your Customer rules and report suspicious activities.

Summary
Money laundering occurs when funds from illegal activity are moved through the financial system in such a way as to make it appear that they came from legitimate sources.
Money laundering usually involves three stages: placement, layering and integration. In the placement stage, cash or cash equivalents are placed into the financial system. In the layering stage, the money is transferred or moved to other accounts through a series of financial transactions designed to obscure the origin of the money. Finally, in the integration stage, the funds are reintroduced into the economy so that they appear to have come from legitimate sources.
Money laundering can have several economic and social consequences, including increased crime and corruption, and the undermining of the legitimate private sector.

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With regard to terrorist financing, the funds may be from illegitimate or legitimate sources. Even where they derive from legitimate sources, their movement may follow the money laundering pattern described above in order to disguise the origin of the funds.
As they have been historically, banks remain an important mechanism for the disposal of criminal proceeds. In this chapter, we described some special danger zones for money laundering through banks and other depository institutions, such as electronic funds transfers, correspondent bank accounts, PTAs and private banking. The several laundering cases that involved use of criminal proceeds via non-bank transactions provide a strong argument for including other industries under the anti-money laundering umbrella, such as car dealers, money remittance businesses, and the securities and insurance industries.
New payment technologies, including prepaid cards, online banking and electronic cash, can widen the opportunities for laundering. Certain prepaid card and e-cash systems likewise present a risk in that no upper limit is set on transactions. In the absence of consistent standards and suitable monitoring by the supervisory authorities, these new payment technologies could well be vulnerable to money laundering operations.

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Review Questions
 Name some indicators of money laundering in an insurance industry setting.
 What are the three stages of money laundering?
 What are the differences between money laundering and terrorist financing?
 How can money be laundered through real estate transactions?  Why is private banking so vulnerable to money laundering?  What are PTAs and what makes them vulnerable to money laundering?
 What structures are used by money launderers to hide beneficial ownership?

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Chapter

3

Compliance Standards for Anti-Money Laundering and Combating the Financing of Terrorism

T

Financial Action Task Force he pace of international activity in the anti-money laundering
(AML) field accelerated in 1989 when the Group of Seven nations, which gathered for its annual economic summit in
Paris, launched the Financial Action Task Force (FATF). With
France serving as its first chairman, this multinational group started working toward a coordinated effort against international money laundering.
Originally referred to as the G-7 Financial Action Task Force, today FATF serves as the vanguard in promulgating guidance for AML to governmental bodies around the globe. The
International Monetary Fund (IMF) and the World Bank have both offered important new perspectives to the field.
FATF has brought significant changes in the customary ways that banks and businesses around the world conduct their affairs. It also has provoked changes in laws and in governmental operations.
The intergovernmental body is based at the Organization for
Economic Cooperation and Development (OECD) in Paris, where it has its own small secretariat.

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Members and Observers
There are currently 36 members of FATF; 34 jurisdictions and 2 regional organizations (the Gulf Cooperation Council1 and the
European Commission). These 36 members are positioned to combat money laundering and terrorist financing. There are also
29 international and regional organizations that are Associate
Members or Observers of FATF and participate in its work.
Member Jurisdictions include: Argentina, Australia, Austria,
Belgium, Brazil, Canada, China, Denmark, Finland, France,
Germany, Greece, Hong Kong (China), Iceland, India, Ireland,
Italy, Japan, Luxembourg, Mexico, the Netherlands, New Zealand,
Norway, Portugal, the Russian Federation, Singapore, South
Africa, South Korea, Spain, Sweden, Switzerland, Turkey, the
United Kingdom, and the United States.
The following two-step criteria must be met for a jurisdiction to become a Member of FATF:
Step 1 — Fundamental criteria of membership
a)

The jurisdiction should be strategically important:

Indicators
 Size of gross domestic product (GDP).
 Size of the banking sector.
 Impact on the global financial system, including the degree of openness of the financial sector and its interaction with international markets.
 Regional prominence in AML/CFT efforts.
 Level of commitment to AML/CFT efforts.

1 Although the Gulf Cooperation Council (GCC) is a full Member of FATF, the individual member countries of the GCC (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the
United Arab Emirates) are not.

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Additional considerations
 Level of adherence to financial sector standards.
 Participation in other relevant international organizations.  Level of AML/CFT risks faced and efforts to combat those risks.
b)  the jurisdiction were to become a member, FATF’s
If
geographic balance should be enhanced.
Step 2 — Technical and other criteria
a) 
The country should provide a written commitment at the political level:
(i) 
Endorsing and supporting the FATF 40
Recommendations and the FATF AML/CFT
Methodology (as amended from time to time).
(ii) 
Agreeing to implement all of the FATF
Recommendations within a reasonable timeframe
(three years).
(iii) 
Agreeing to undergo a mutual evaluation during the membership process for the purposes of assessing compliance with FATF membership criteria, using the AML/CFT Methodology applicable at the time of the evaluation, as well as agreeing to undergo subsequent periodic mutual evaluations following admission as a full member.
(iv) 
Agreeing to participate actively in FATF and to meet all the other commitments of FATF membership, including supporting the role and work of FATF in all relevant forums.

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b) 
The country should be a full and active member of a relevant FATF-style regional body.
c) 
The overall mutual evaluation needs to be regarded as satisfactory, and in particular the level of compliance with the Recommendations dealing with the money laundering and terrorist financing offenses, freezing and confiscation, customer due diligence, record-keeping, suspicious transaction reporting, financial sector supervision, and international co-operation need to be acceptable.
 In determining whether the overall level of compliance is satisfactory, some flexibility may be allowed with respect to the Customer Due Diligence
Recommendation due to its complexity and multifaceted requirements. The assessed country, however, is expected to demonstrate significant progress toward full compliance with the components of this
Recommendation.
 It is expected that a country should obtain ratings of fully or largely compliant for all FATF
Recommendations listed above in paragraph c. If that is not achieved, however, then the country must, at a minimum, achieve ratings of LC or C for a large majority of these Recommendations, and, for the remainder, should demonstrate substantial progress toward full implementation and should provide a clear commitment at the Ministerial level to come into compliance within a reasonable timeframe and with a detailed action plan setting out the steps to be taken.

Objectives
FATF focuses on several important tasks including:
1.

Spreading the anti-money laundering message worldwide:


The group promotes the establishment of a global AML and anti-terrorist financing network based on expansion

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of its membership, the development of regional antimoney laundering bodies in various parts of the world, and cooperation with other international organizations.
2. 
Monitoring implementation of the FATF Recommendations among FATF members. 
Implementation is monitored through a two-pronged approach:  An annual self-assessment exercise where member countries are required to fill out detailed standard questionnaires on the status of their compliance with the Recommendations. This information is then compiled and analyzed, and provides the basis for assessing the extent to which the Recommendations have been implemented by both individual countries and the group as a whole.
 The more detailed mutual evaluation procedure. Each member country is examined by FATF on the basis of an on-site visit conducted by a team of three or six experts in the legal, financial and law enforcement fields from other member governments. The experts write a report assessing the extent to which the evaluated country has moved forward in implementing an effective system to counter money laundering and to highlight areas in which further progress is still required. 
The FATF Anti-Money Laundering/Combating Terrorist
Financing (AML/CFT) Methodology is used to help assessors determine whether countries are in compliance with the FATF Recommendations in place at the time of the assessment. The Methodology reflects the principles of the FATF’s Recommendations . It is also based on the experience of FATF and FATF-style regional bodies in their mutual evaluations of the IMF and the World Bank’s

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Financial Sector Assessment Program and of the IMF’s
Offshore Financial Center Assessment Program. 
FATF does not have the power to impose fines or penalties against recalcitrant member-nations. However, in 1996,
FATF launched a policy for dealing with nations that fail to comply with the FATF Recommendations that it describes as “a graduated approach aimed at enhancing peer pressure.” The first step is requiring the country to deliver a progress report at plenary meetings. The country may then receive a letter from the FATF president or a visit from a high-level mission. FATF may also issue a statement that calls for financial institutions to give special attention to business relations and transactions with persons, companies and financial institutions domiciled in the noncomplying country. Then, as a final measure, FATF may suspend the membership of the country in question.  September 1996, Turkey became the first FATF
In
member exposed to the “peer pressure” policy. Although a member since 1990, Turkey had yet to criminalize money laundering. FATF issued a warning to financial institutions worldwide to be vigilant of business relations and transactions with persons and entities in Turkey due to its lack of laundering controls. One month later, Turkey enacted a money laundering law. Thus, FATF, since 1989, has made significant strides in fostering money laundering controls around the world.
3. 
Reviewing money laundering trends and countermeasures
(“Typologies” exercise). 
Faced with a financial system that has no geographic horizons, operates around the clock in every time zone, and maintains the pace of the global electronic highway, criminals can constantly search for new points of vulnerability and can adjust their laundering techniques to respond to counter-measures introduced by FATF members and other countries. FATF members gather information on money laundering trends in an effort to ensure that its
Recommendations remain up to date.

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Since its creation in 1989, FATF has been working under five-year mandates. In May 2004, its members extended the organization’s charter by a record eight years, signaling the possibility that it may become a permanent institution in global money laundering and terrorist financing control efforts.
FATF members agreed that the organization would continue to operate until December 2012, subject to renewal.
A mid-term review was conducted in 2007 to ensure that FATF is equipped to respond flexibly to new challenges. The FATF mandate, revised through this mid-term review process, is set to expire in December 2012.
FATF, since its establishment, has focused its work on three main activities: standard setting, ensuring effective compliance with the standards and identifying money laundering and terrorist financing threats. These activities will remain at the core of FATF’s work for the remainder of this mandate. Going forward, FATF will build on this work and respond to new and emerging threats, such as proliferation financing and vulnerabilities in new technologies which could destabilize the international financial system.

Financial Action Task Force 40 Recommendations
A key element of FATF’s efforts is its detailed list of appropriate standards for countries to implement. These measures are set out in the “40 Recommendations,” which were first issued in 1990 and were revised in 1996, 2003 and 2012. FATF has also issued various Interpretative Notes which are designed to clarify the application of specific Recommendations and to provide additional guidance. After the events of September 11, 2001, FATF adopted
Nine Special Recommendations of Terrorist Financing. The first eight Special Recommendations were adopted on October 31,
2001 and the ninth on October 22, 2004. The 2012 revisions combined the Nine Special Recommendations into the 40
Recommendations.

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The FATF’s Recommendations have become the world’s blueprint for effective national and international AML and CTF related controls. The IMF and the World Bank have recognized the FATF
Recommendations as the international standard for combating money laundering and terrorist financing. In 2002, the IMF, the
World Bank and FATF agreed to a common methodology to assess compliance with the FATF Recommendations.
The 40 Recommendations provide a complete set of countermeasures against money laundering and terrorist financing, covering:  The identification of risks and development of appropriate policies.
 The criminal justice system and law enforcement.
 The financial system and its regulation.
 The transparency of legal persons and arrangements
 International cooperation.
FATF recognizes that because countries have different legal and financial systems they cannot use identical measures to fight money laundering and terrorist financing. The Recommendations set minimum standards of action for countries to implement according to their particular circumstances and constitutional frameworks. With its 2012 revision, FATF introduced the risk assessment as the first recommendation, underscoring that assessing the risk is the first step in combating money laundering and terrorist financing.
With its 2003 revisions of the 40 Recommendations, FATF expanded the reach of its global blueprint for cracking down on illicit movements of funds. It introduced substantial changes intended to strengthen measures to combat money laundering and terrorist financing, which established further enhanced standards by which countries can better combat money laundering and terrorist financing.

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The most important changes made to the Recommendations were in 2003 and are as follows:
 Expanded coverage to include terrorist financing.
 Widened the categories of business that should be covered by national laws, including real estate agents, precious metals dealers, accountants, lawyers and trust services providers.
 Specified compliance procedures on issues such as customer identification and due diligence, including enhanced identification measures for higher-risk customers and transactions.
 Adopted a clearer definition of money laundering predicate offenses.
 Encouraged prohibition of so-called “shell banks,” typically set up in offshore secrecy havens and consisting of little more than nameplates and mailboxes, and urged improved transparency of legal persons and arrangements.
 Included stronger safeguards, notably regarding international cooperation in, for example, terrorist financing investigations.
In 2012, the Recommendations were revised again, incorporating the Nine Special Recommendations into the 40 Recommendations.
The most important changes in this revision were:
 Creating a Recommendation on assessing risks and applying a risk based approach
 Creating a Recommendation for targeted financial sanctions related to proliferation of weapons of mass destruction  Focusing more attention on domestic PEPs and those entrusted with a prominent function by an international organization 119

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 Requiring identification and assessment of risks of new products prior to the launch of the new product
 Adding a requirement that financial groups implement a group-wide AML/CFT program and have procedures for sharing information within the group
 Including tax crimes within the scope of designated categories of offenses for money laundering

Group

Topic

Recommendations

I

AML/CFT Policies and Coordination n Assessing risks & applying a risk-based approach n National cooperation and coordination

1-2

II

Money Laundering and Confiscation n Money laundering offence n Confiscation and provisional measures.

3-4

III

Terrorist Financing and Financing of
Proliferation
n Terrorist financing offence n Targeted financial sanctions related to terrorism & terrorist financing n Targeted financial sanctions related to proliferation n Non-profit organisations

5-8

IV

Financial and Non-Financial Institution
Preventative Measures n Financial institution secrecy laws n Customer due diligence and record keeping n Additional measures for specific customers and activities n Reliance, Controls and Financial Groups n Reporting of suspicious transactions n Designated non-financial Businesses and
Professions

9-23

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Group

Topic

Recommendations

V

Transparency and Beneficial Ownership of
Legal Persons and Arrangements n Transparency and beneficial ownership of legal persons n Transparency and beneficial ownership of legal arrangements

24-25

VI

Powers and Responsibilities of Competent
Authorities and Other Institutional
Measures

26-35

n Regulation and Supervision n Operational and Law Enforcement n General Requirements n Sanctions

VII

International Cooperation n International instruments n Mutual legal assistance n Mutual legal assistance: freezing and confiscation n Extradition n Other forms of international cooperation

36-40

Some highlights of the 40 Recommendations are:
Risk-Based Approach: Countries should start by identifying, assessing and understanding the money laundering and terrorist financing risks they face. Then they should take appropriate measures to mitigate the identified risks. The risk-based approach allows countries to target their limited resources in a targeted manner to their own particular circumstances, thereby increasing the efficiency of the preventative measures. Financial institutions should also use the risk-based approach to identify and mitigate the risks they face.

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Designated Categories of Offenses: The Recommendations specify crimes, called “designated categories of offenses,” that should serve as money laundering predicates — meaning that trying to conceal them through financial subterfuge would constitute criminal money laundering. Countries should also put in place provisions to allow for the confiscation of the proceeds of crime or otherwise prevent criminals from having access to their criminal proceeds.
Terrorist Financing and Financing of Proliferation: Countries should criminalize terrorist financing, including the financing of terrorist acts, organizations and individual terrorists, even if no terrorist activity can be directly attributed to the provision of financing. Countries should impose sanctions regimes that will allow them to freeze assets of persons designated by the United
Nations Security Council for involvement in terrorism or the proliferation of weapons of mass destruction. Countries should also establish sufficient controls to mitigate the misuse of non-profit organizations to provide support to terrorists.
Knowledge and Criminal Liability: The Recommendations include the concept that knowledge required for the offense of money laundering may be inferred from objective factual circumstances. This is similar to what is known, in some countries, as “willful blindness,” or deliberate avoidance of knowledge of the facts. In addition, the Recommendations urge that criminal liability and, where that is not possible, civil or administrative liability, should apply to legal persons as well.
Customer Due Diligence (CDD) measures:
Financial institutions should conduct customer due diligence when they:
 Establish business relations
 Carry out an occasional transaction or a wire transfer above the specified threshold
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 Have doubts about the veracity or adequacy of previously obtained customer identification Information
Financial institutions must, using the risk-based approach:
 Identify the customer and verify that customer’s identity using reliable, independent source documents, data or information. Establishing accounts in anonymous or obviously fictitious names should be prohibited.
 Identify the beneficial owner and take reasonable measures to verify the identity of the beneficial owner such that the financial institution is satisfied that it knows who the beneficial owner is. For legal persons and arrangements, this should include understanding the ownership and control structure of the customer.
 Understand and, as appropriate, obtain information on the purpose and intended nature of the business relationship.  Conduct ongoing due diligence on the business relationship and scrutinize transactions undertaken in the course of that relationship to ensure that the transactions are consistent with the institution’s knowledge of the customer, the customer’s business and risk profile, including, where necessary, the source of funds.
 Maintain records of the above customer information as well as all transactions to enable them to comply with requests from competent authorities.
Financial institutions may rely on other parties to conduct customer due diligence in certain circumstances; however, the relying institution remains liable for compliance with completing the required customer due diligence. Financial groups should establish a group-wide AML program.
Additional Customer Due Diligence on Specific Customers and Activities: Some customer types and activities pose heightened risks, especially:

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 Politically Exposed Persons (PEPs), including taking appropriate steps to identify PEPs, obtaining senior management approval of such business relationships, taking measures to establish the sources of wealth and funds, and conducting ongoing monitoring.
 Cross-Border Correspondent Banking, including understanding the respondent institution’s business, reputation, supervision and AML controls; obtaining management approval of such relationships; documenting the responsibilities of each institution; taking appropriate controls to mitigate risks associated with payable through accounts and taking steps to ensure accounts are not established for shell banks.
 Money or Value Transfer Services (MVTS). Countries should ensure that MVTS are licensed or registered, and subject to appropriate AML requirements
 New Technologies. Countries and financial institutions should assess the risks associated with developments of new products, business practices, delivery mechanisms and technology. Financial institutions should assess these risks prior to launching new products; they should also take appropriate measures to mitigate the risks identified.
 Wire Transfers. Countries should require financial institutions to obtain and send required and accurate originator, intermediary and beneficiary information with wires. Financial institutions should monitor wires for incomplete information and take appropriate measures. They should also monitor wires for those involving parties designated by the United Nations
Security Council and take freezing actions or otherwise prohibit the transactions from occurring.
Suspicious Transaction Reporting: The Recommendations say that financial institutions must report to the Financial Intelligence
Unit where they suspect or have reasonable grounds to suspect that funds are the proceeds of a criminal activity or are related to

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terrorist financing. The financial institutions and the employees reporting such suspicions should be protected from liability for reporting and should be prohibited from disclosing that they have reported such activity.
Expanded Coverage of Industries: The Recommendations expand the fight against money laundering by adding new businesses to the roster of financial institutions that are the usual focus of AML efforts. Expanding the scope of anti-money laundering scrutiny is a key area where many governments have been aiming their AML arsenal in response to an increased flow of illicit money. The institutions and professions FATF recommends should be added to those subject to AML regulations include:
 Casinos, when customers engage in financial transactions equal to or above a designated threshold.
(At a minimum, casinos should be licensed; authorities should prevent criminals from participating in casino operations and should supervise casinos to ensure compliance with requirements to combat money laundering and terrorist financing.)
 Real estate agents, when they are involved in transactions for clients concerning buying and selling properties.  Dealers in precious metals and stones, when they engage in any cash transaction with a customer at or above a designated threshold.
 Lawyers, notaries and independent legal professionals and accountants when they prepare or carry out transactions for clients concerning: buying and selling real estate; managing client money, securities or other assets; establishing or managing bank, savings or securities accounts; organizing contributions for the creating or managing companies; creating, operating or managing legal persons or arrangements, and buying and selling businesses.

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 Trust and company service providers when they prepare or carry out transactions for a client concerning certain activities (e.g., when acting as a formation agent of legal persons; acting as a director or secretary of a company; acting as a trustee of an express trust; or acting as a nominee shareholder for another person).
FATF also designated specific thresholds that trigger AML scrutiny.
For example, the threshold that financial institutions should monitor for occasional customers is €15,000; for casinos, including Internet casinos, it is €3,000; and for dealers in precious metals, when engaged in any cash transaction, it is €15,000.
(See the definition of “designated non-financial businesses and professions” and “financial institutions” in the Glossary of the 40
Recommendations.)
Transparency and Beneficial Ownership of Legal Persons and Arrangements: Countries should take appropriate measures to prevent the misuse of legal persons for money laundering or terrorist financing, including ensuring information about the beneficial ownership and control of such legal persons is available to competent authorities, particularly with regard to legal persons that can issue bearer shares or have nominee shareholders or directors. Powers and Responsibilities of Competent Authorities:
Countries should oversee financial institutions to ensure the financial institutions are implementing the FATF recommendations, are not owned by or controlled by criminals. The supervisors should be given sufficient resources and powers to effectively oversee the financial institutions within their jurisdiction.
Designated non-financial businesses and persons should be subject to oversight as well, when they engage in certain financial activities. Countries should establish financial intelligence units and provide law enforcement and investigative authorities with sufficient resources and powers to investigate money laundering and terrorist financing and to seize or freeze criminal proceeds

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where found. Countries should implement measures to detect the physical cross-border movement of currency and bearer negotiable instruments. The authorities should provide meaningful statistics, guidance and feedback on the AML/CTF systems.
International Cooperation: Several Recommendations deal with strengthening international cooperation. Countries should rapidly, constructively and effectively provide the widest possible range of mutual legal assistance in money laundering and terrorist financing investigations, freezing and confiscation of criminal proceeds, extradition, and in other matters. Countries should ratify United
Nations conventions against significant crimes and terrorism.
For detailed information on these and other important issues, see the 40 Recommendations and their Interpretative Notes.

Non-Cooperative Countries
FATF had a practice of “naming and shaming” countries that it determined maintained inadequate anti-money laundering controls or did not cooperate in the global money laundering effort.
For years, FATF was engaged in this initiative to identify “NonCooperative Countries and Territories” (NCCTs) in the global fight against money laundering. It developed a process to seek out critical weaknesses in specific jurisdictions’ anti-money laundering systems, which obstruct international cooperation in this area.
According to a June 2000 paper, “Review to Identify NonCooperative Countries or Territories: Increasing the Worldwide
Effectiveness of Anti-Money Laundering Measures,” FATF’s assessment of a jurisdiction under 25 distinct criteria covered the following four broad areas:
1.

Loopholes in financial regulations:
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 Inadequate rules for the licensing or creation of financial institutions, including assessing the backgrounds of managers and beneficial owners
 Inadequate customer identification requirements for financial institutions.
 Excessive secrecy provisions regarding financial institutions.  Lack of efficient suspicious transactions reporting.
2.

Obstacles raised by other regulatory requirements:
 Inadequate commercial law requirements for registration of business and legal entities.
 Lack of identification of the beneficial owner(s) of legal and business entities.

3.

Obstacles to international cooperation:
 Obstacles to cooperation from administrative authorities.  Obstacles to cooperation from judicial authorities.

4. 
Inadequate resources for preventing and detecting money laundering activities:
 Lack of resources in public and private sectors.
 Absence of a financial intelligence unit or equivalent mechanism. The goal of the NCCT process was to reduce the vulnerability of the financial system to money laundering by ensuring that all financial centers adopt and implement measures for the prevention, detection and punishment of money laundering according to internationally recognized standards.

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NCCT Countries from 2000 to 2006

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On February 14, 2000, FATF published an initial report on NCCTs. The report set out the 25 criteria that help identify relevant detrimental rules and practices and that are consistent with the 40
Recommendations. It described a process whereby jurisdictions having such rules and practices can be identified and encouraged to implement international standards in this area.
The next step in the NCCT initiative was the publication in June 2000 of the first Review identifying
15 specific NCCTs (refer to table below). Additions were made to the NCCT list through September 2001.
From that point on, the only modifications to the list were the gradual removal of nations, culminating with
Nigeria and Myanmar being taken off the list on June
23, and October 13, 2006, respectively.

T

HE GOAL OF THE
NCCT PROCESS
WAS TO REDUCE
THE VULNERABILITY OF
THE FINANCIAL SYSTEM
TO MONEY LAUNDERING
BY ENSURING THAT ALL
FINANCIAL CENTERS
ADOPT AND IMPLEMENT
MEASURES FOR
PREVENTION, DETECTION
AND PUNISHMENT OF
MONEY LAUNDERING
ACCORDING TO
INTERNATIONALLY
RECOGNIZED STANDARDS.

In 2009, at the request of the G-20, FATF started the process of assessing countries’ compliance with international AML/CFT standards and identifying jurisdictions having deficiencies in their AML/CFT regimes.

The Basel Committee on Banking Supervision
The Basel Committee on Banking Supervision, established in 1974 by the central bank governors of the G-10 countries, promotes sound supervisory standards worldwide. The Committee’s secretariat is provided by the Bank for International Settlements
(BIS) in Basel, Switzerland. The BIS is an international organization that fosters cooperation among central banks and other agencies in pursuit of monetary and financial stability. Its services are provided exclusively to central banks and international organizations.

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Banking supervisors are not generally responsible for criminal prosecution of money laundering in their countries. But they have a role in ensuring that banks have procedures in place, including strict AML policies, to avoid involvement with drug traders and other criminals, as well as in the general promotion of high ethical and professional standards in the financial sector. The BCCI scandal of the early 1990s, the indictments and guilty pleas of former officials of the Atlanta branch of the Italian Banca Nazionale del Lavoro in 1992 and other international banking scandals have prompted banking regulators in the richest nations to agree on basic rules for the supervision and operation of multinational banks. The Committee’s members come from Argentina, Australia,
Belgium, Brazil, Canada, China, France, Germany, Hong Kong
SAR, India, Indonesia, Italy, Japan, Luxembourg, Mexico, the
Netherlands, Russia, Saudi Arabia, Singapore, South Africa, South
Korea, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States.
In 1988, the Basel Committee issued a Statement of Principles called “Prevention of Criminal Use of the Banking System for the
Purpose of Money Laundering” in recognition of the vulnerability of the financial sector to misuse by criminals. This was a step toward preventing the use of the banking sector for money laundering, and it set out principles with respect to:


Customer identification.



Compliance with laws.

 
Conformity with high ethical standards and local laws and regulations.  
Full cooperation with national law enforcement to the extent permitted without breaching customer confidentiality.


Staff training.



Record keeping and audits.

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These principles preceded anti-money laundering legislation that provided for disclosure of client information to enforcement agencies and protection from civil suits brought by clients for breach of client confidentiality. Therefore, these principles stressed cooperation within the confines of confidentiality.
In 1997, the Basel Committee issued its “Core Principles for
Effective Banking Supervision,” a basic reference for authorities worldwide. “Banking supervisors must determine that banks have adequate policies, practices and procedures in place, including strict ‘know-your-customer’ rules, that promote high ethical and professional standards in the financial sector and prevent the bank being used, intentionally or unintentionally, by criminal elements,” said the guide. It also urged nations to adopt the 40 Recommendations of the Financial Action Task Force.
(See previous section in this chapter.) The Core Principles were prepared with the assistance of 15 non-G-10 nations, including
Brazil, Chile, Hong Kong, Mexico, Russia, Singapore and Thailand.
To facilitate implementation and assessment, the Committee in
October 1999 developed the “Core Principles Methodology.”
Since 1997, however, significant changes have occurred in banking regulation, much experience has been gained with implementing the Core Principles in individual countries, and new regulatory insights in regulation have become apparent. These developments made it necessary to update the Core Principles and the associated assessment Methodology.
The Committee has identified deficiencies in a large number of countries’ Know Your Customer (KYC) policies, based on the findings of an internal survey of cross-border banking conducted in 1999. “KYC policies in some countries have significant gaps and in others they are non-existent. Even among countries with well developed financial markets, the extent of KYC robustness varies,” observed the Committee in an October 2001 paper, called “Customer Due Diligence for Banks.” The paper follows a consultation document issued in January 2001.

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The Committee’s interest in KYC centers on the use of due diligence requirements to mitigate the dangers of bad customers.
Without due diligence, banks can be subject to reputational, operational, legal and concentration risks, which can result in significant financial cost. Sound KYC policies and procedures are critical to protecting the safety and soundness of banks, as well as the integrity of banking systems. An example is the BCCI scandal that began in 1988 when nine BCCI officials were arrested in Florida, United States, for allegedly laundering drug money.
It escalated, and, in 1991, BCCI was shut down by regulators, resulting in a £9 billion loss for depositors.
This 21-page paper reinforces the principles established in earlier
Committee papers by providing more precise guidance on the essential elements of KYC standards and their implementation.
In developing the guidance, the Working Group drew on practices in member countries and took into account evolving supervisory developments. The essential elements presented in this paper are guidance as to minimum standards for worldwide implementation for all banks. These standards may need to be supplemented or strengthened with further measures tailored to the risks in particular institutions and in the banking system of individual countries.
For example, enhanced due diligence is required for higher-risk accounts and for banks that seek high net-worth customers. A number of specific sections in this paper offer recommendations for tougher standards of due diligence for higher risk areas within a bank. The paper has five sections:
1. Introduction.
2.

Importance of KYC standards for supervisors and banks.

3.

Essential elements of KYC standards.

4.

The role of supervisors.

5.

Implementation of KYC standards in a cross-border context.

The Committee discusses the following issues in the paper:

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 Banks should not only establish the identity of their customers, but should also monitor account activity to identify transactions that do not conform to the normal or expected transactions for that customer or type of account. “To ensure that records remain relevant, there is a need for banks to undertake regular reviews of existing records. An appropriate time to do so is when a transaction of significance takes place, when customer documentation standards change substantially, or when there is a material change in the way that the account is operated.”
 The paper does not prohibit numbered accounts.
Instead it says that numbered accounts should be subjected to exactly the same KYC procedures as other customer accounts. KYC tests may be carried out by selected staff, but the identity of customers must be known to an adequate number of staff if the bank is to be sufficiently diligent. “Such accounts should in no circumstances be used to hide the customer identity from a bank’s compliance function or from the supervisors,” urged the Committee.
 The paper has identified seven specific customer identification issues: q Trust, nominee and fiduciary accounts. q Corporate vehicles, particularly companies with

nominee shareholders or entities with shares in bearer form. q Introduced businesses. q Client accounts opened by professional

intermediaries, such as “pooled” accounts managed by professional intermediaries on behalf of entities such as mutual funds, pension funds and money funds. q Politically exposed persons.

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q Non-face-to-face customers, i.e., customers who

do not present themselves for a personal interview. q Correspondent banking.

 Banks should develop customer acceptance policies and procedures describing the customer’s background, country of origin, business activities and other risk indicators, and should develop clear and concise descriptions of who is an acceptable customer.
 Private banking accounts should “under no circumstances” be allowed to escape KYC policies.
 Banks should make every effort to know the identity of corporations that operate accounts and, when professional intermediaries are involved, should verify the exact relationship between the owners and intermediary.  Banks should use standard identification procedures when dealing with “non-face-to-face” customers and should never agree to open an account for persons who are adamant about anonymity.
 Periodic bank-wide employee training should be provided that explains the importance of the KYC policies and AML requirements.
 Internal auditors and compliance officials should regularly monitor staff performance and adherence to
KYC procedures.
 Continued monitoring of high-risk accounts by compliance personnel should be conducted to obtain a greater understanding of the customers’ “normal activities” and to enable the updating of identification papers and the detection of suspicious transaction patterns.  Bank regulators should ensure that bank staff follow
KYC procedures, review customer files and a sampling

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of accounts, and emphasize that they will take the
“appropriate action” against officers who fail to follow
KYC procedures.
 The four key elements of KYC, according to this paper are: q Customer identification; q Risk management; q Customer acceptance; and q Monitoring.

In its paper, the Basel Committee referred to the intention of the
Working Group on Cross-border Banking to develop guidance on customer identification. Customer identification is an essential element of an effective customer due diligence program, which banks need in order to guard against reputational, operational, legal and concentration risks. It is also necessary in order to comply with anti-money laundering legal requirements and to be able to identify bank accounts related to terrorism.
In February 2003, the Committee issued account opening and customer identification guidelines and a general guide to good practices based on the principles of the Committee’s paper on
Customer Due Diligence for Banks. This document, which was developed by the Working Group on Cross-border Banking, does not cover every eventuality, but instead focuses on some of the mechanisms that banks can use in developing an effective customer identification program.
The need for rigorous customer due diligence standards is not restricted to banks. The Basel Committee believes similar guidance needs to be developed for all non-bank financial institutions and professional intermediaries of financial services, such as lawyers and accountants.
In October 2004, the Committee released another important publication on KYC: “Consolidated KYC Risk Management.” The publication is a complement to the Basel Committee’s Customer
Due Diligence for Banks issued in October 2001. It examines the

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critical elements for effective management of KYC risk throughout a banking group. The paper addresses the need for banks to adopt a global approach and to apply the elements necessary for a sound KYC program to both the parent bank or head office and all of its branches and subsidiaries. These elements consist of risk management, customer acceptance and identification policies, and ongoing monitoring of higher-risk accounts.

European Union Directives on Money Laundering
FIRST DIRECTIVE
The first European Union Directive on Prevention of the Use of the
Financial System for the Purpose of Money Laundering (Directive
91/308/EEC) was adopted by the Council of Europe in June 1991.
Like all Directives adopted by the Council, it required European
Union member states to achieve (by amending national law, if necessary) specified results. The Directive required the members to enact legislation to prevent their domestic financial systems from being used for money laundering. The unique nature of the
EU as a “Community of States” makes it fundamentally different from other international organizations. The EU can adopt measures that have the force of law even without the approval of the national
Parliaments of the various member states. Plus, European law prevails over national law in the case of directives.
In this respect, EU Directives have far more weight than the voluntary standards issued by groups such as the Basel Committee or the Financial Action Task Force. Of course, the Directive applies only to EU member states and not to other countries.
The first directive of 1991 was confined to drug trafficking, as defined in the 1988 Vienna Convention. However, member states were encouraged to extend the predicate offenses to other crimes.

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SECOND DIRECTIVE
In December 2001, the EU agreed on a Second Directive (Directive
2001/97/EEC) that amended the prior one. The Second Directive required stricter money laundering controls across the continent.
Member states agreed to implement it as national law by June
15, 2003; however, only Denmark, Germany, the Netherlands and
Finland met the deadline, with Ireland and Spain complying shortly afterwards. Other member states eventually followed.
The following were the key features of the Second Directive:
 It extended the scope of the First Directive beyond drug-related crimes. The definition of “criminal activity” was expanded to cover not just drug trafficking, but all serious crimes, including corruption and fraud against the financial interests of the European Community.
 It explicitly brought bureaux de change and money remittance offices under AML coverage.
 The Directive said that knowledge of criminal conduct can be inferred from objective factual circumstances.
 It provided a more precise definition of money laundering to include: q The conversion or transfer of property with

knowledge that it is derived from criminal activity or from participation in that activity, for the purpose of concealing or disguising the illicit origin of the property, or assisting anyone who is involved in the commission of the activity to evade the legal consequences of his action. q Concealing or disguising the nature, source,

location, disposition, movement, rights with respect to, or ownership of property, knowing that the property is derived from criminal activity or from an act of participation in that activity.

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q The acquisition, possession or use of property,

knowing, when it is received, that it was derived from criminal activity or from an act of participation in the activity. q Participation in, association to commit, the attempt

to commit, and the aiding, abetting, facilitating or counseling the commission of any of the mentioned actions.  It widened the businesses and professions that are subject to the obligations of the Directive. Certain persons, including lawyers when they participate in the movement of money for clients, were required to report to authorities any fact that might indicate money laundering. Covered groups included: auditors, external accountants, tax advisers, real estate agents, notaries and legal professionals.
The Second Directive was a tremendous step forward because its applicability included many of the important financial centers of the world. It went well beyond similar standards issued by other organizations such as the UN and even FATF. In many respects, it exceeded the norms contained in U.S. law and regulations.

THIRD DIRECTIVE
A Third EU Directive on the Prevention of the Use of the Financial
System for the Purpose of Money Laundering and Terrorist
Financing, based on elements of the Financial Action Task Force’s revised 40 Recommendations, was adopted in 2005.
The Third Directive was to be implemented by the member states by December 15, 2007. While several countries did not meet this original deadline, the directive has since been implemented by all members. In line with the FATF money laundering recommendations, the
Third EU Directive extended the scope of the directives by:

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 Defining “money laundering” and “terrorist financing” as separate crimes. The directive’s measures were expanded to cover not only the manipulation of money derived from crime, but also the collection of money or property for terrorist purposes.
 Extending customer identification and suspicious activity reporting obligations to trusts and company service providers, life insurance intermediaries and dealers selling goods for cash payments of more than
15,000 Euros.
 Detailing a risk-based approach to customer due diligence. The extent of due diligence that is performed on customers, whether simplified or enhanced, should be dependent on the risk of money laundering or terrorist financing they pose.
 Protecting employees who report suspicions of money laundering or terrorist financing. This provision instructs member states to “do whatever is in their power to prevent employees from being threatened.”
 Obligating member states to keep comprehensive statistics regarding the use of and results obtained from suspicious transaction reports such as: the number of suspicious transaction reports filed; the follow-up given to those reports; and the annual number of cases investigated, persons prosecuted and persons convicted.
 Requiring all financial institutions to identify and verify the “beneficial owner” of all accounts held by legal entities or persons. “Beneficial owner” refers to the natural person who directly or indirectly controls more than 25 percent of a legal entity or person.
The Third Money Laundering Directive applies to:
 Credit institutions;

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 Financial institutions;
 Auditors, external accountants and tax advisors;
 Legal professionals;
 Trust and company service providers;
 Estate agents;
 High value goods dealers who trade in cash over
15,000 Euro; and
 Casinos.
The scope of the Third Money Laundering Directive differs from the
Second Money Laundering Directive in that:
 It specifically includes the category of trust and company service providers.
 It covers all dealers trading in goods who trade in cash over 15,000 Euros.
 The definition of financial institution includes certain insurance intermediaries.
There were three main points of contention with regard to the
Third Directive: the definition of politically exposed persons
(PEPs); the inclusion of lawyers among those who are required to report suspicious activity; and the precise role of a
“comitology committee.” The European Commission coined the term “comitology,” which means the EU system that oversees implementation of acts proposed by the European Commission.
The Third Money Laundering Directive includes the following definition of a politically exposed person:
“Politically exposed persons” means natural persons who are or have been entrusted with prominent public functions and the immediate family members, or individuals known to be close associates, of such persons. 141

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Close associates must be identified only when their relationship with a PEP is publicly known or when the institution suspects there is a relationship. Finally, the commission said persons should not be considered PEPs after at least one year of not being in a prominent position.

Regional and Other
International Initiatives
Regional FATF-Style Bodies and FATF Associate Members
There are eight regional FATF-style bodies and FATF Associate
Members that have similar form and functions to those of FATF.
Many FATF member countries are also members of these bodies.
 Asia/Pacific Group on Money Laundering (APG).
 Caribbean Financial Action Task Force (CFATF).
 Council of Europe Select Committee of Experts on the Evaluation of Anti-Money Laundering Measures
(MONEYVAL) (formerly PC-R-EV).
 Eastern and Southern Africa Anti-Money Laundering
Group (ESAAMLG).
 Eurasian Group (EAG).
 Financial Action Task Force of South America against
Money Laundering (GAFISUD – Grupo de Acción
Financiera de Sudamérica)
 Intergovernmental Action Group against MoneyLaundering in West Africa (GIABA – Groupe

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Intergouvernemental d’Action contre le Blanchiment d’Argent en Afrique de l’Quest)
 Middle East and North Africa Financial Action Task
Force (MENAFATF)
Some of these are discussed below.

ASIA/PACIFIC GROUP ON MONEY LAUNDERING
The APG, an autonomous regional anti-money laundering body, was established in February 1997 at the Fourth Asia/Pacific Money
Laundering Symposium in Bangkok, where it adopted its “Terms of
Reference.”
The Terms of Reference recognized that the FATF’s 40
Recommendations constituted the international money laundering control benchmark. The Terms included a commitment that APG members would implement these recommendations according to their particular cultural values and constitutional frameworks. The
Terms also said that, to ensure a global approach, members of the
APG would work closely with FATF. The Terms of Reference were revised at the 2006 Annual Meeting.
The APG:
 Provides a focus for cooperative AML and anti-terrorist financing efforts in the Asia/Pacific region.
 Provides a forum in which:
 Regional issues can be discussed and experiences shared.  Operational co-operation among member jurisdictions is encouraged.
 Facilitates the adoption and implementation by member jurisdictions of internationally accepted AML and anti-terrorist financing measures.

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 Enables regional and jurisdictional factors to be taken into account in the implementation of international AML and anti-terrorist financing measures.
 Encourages jurisdictions to implement AML and antiterrorist financing initiatives, including more effective mutual legal assistance.
 Coordinates and provides practical support, where possible, to member and observer jurisdictions in the region, when requested.
The APG is voluntary and cooperative in nature. The APG was established by agreement among its members and is autonomous.
It is not derived from an international treaty. It is not part of any international organization. The work done by the APG and its procedures are decided by mutual agreement among its members.
The APG also uses similar mechanisms to those used by FATF to monitor and facilitate progress. Since its inception, the APG has worked closely with FATF. The APG and FATF have reciprocal rights of attendance at each other’s meetings, as well as reciprocal sharing of documents. However, the APG, like other autonomous anti-money laundering bodies, determines its own policies and practices. Membership of the APG is open to any jurisdiction within the Asia/
Pacific region that:
 Recognizes the need for action to combat money laundering and terrorist financing.
 Recognizes the benefits to be obtained by sharing knowledge and experience.
 Has taken or is actively taking steps to develop, pass and implement anti-money laundering and anti-terrorist financing legislation and other measures based on accepted international standards.

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 Subject to its domestic laws, commits itself to implementing the decisions made by the APG.
 Commits itself to participation in the mutual evaluation program.  Contributes to the APG budget in accordance with arrangements agreed to by the APG.
It is not a precondition for participation in the APG that anti-money laundering or anti- terrorist financing laws already be enacted.
The APG Secretariat is located in Sydney, Australia. The APG’s homepage is: www.apgml.org.

CARIBBEAN FINANCIAL ACTION TASK FORCE
Given its proximity to the world’s largest cocaine producers and exporters in South America’s Andean region and one of the largest drug markets (the U.S.), the Caribbean basin has long been a convenient banking center for many international criminals, including drug dealers. The Caribbean Financial Action Task Force
(CFATF) fosters money laundering controls in the Caribbean region. The main objective of the CFATF is to secure effective compliance with its recommendations to prevent and control money laundering and to combat the financing of terrorism. The
CFATF home page can be found at: www.cfatf.org.
The group consists of dozens of states in the Caribbean basin that have agreed to implement common countermeasures to address the problem of criminal money laundering and the financing of terrorism. It was established as the result of meetings convened in Aruba in May 1990 and Jamaica in November 1992. Countries such as Canada, France, Mexico, the Netherlands, Spain, the United Kingdom and the U.S. serve as “Cooperating and
Supporting Nations.”
At the Aruba meeting, representatives from the Caribbean and
Central America got together to develop a common approach

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to fighting the laundering of the proceeds of crime. Nineteen recommendations were formulated. These recommendations, which have specific relevance to the region, are complementary to the FATF 40 Recommendations and were revised in 1999.
The Jamaica Ministerial Meeting was held in Kingston in November
1992. Ministers issued the Kingston Declaration in which they endorsed and affirmed their governments’ commitment to implement the FATF and Aruba Recommendations, the OAS Model
Regulations, and the 1988 U.N. Convention Against Illicit Traffic in
Narcotic Drugs and Psychotropic Substances. They also mandated the establishment of a secretariat.
The declaration recommended laws:
 Defining money laundering based on the model laws issued by the Organization of American States.
 Concerning the seizure and forfeiture of drug proceeds and linked assets which enable the identification, tracing and evaluation of property subject to seizure, and which permit freezing orders.
 Allowing judicial challenges to seizure orders by an administrative body.
 Permitting forfeiture in all cases following conviction.
 Permitting courts to decide that “all property obtained during a prescribed period of time by a person convicted of drug trafficking has been derived from such criminal activity.”
The Caribbean nations agreed to enter into mutual assistance agreements with each other to assist in money laundering investigations. They also agreed that money laundering should be an extraditable offense, subject to simplified procedures and that forfeited assets should be shared among cooperating nations.
The declaration’s terms:

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 Permit continuation of numbered accounts at financial institutions with the understanding that account information would be made available to “competent authorities” upon request, and that there are strong legal requirements for customer identification.
 Insist that, in large currency transactions, customer identification procedures and record keeping are
“mandatory.”
 Amend bank secrecy laws to allow the reporting of suspicious transactions by financial institutions, but leave it optional whether a statute is required.
The CFATF monitors members’ implementation of the anti-money laundering recommendations through the following activities:
 Self-assessment of the implementation of the recommendations.  An ongoing program of mutual evaluation of members.
 Coordination of, and participation in, training and technical assistance programs.
 Biennial plenary meetings for technical representatives.  Annual ministerial meetings.
The Caribbean Financial Action Task Force’s homepage is http:// www.cfatf-gafic.org/. FINANCIAL ACTION TASK FORCE ON MONEY LAUNDERING IN
SOUTH AMERICA (GAFISUD — GRUPO DE ACCIÓN FINANCIERA DE
SUDAMÉRICA)
The Financial Action Task Force on Money Laundering in South
America was created in December 2000 in Cartagena de Indias,
Colombia. Its member countries are Argentina, Bolivia, Brazil,
Chile, Colombia, Costa Rica, Ecuador, Mexico, Panama, Paraguay,

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Peru and Uruguay, and its main objective is to implement antimoney laundering measures in South America.
GAFISUD, with a secretariat in Argentina, was created by an intergovernmental agreement that left the door open for more countries to join. GAFISUD’s website can be found at: http://www.gafisud. info/home.htm. GAFISUD has adopted the FATF’s Recommendations and expects to develop its own Recommendations for the improvement of national policies against both money laundering and terrorist financing. MIDDLE EAST AND NORTH AFRICA
FINANCIAL ACTION TASK FORCE
At an inaugural Ministerial Meeting held in Manama, Bahrain, in November 2004, the governments of 14 countries decided to establish a Financial Action Task Force-style regional body for the Middle East and North Africa. Currently, the body, known as the Middle East and North Africa Financial Action Task Force
(MENAFATF) consists of the following 18 members:
1. Algeria
2. Lebanon
3. Saudi Arabia
4. Bahrain
5. Libya
6. Sudan
7. Egypt
8. The Islamic Republic of Mauritania
9. Syria

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10. Republic of Iraq
11. Morocco
12. Tunisia
13. Jordan
14. Oman
15. United Arab Emirates
16. Kuwait
17. Qatar
18. Yemen
The MENAFATF is voluntary in nature and was established by agreement between its members. It is not derived from an international treaty. It is independent of any other international organization and sets its own work, rules and procedures, which are determined by consensus of its members. It cooperates with other international bodies, notably FATF, to achieve its objectives.
Member countries of the MENAFATF agreed on the following objectives and are working towards achieving them:
 To adopt and implement the 40 Recommendations of
FATF against money laundering and terrorist financing.
 To implement the relevant UN treaties and agreements and United Nations Security Council Resolutions dealing with fighting money laundering and terrorist financing.  To cooperate to raise compliance with these standards and measures within the MENA region and to work with other international organizations to raise compliance worldwide.
 To work together to identify money laundering and terrorist financing issues of a regional nature, to share

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experiences with these problems and to develop regional solutions for dealing with them.
 To build effective arrangements throughout the region to effectively fight money laundering and terrorist financing in accordance with the particular cultural values, constitutional framework and legal systems of the member countries.
The MENAFATF is headquartered in Bahrain. Its website is www.menafatf.org. EURASIAN GROUP ON COMBATING MONEY LAUNDERING
AND TERRORIST FINANCING
Another Financial Action Task Force-style regional body, the
Eurasian Group (EAG), was formed in October 2004 in Moscow.
Its current members are: Belarus, China, Kazakhstan, Kyrgyzstan,
Russia, Tajikistan, Turkmenistan, and Uzbekistan. The EAG is open to other states of the Eurasian region which can become members of the Group after approval of the EAG Plenary meeting.
Former FATF president Jean-Louis Fort said that the organization, initiated by the Russian Federation, “spans a huge area of the globe and provides a new and necessary mechanism for fighting terrorists and money launderers in this region.” Countries such as
Georgia, Uzbekistan, Ukraine, Italy, the United Kingdom and the
United States, as well as international organizations such as FATF, the World Bank and the IMF, sit as observers of the organization.
The website of the group is http://www.eurasiangroup.org/.

EASTERN AND SOUTH AFRICAN
ANTI-MONEY LAUNDERING GROUP
Fourteen countries from East Africa to the southern tip of Africa make up this FATF-style regional body, which consists of a ministerial council, a task force of senior officials and a secretariat.

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In 1999, the group developed a memorandum of understanding among its member states. Its objectives are to:
 Adopt and implement the 40 Recommendations of the
Financial Action Task Force.
 Apply AML provisions to all serious crimes.
 Implement any other measures contained in multilateral agreements and initiatives to which member states subscribe pertaining to the prevention and control of the laundering of proceeds from all serious crimes.
All 14 member states have signed the memorandum. The website of the group is www.esaamlg.org.

Other Anti-Money Laundering Initiatives
ORGANIZATION OF AMERICAN STATES: INTER-AMERICAN DRUG
ABUSE CONTROL COMMISSION (COMISIÓN INTERAMERICANA PARA
EL CONTROL DEL ABUSO DE DROGAS) (CICAD)
In May 1992, the Organization of American States (OAS) became the first permanent international body to reach an agreement on the details of model legislation aimed specifically at dealing with money laundering. At its annual general assembly held in Nassau, the Bahamas, the OAS unanimously approved a set of 19 articles, written in statutory language, which it recommended its member nations enact.
The OAS action was not an overnight affair. The vote was the culmination of a two-year effort by the Inter-American Drug Abuse
Control Commission, an OAS entity that goes by the acronym
CICAD (Comisión Interamericana para el Control del Abuso de
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CICAD:
 Serves as the Western Hemisphere’s policy forum on all aspects of the drug problem.
 Fosters multilateral cooperation on drug issues in the
Americas.
 Executes action programs to strengthen the capacity of member states to prevent and treat drug abuse, to combat production and trafficking of illicit drugs; and to deny traffickers their ill-gotten gains.
 Promotes drug-related research, information exchange, specialized training and technical assistance.  Develops and recommends minimum standards for drug-related legislation; treatment; the measurement of both drug consumption and the cost of drugs to society; and drug-control measures, among others.
CICAD’s core mission is to strengthen the human and institutional capabilities and to harness the collective energy of member states to reduce the production, trafficking and use of illegal drugs in the
Americas.
Within CICAD is an Anti-Money Laundering Unit (CICAD-AMLU) established in 1999. The Unit focuses its efforts on providing technical assistance and training to all member states in judicial and financial measures and law enforcement. It also acts as secretariat of CICAD’s Group of Experts for the Control of Money
Laundering.
Through the Group of Experts, Model Regulations are developed on money laundering offenses related to drug trafficking and other crimes. These regulations serve as permanent legal documents providing a legal framework to member states.
They were influenced by and are compatible with the FATF
Recommendations.
The entire set of Model Regulations is at: http://www.cicad.oas.org.

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CICAD’s work on the Model Regulations has not been without its obstacles. One was the variety of legal systems among the nations of the hemisphere. Most have legal systems that were inherited from, or were strongly influenced by, their colonial rulers, including
Spain, England, France, Portugal and even the Netherlands.
In 1999, the Inter-American Development Bank (IADB) and
CICAD started a program in eight South American countries to train employees from financial institutions and from the financial regulatory agencies responsible for enforcing anti-money laundering requirements. In 2001, another program was developed and conducted for judges and prosecutors among the eight countries, and, in 2002, a long term project was begun to establish
Financial Intelligence Units in Argentina, Chile, Ecuador, Bolivia,
Brazil, Peru, Uruguay and Venezuela.
In addition, CICAD-AMLU has the capacity to develop, supervise and offer technical assistance and training courses related to the legal framework of anti-money laundering, be it through analysis or development of laws, or their application (law enforcement). CICAD also launched a joint training program called “Mock Trial on Money
Laundering” in various Latin American countries.
Other CICAD efforts have specifically targeted:
 Bankers and Regulators: Created with the IADB in 1999, it was developed to provide training and technical assistance to financial entities in formulating typologies of money laundering offenses found in financial institutions.
 Judges and Prosecutors: Developed from 1999 to
2002 in conjunction with Spanish authorities and coordinated with the IADB, it seeks to train national judicial bodies on money laundering techniques and their criminalization.
 Financial Intelligence Units: This program, coordinated by CICAD and IADB, seeks to develop and create, through technical assistance and training, institutions

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that can analyze and control organized crime efforts to launder assets.
 Law Enforcement: Law enforcement agencies are trained in strategic techniques to: 1) facilitate financial investigations involving the proceeds from serious crimes; 2) improve prosecutions of money laundering/terrorism financing offenses; and 3) improve procedures and techniques for the seizure of property related to these criminal activities.
CICAD’s website is http://www.cicad.oas.org.

EGMONT GROUP OF FINANCIAL INTELLIGENCE UNITS
In 1995, a number of national financial intelligence units (FIUs) began working together in an informal organization known as the
Egmont Group (named for the location of the first meeting, the
Egmont-Arenberg Palace in Brussels). The goal of the group is to provide a forum for FIUs around the world to improve cooperation in the fight against money laundering and financing of terrorism and to foster the implementation of domestic programs in this field.
This support includes:
 Expanding and systematizing cooperation in the reciprocal exchange of information.
 Increasing the effectiveness of FIUs by offering training and promoting personnel exchanges to improve the expertise and capabilities of personnel employed by
FIUs.
 Fostering better and secure communication among
FIUs through the application of technology, such as the
Egmont Secure Web (ESW).
 Promoting the operational autonomy of FIUs.
 Promoting the establishment of FIUs in conjunction with jurisdictions with an AML/CFT program in place,

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or in areas with a program in the early stages of development. In 1996, based on the work of its Legal Working Group, Egmont approved a definition of an FIU. It was amended in 2004 to reflect the FIUs’ role in combating terrorism financing as follows:
 A central, national agency responsible for receiving
(and, as permitted, requesting), analyzing and disseminating to the competent authorities, disclosures of financial information:
 Concerning suspected proceeds of crime and potential financing of terrorism.
 Required by national legislation or regulation, in order to combat money laundering and terrorism financing.
In 1999, the Egmont Training Working Group undertook an initiative to draw together cases from the fight against money laundering waged by Egmont Group member FIUs.
In 2001, the group issued a document, “Principles for Information
Exchange Between Financial Intelligence Units for Money
Laundering and Terrorism Financing Cases,” which sets out guidelines for sharing information among FIUs. In 2004, the group issued “Best Practices for the Exchange of Information Between
Financial Intelligence Units.”
As of June 30, 2010, there were 117 Egmont member FIUs.
The Egmont Group’s homepage is http://www.egmontgroup.org/.

THE WOLFSBERG GROUP
The Wolfsberg Group is an association of 11 global banks that aims to develop financial services industry standards and related products for Know Your Customer, Anti-Money Laundering and
Counter Terrorist Financing policies.

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The Group first came together in 2000 at the Wolfsberg castle in
Switzerland, accompanied by representatives of Transparency
International, to draft anti-money laundering guidelines for private banking that, when implemented, would mark an unprecedented private-sector assault on the laundering of corruption proceeds.
Their principles hold no force of law and carry no penalties for those who do not abide by them.
The Wolfsberg Anti-Money Laundering Principles for Private
Banking was published in October 2000 and was revised in May
2002. These principles recommend controls for private banking that range from the basic, such as customer identification, to enhanced due diligence, such as heightened scrutiny of individuals who “have or have had positions of public trust.” The banks that released the principles with Transparency International said that the principles would “make it harder for corrupt people to deposit their ill-gotten gains in the world’s banking system.”
The principles say banks will “endeavor to accept only those clients whose source of wealth and funds can be reasonably established to be legitimate.” They highlight the need to identify the beneficial owner of funds “for all accounts” when that person is someone other than the client, and urge private bankers to perform due diligence on “money managers and similar intermediaries” to determine that the middlemen have a “satisfactory” due diligence process for their clients or a regulatory obligation to conduct such due diligence. The principles recommend that “at least one person other than the private banker” should approve all new clients and accounts. The principles list several situations that require further due diligence, including activities that involve:
 Public officials, including individuals holding, or having held, positions of public trust, as well as their families and close associates.
 High-risk countries, including countries “identified by credible sources as having inadequate anti-money

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laundering standards or representing high-risk for crime and corruption.”
 High-risk activities, involving clients and beneficial owners whose source of wealth “emanates from activities known to be susceptible to money laundering.” The Wolfsberg principles say that banks should have written policies on the “identification of and follow-up on unusual or suspicious activities,” and should include a definition of what is suspicious, as well as examples of such activity. They recommend a “sufficient” monitoring system that uses the private banker’s knowledge of the types of activity that would be suspicious for particular clients. They also outline mechanisms that can be used to identify suspicious activity, including meetings, discussions and in-country visits with clients and steps that should be taken when suspicious activity is detected.
The principles also address:
 Reporting to management of money laundering issues.
 AML training.
 Retention of relevant documents.
 Deviations from policy.
 Creation of an anti-money laundering department and an AML policy.
In May 2002, the Wolfsberg Principles for Private Banking were revised. A section was added prohibiting the use of internal non-client accounts (sometimes referred to as “concentration” accounts) to keep clients from being linked to the movement of funds on their behalf (i.e., banks should forbid the use of such internal accounts in a manner that would prevent officials from appropriately monitoring movements of client funds).
The Wolfsberg Group also issued guidelines in early 2002 on “The
Suppression of the Financing of Terrorism,” outlining the roles of

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financial institutions in the fight against money laundering and terrorism financing.
The Wolfsberg recommendations include:
 Providing official lists of suspected terrorists on a globally coordinated basis by relevant authorities.
 Including adequate information in the lists to help institutions search customer databases efficiently.
 Providing prompt feedback to institutions following circulation of the official lists.
 Providing information on the manner, means and methods used by terrorists.
 Developing government guidelines for business sectors and activities identified as high-risk for terrorism financing.
 Developing uniform global formats for funds transfers that assist in the detection of terrorism financing.
The group also recommends that financial institutions be protected by a safe harbor immunity to encourage them to share information and to report to authorities.
The Wolfsberg Group also committed itself to recommending enhanced due diligence for “business relationships with remittance businesses, exchange houses, casas de cambio, bureaux de change and money transfer agents…” and committed its members to taking enhanced due diligence steps for high-risk customers or those in high-risk sectors, and activities “such as underground banking businesses or alternative remittance systems.”
In 2002, Wolfsberg issued guidelines on “Anti-Money Laundering
Principles for Correspondent Banking” that outlined steps financial institutions should take to combat money laundering and terrorism financing through correspondent banking.
Correspondent accounts are accounts established by one financial institution with another financial institution to hold deposits, make

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payments on its behalf, and process other transactions. The
14 Wolfsberg guidelines extend to all correspondent banking relationships an institution maintains, including those with banks, broker-dealers, mutual funds, money services businesses, hedge funds and credit card issuers.
Some of the more notable recommendations include the following:
 Due diligence should be risk-based, depending on the location, type of business, ownership, customer base, regulatory status and AML controls of the correspondent banking client or business.
 An institution should not offer its products or services to a shell bank.
 Generally, the new principles should not apply to central banks and monetary authorities of member countries of FATF or multinational institutions, such as the International Monetary Fund and the World Bank.
 All correspondent banking client information should be reviewed and updated periodically based on risk factors.  The principles should be part of a financial institution’s larger AML program.
The Wolfsberg Group began collaborating with the Banker’s
Almanac in 2004 and the International Due Diligence Repository that has subsequently been developed is available at www. bankersalmanac.com/addcon/products/due_diligence.aspx. Details in the Repository include copies of company by-laws, relevant licenses, extracts from commercial registers or certificates of incorporation, the most recent annual reports, information about shareholders with stakes of more than 5 percent, biographies of board members and senior management, information about each financial institution’s AML policies and procedures, etc.
The initiative is a move towards standardizing due diligence information, which in itself provides a potential cost-saving in time spent seeking information from a variety of sources. Since its launch, the Banker’s Almanac has added further functionality to

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the Repository with the inclusion of an alert service which updates users with any changes to documents or status of an institution.
The Wolfsberg Group, which has no enforcement powers, issued the guidelines to manage its members’ own risks, to help make sound decisions about clients and to protect their operations from criminal abuse.
The group released the “Monitoring, Screening and Searching
Wolfsberg Statement” in September 2003. This document discussed the need for appropriate monitoring of transactions and customers to identify potentially unusual or suspicious activity and transactions, and for reporting such to competent authorities.
In particular, it covered issues related to the development of risk-based processes for monitoring, screening and searching transactions and customers.
All of the Group’s publications can be found on its website at www. wolfsberg-principles.com/standards.html. As of June 2010, the Wolfsberg Standards listed on the website were:  Wolfsberg AML Guidance on Credit/Charge Card
Issuing and Merchant Acquiring Activities (May 2009).
 Wolfsberg Trade Finance Principles (January 2009).
 Wolfsberg Group, Clearing House Statement on
Payment Message Standards (April 2007).
 Wolfsberg Group, Notification for Correspondent Bank
Customers (April 2007).
 The Wolfsberg Statement against Corruption (February
2007).
 Wolfsberg Statement — Guidance on a Risk Based
Approach to Managing Money Laundering Risks
(March 2006).

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 Wolfsberg Statement — Anti-Money Guidance for
Mutual Funds and Other Pooled Investment Vehicles
(March 2006).
 Wolfsberg Statement on Monitoring, Screening and
Searching (September 2003).
 Wolfsberg Principles for Correspondent Banking
(November 2002).
 Wolfsberg Statement on the Suppression of the
Financing of Terrorism (January 2002).
 Wolfsberg AML Statement on Private Banking —
Revised Version (May 2002).

THE WORLD BANK AND THE INTERNATIONAL MONETARY FUND
The International Monetary Fund (IMF) and the World Bank have supported the efforts of FATF in addressing the resistance of certain nations to joining the international battle against money laundering. Since 2001, the two institutions have required countries that benefit from their financial and structural assistance programs to have effective money laundering controls.
In an April 2000 joint policy paper called “Enhancing Contributions
To Combating Money Laundering,” the two organizations detailed the steps that they would take to strengthen the global assault on money laundering.
In September 2001, the IMF and the World Bank started to “fully integrate” the battle against money laundering and other financial crimes into its “surveillance exercises and programs.” That month, the International Monetary and Financial Committee (IMFC), the advisers to the IMF’s board of governors, issued a communiqué that said it would “explore incorporating work on financial abuse, particularly with respect to international efforts to fight against money laundering, into its various activities, as relevant and appropriate.” 161

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The IMFC asked the IMF and the World Bank to prepare a joint paper outlining their appropriate roles in the effort and suggesting how to integrate the subject into their work. In response, an IMF background paper, “Financial System Abuse, Financial Crime and
Money Laundering,” issued in February, 2001, explored how the institutions could “play … role[s] in protecting the integrity of the international financial system from abuse” through use of their influence to promote national anti-corruption programs.
Since then, the IMF and the World Bank have become more active in combating money laundering by:
 Concentrating on money laundering over other forms of financial abuse.
 Helping to strengthen “financial supervision and regulation” in countries.
 More closely interacting with the OECD and the Basel
Committee on Banking Supervision.
 Insisting on the application of international AML standards in countries that ask for financial assistance.
In a joint meeting in April 2004 of their boards of directors, the two bodies agreed to adopt, on a permanent basis, their pilot program that assesses a nation’s compliance with international AML and anti-terrorist financing standards. The program put an end to
FATF’s practice of publicizing Non-Cooperative Countries and
Territories (NCCT).
The World Bank and the IMF established a collaborative framework with FATF for conducting comprehensive assessments, using a single global methodology, of countries’ compliance with the FATF
40+9 Recommendations on methods to fight money laundering and to combat the financing of terrorism. The assessments are carried out as part of the Financial Sector Assessment Program and result in the “Report on Observance of Standard and Codes.”
In 2002, the World Bank and the IMF developed the “Reference
Guide to Anti-Money Laundering (AML) and Combating the
Financing of Terrorism (CFT)” in an effort to provide practical steps

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for countries implementing AML/CFT regimes in accordance with international standards. The guide describes the global problem of money laundering and terrorist financing on the development agenda of individual countries and across regions. It explains the basic elements required to build an effective AML/CFT legal and institutional framework and summarizes the role of the World Bank and the IMF in those efforts.
For more information, see: http://www.imf.org/external/pubs/cat/ longres.cfm?sk=20274.0 Other International Organizations
Other international organizations with anti-money laundering and terrorist financing initiatives include:
 African Development Bank.
 Asia Development Bank.
 The Commonwealth Secretariat.
 European Bank for Reconstruction and Development
(EBRD).
 European Central Bank (ECB).
 Europol.
 Inter-American Development Bank (IADB).
 Interpol.
 International Organization of Securities Commissions
(IOSCO).
 Offshore Group of Banking Supervisors (OGBS).
 World Customs Organization (WCO).

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Key U.S. Legislative and
Regulatory Initiatives Applied to Transactions Internationally
This guide contains an overview of the principal elements of United
States laws related to money laundering and terrorism financing that bear on international transactions and jurisdictions.

USA Patriot Act
Motivated by the attacks of September 11, 2001, and the urgent need to decipher and disable mechanisms that finance terrorism, the U.S. Congress enacted the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act (USA Patriot Act) in October 2001 to strengthen money laundering laws and the Bank Secrecy Act to levels unseen since the original passage of the BSA in 1970 and the world’s first anti-money laundering law in 1986.
Title III of the USA Patriot Act (U.S. Public Law 107-56), entitled the International Money Laundering Abatement and Anti-Terrorist
Financing Act of 2001, contains most, though not all, of the antimoney laundering-related provisions in this diverse law.
The USA Patriot Act has implications for U.S. institutions and non-U.S. institutions that do business in the United States. It is important to note that the regulations issued under the USA
Patriot Act by the U.S. Treasury Department provide the detailed requirements that financial institutions must follow to comply with the provisions of the Act. These regulations are compiled in 31
Code of Federal Regulation Part 103.
Key provisions of the USA Patriot Act stem from the premise that international access points to the U.S. financial system must be controlled. Thus, the law covers a wide range of anti-money laundering and terrorism financing provisions affecting foreign businesses. These include:

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Section 311: Special Measures for Primary Money Laundering
Concerns (31 U.S.C. 5318A). This section provides the U.S.
Treasury Department with the authority to apply graduated, proportionate measures against a foreign jurisdiction, a foreign financial institution, a type of international transaction or a type of account that the Treasury Secretary determines to be a
“primary money laundering concern.” By designating a country or a financial institution as a “primary money laundering concern,” the U.S. government can force U.S. banks to halt many of their financial dealings with the designee. Once identified, the Treasury
Department can require U.S. financial institutions to follow any or all of the following five special measures:
1. Keep records and/or file reports on certain financial transactions, including a description of the transactions, the identities and addresses of the participants in the transactions and the identities of the beneficial owners of the funds involved.
2. Obtain information on the beneficial ownership of any account opened or maintained in the U.S. by a foreign person or a foreign person’s representative.
3. Identify and obtain information about customers who are permitted to use, or whose transactions are routed through, a foreign bank’s “payable-through” account.
4. Identify and obtain information about customers permitted to use, or whose transactions are routed through, a foreign bank’s “correspondent” account.
5. Close certain payable-through or correspondent accounts. To ensure that all relevant factors are considered, the Secretary of
Treasury must consult with the Secretary of State and the Attorney
General before designating a jurisdiction, institution or a particular type of transaction or account as a primary money laundering concern. The U.S government has used Section 311 to cut financial ties to countries such as Myanmar (formerly known as Burma), and

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has also singled out specific institutions, including banks in Latvia,
Syria, Macau and Myanmar.
Section 312: Correspondent and Private Banking Accounts (31
U.S.C. 5318(i)). Requires due diligence and, in certain situations,
“enhanced due diligence” for foreign correspondent (which includes virtually all account relationships that institutions can have with a foreign financial institution) and private banking accounts for nonU.S. persons.
The correspondent banking portions of the rule apply to U.S. banks, credit unions, thrift institutions, trust banks, brokerdealers, futures commission merchants and introducing brokers in commodities and mutual funds and U.S.-based agencies and branches of foreign banks.
Foreign financial institutions covered by the rule include foreign banks, foreign branches of U.S. banks, foreign businesses that would be considered broker-dealers, futures commission merchants, introducing brokers in commodities, or mutual funds if they operated in the United States, and money transmitters or currency exchangers organized in a foreign country.
The due diligence program must include “appropriate, specific and risk-based,” and, where necessary, enhanced policies, procedures and controls reasonably designed to identify and report suspected money laundering in a correspondent account maintained in the
United States. This due diligence program must also be included in the institution’s anti-money laundering program.
The due diligence program must address three measures:
 Determining whether enhanced due diligence is necessary.  Assessing the money laundering risk presented by the correspondent account.
 Applying risk-based procedures and controls reasonably designed to detect and report suspected money laundering.

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Pursuant to the implementing regulation, enhanced due diligence procedures must be applied to a correspondent account established for a foreign bank operating under:
 An offshore banking license.
 A license issued by a foreign country designated as non-cooperative by an international organization, with which designation the Treasury Secretary agrees.
 A license issued by a foreign country that has been designated by the U.S. as warranting special measures pursuant to Section 311 of the USA Patriot Act, described above.
The enhanced due diligence that must be implemented in these situations includes:
 Conducting enhanced scrutiny for possible money laundering and suspicious transactions, including: q Obtaining information relating to the foreign bank’s

AML program. q Monitoring transactions in and out of the

correspondent account in a manner reasonably designed to detect possible money laundering and suspicious activity. q Obtaining information about the correspondent

account that is being used as a payable-through account.  Determining whether the correspondent account is being used by other foreign banks that have a correspondent relationship with the foreign bank for which the correspondent account was established, and taking reasonable steps to assess and mitigate the money laundering risks associated with such accounts.
 Determining, for any such foreign bank whose shares are not publicly traded, the identity of each of the owners of the foreign bank with the power to vote 10

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percent or more of any class of securities of the bank, and the nature and extent of the ownership interest of each such owner.
The private banking portions of the rule apply to the same institutions covered by the correspondent banking provisions of the rule. Such institutions must maintain a due diligence program for private banking accounts and must conduct enhanced scrutiny of private banking accounts maintained for senior foreign political figures, their immediate family and their close associates.
Under the rule, a private banking account is defined as an account with a minimum aggregate deposit of $1 million for one or more non-U.S. persons and which is assigned to a bank employee acting as a liaison with the non-U.S. person.
The private banking due diligence program must include policies and procedures designed to detect and report suspected money laundering or suspicious activity in the U.S. account.
For covered private banking accounts, U.S. institutions must take reasonable steps to:
 Ascertain the identity of all nominal and beneficial owners of the accounts.
 Ascertain whether any such owner is a “senior foreign political figure.”
 Ascertain the source of the funds in the account and the purpose and expected use of the account.
 Monitor the account to ensure the activity in the account is consistent with the information provided as to the source of funds and the purpose and expected use of the account, as needed to guard against money laundering and to report any suspected money laundering or suspicious activity.
In ascertaining whether an account owner is a “senior foreign political figure,” the institution must take reasonable steps to determine if the person is a “current or former senior official in the

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executive, legislative, administrative, military or judicial branches of a foreign government.” The definition also covers officials of foreign political parties and government-owned commercial enterprises.
The definition includes immediate family members and persons who are “widely and publicly known” to be close associates.
An institution that maintains accounts for these individuals must conduct “enhanced scrutiny” that is reasonably designed to detect if the funds “may involve the proceeds of foreign corruption,” which includes any asset or property obtained “through misappropriation, theft or embezzlement of public funds, the unlawful conversion of property of a foreign government, or . . . bribery or extortion.”
Section 313: Prohibition on correspondent accounts for foreign shell banks (31 U.S.C. 5318(j)). Prohibits U.S. banks and securities brokers and dealers from maintaining correspondent accounts for foreign unregulated “shell” banks that have no physical presence anywhere. The term “physical presence” is defined as a place of business that is maintained by a foreign bank; is located at a fixed address (as opposed to solely an electronic address) where it is authorized to conduct banking activities; employs one or more individuals on a full-time basis at that location; maintains operating records at that location; and is subject to inspection by the banking authority which licensed it at that location. The term shell bank does not include a bank that is a regulated affiliate of a bank that maintains a physical presence.
The section also requires financial institutions to take reasonable steps to ensure that foreign banks with correspondent accounts do not themselves permit access to such accounts by foreign shell banks. Banks and securities brokers are permitted to use a certification form to comply with the rule. That process requires the foreign banks to certify at least once every three years that they are not themselves shell banks and that they do not permit shell banks access to the U.S. correspondent account through a nested correspondent relationship.
Section 319(a): Forfeiture from U.S. Correspondent Account (18
U.S.C. 981(k)). In situations where funds have been deposited with a foreign bank, this section permits the U.S. Government to seize funds in the same amount from a correspondent bank account

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in the U.S. that has been opened and maintained for the foreign bank. The U.S. Government is not required to trace the funds, as they are deemed to have been deposited into the correspondent account. However, the owner of the funds may contest the seizure order. Section 319(b): Records relating to Correspondent Accounts for Foreign Banks (31 U.S.C. 5318(k)). Allows the appropriate
Federal banking agency to require a financial institution to produce within 120 hours (five days) records or information related to the institution’s AML compliance or related to a customer of the institution or any account opened, maintained, administered or managed in the U.S. by the financial institution.
The section also allows the Secretary of the Treasury or the
Attorney General to subpoena records of a foreign bank that maintains a correspondent account in the U.S. The subpoena can request any records relating to the account, including records located outside the United States. If the foreign bank fails to comply with or fails to contest the subpoena, the Secretary or the
Attorney General can order the U.S. financial institution to close the correspondent account within ten days of receipt of such order.
Additionally, the section also requires foreign banks to designate a registered agent in the U.S. to accept service of subpoenas pursuant to this section. Furthermore, U.S. banks and securities brokers and dealers that maintain correspondent accounts for foreign banks must keep records of the identity of the 25 percent owners of the foreign bank, unless it is publicly traded, as well as the name of the correspondent bank’s registered agent in the U.S.
Generally this information is collected on the certification form used to comply with Section 313 above and must be updated at least every three years or more frequently if the information is no longer correct. 170

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The Reach of the U.S. Criminal Money
Laundering and Civil Forfeiture Laws
First enacted in 1986, the criminal money laundering law of the
United States is a powerful legal weapon, but it may be used only if the property involved in the financial transaction at issue represents the proceeds of at least one designated underlying crime — a
“specified unlawful activity” (SUA). However, SUAs include virtually every U.S. crime that produces economic advantage, including aircraft piracy, wire fraud, bank fraud, copyright infringement, embezzlement, export violations, illegal gambling, narcotics offenses, racketeering and even some environmental crimes.
(18 USC 1956 and 1957.)
This money laundering law also reaches foreign individuals and foreign financial institutions if the financial transaction occurs in whole or in part in the U.S. or if the foreign financial institution maintains a bank account at a U.S. financial institution.
Although the prosecution must prove the existence of an SUA’s proceeds, it need not prove that the accused “knew” the exact source of the funds. The prosecution must prove only that the defendant knew that the funds came “from some form . . . of activity that constitutes a felony under state, federal, or foreign law, regardless of whether or not such activity” is an SUA (18 USC
1956(c)(1)). Courts have often ruled that “willful blindness,” which has been defined as “the deliberate avoidance of knowledge of the facts,” is the equivalent of actual knowledge. Willful blindness may be proven by the circumstances surrounding the transaction and the defendant’s conduct.
Finally, Section 319(a) of the USA Patriot Act, discussed above, greatly strengthened the forfeiture powers over the funds of foreign persons and institutions. If the funds the U.S. pursues are deposited in a foreign bank, which keeps an “interbank account” at a U.S. bank, the U.S. may bring a case to forfeit the crime-tainted funds in the U.S. account.

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Office of Foreign Assets Control
In addition to these laws and regulations, financial institutions and businesses in other countries must recognize the extraterritorial reach of regulations enforced by the U.S. Treasury Department’s
Office of Foreign Assets Control (OFAC).
OFAC administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign countries, terrorists, international narcotics traffickers and those engaged in activities related to the proliferation of weapons of mass destruction. OFAC acts under presidential wartime and national emergency powers, as well as authority granted by specific legislation, to impose controls on transactions and to freeze foreign assets under U.S. jurisdiction.
Many of the sanctions are based on United Nations and other international mandates, are multilateral in scope, and involve close cooperation with allied governments.
OFAC rules prohibit transactions and require the blocking of assets of persons and organizations that appear on one of a series of lists that OFAC issues periodically. The agency has the power to impose significant penalties on those who are found to be in violation of the blocking orders.
All U.S. persons must comply with OFAC regulations, including all
U.S. citizens and permanent resident aliens, regardless of where they are located; all persons and entities within the United States; and all U.S. incorporated entities and their foreign branches. In the cases of certain programs, such as those regarding Cuba and North Korea, all foreign subsidiaries owned or controlled by
U.S. companies also must comply. Certain programs also require foreign persons in possession of U.S.-origin goods to comply.
See: http://www.treasury.gov/about/organizational-structure/offices/
Pages/Office-of-Foreign-Assets-Control.aspx

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Summary
International cooperation is a key to success in the anti-money laundering and anti-terrorist financing battle due to the nature of criminal proceeds and laundering offenses, and the speed with which international financial transactions can take place.
The Financial Action Task Force on Money Laundering (FATF), which is part of the Organization for Economic Cooperation and
Development based in Paris, was formed by the Group of Seven industrial nations in 1989. FATF is the group that has issued recognized standards in the worldwide effort against money laundering and terrorism financing.
Its 40 Recommendations, published in 1990 and revised in 1996,
2003 and 2012, form a comprehensive regime against money laundering and have been accepted worldwide as a basis for tackling money laundering and terrorism financing. In 2012,
FATF incorporated the 9 Special Recommendations into its 40
Recommendations.
FATF issued eight Special Recommendations on Terrorist
Financing in 2001, shortly after the September 11 terrorist attacks in the U.S., and, in 2004, updated the eight Special
Recommendations and issued a ninth Special Recommendation.
FATF also issues guidance on money laundering typologies or trends. While the original FATF list of Non-Cooperative Countries and
Territories no longer exists, in 2009 FATF issued a statement on high-risk and non-cooperative jurisdictions. Further, in March
2010, FATF issued guidance concerning how it would identify certain high-risk countries and set forth the countries’ specific strategic AML deficiencies.
As of June 2010, FATF comprised 34 Members and two Regional
Organizations, representing most major financial centers in all parts of the globe. The following eight regional FATF-style bodies

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(FSRBs) are FATF Associate Members and have a similar form and functions to those of FATF. Some FATF members are also members of these bodies. There are 21 International organizations that have FATF Observer status.
The Basel Committee, established by the central bank governors of the G-10 countries in 1974, promotes sound supervisory standards worldwide. It has recognized that sound Customer Due Diligence (CDD) policies and procedures are critical in protecting the safety and soundness of banks and the integrity of banking systems, and, in October 2001, it issued a paper called “Customer Due
Diligence for Banks.”
The first European Union Directive on Prevention of the Use of the Financial
System for the Purpose of Money Laundering was adopted by the Council of
Europe in 1991. In December 2001, the European Union issued a Second
Directive that widened money laundering offenses beyond drugs to all serious crimes and extended the scope of financial sector compliance beyond credit and financial institutions to bureaux de change and money remittance offices, auditors, tax advisors, lawyers and external accountants. European law prevails over national law in the case of directives. A Third Directive was adopted in 2005, and broadened the scope of the directives by defining “money laundering” and
“terrorist financing” as separate crimes and extending customer Identification and
STR requirements to trusts and company service providers and dealers selling goods for cash in excess of 15,000 Euros. The Third Directive also detailed a risk-based approach to customer due diligence; instructed member states to provide a safe haven for employees filing STRs; obligated member states to keep comprehensive statistics on STRs and required all financial institutions to identify and verify beneficial owners of accounts.
In May 1992, the Organization of American States (OAS) became the first permanent international body to reach agreement on the details of model legislation aimed specifically at dealing with money laundering.
In addition, the United States, realizing its role as major financial market, has implemented AML/CFT laws that have an extraterritorial reach. These laws show the increased importance countries are placing on AML/CTF efforts, by expanding their scope to go beyond just imposing requirements on the financial institutions that operate in the jurisdiction to applying the requirements to those persons and financial institutions that want to maintain accounts in the jurisdiction. 174

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Group

What is It?

Important Documents

Financial Action
Task Force on Money
Laundering

 Intergovernmental body with 34 member countries and two international organizations.   ets money laundering and terrorist
S
financing standards.

  0 Recommendations on Money
4
Laundering and Terrorist Financing
(Last updated February 2012).

Basel
Committee
on Banking
Supervision

  stablished by the central bank
E
governors of the G-10.
  romotes sound supervisory standards
P
worldwide.

 Customer Due Diligence for Banks
Paper (2001).
  haring of financial records between
S
jurisdictions in connection with the fight against terrorist financing (2002).
 General Guide to Account Opening and
Customer Identification (2003).
 Consolidated KYC Risk Management
Paper (2004).

European Union

 The EU Directives on anti-money laundering require the EU member states to issue legislation to prevent their domestic financial systems being used for money laundering.

 1st EU Directive on Prevention of the
Use of the Financial System for the
Purpose of Money Laundering (1991).
 2nd Directive (2001).
 3rd Directive (2005).

Wolfsberg Group

 Association of 11 global banks.
 Aims to develop standards on money laundering controls for banks.

 Wolfsberg Anti-Money Laundering
Principles for Private Banking (last updated 2002).
 The Suppression of the Financing of
Terrorism Guidelines (2002).
 Anti-Money Laundering Principles for
Correspondent Banking (2002).

APG, GAFISUD,
CFATF,
MENAFATF,
Eurasian Group,
Eastern and
South African
AML Group

 FAFT-style regional bodies

 Typologies, etc.

Egmont Group

 Informal networking group of Financial
Intelligence Unit

 Statement of Purpose (last updated
2004).
 Principles for Information Exchange
Between Financial Intelligence Units for
Money Laundering Cases (2001).
 Best Practices for the Exchange of Information Between Financial
Intelligence Units (2004).

CICAD

 Commission within the Organization of American States that deals with drug-related issues, including money laundering.  Model Regulations

World
Bank and
International
Monetary Fund

 These organizations work together and in conjunction with FATF in, among other things, encouraging countries to have adequate antimoney laundering laws and reviewing and anti-money laundering laws and procedures of FATF member countries. 175

 Reference Guide to Anti-Money
Laundering and Combating the
Financing of Terrorism: A Manual for
Countries to Establish and Improve
Their Institutional Framework 2002
(revised 2007).

Study Guide for the CAMS Certification Examination
Historic overview of important developments in the international AML arena:
Year
1986

Important Developments in the International AML Arena

 U.S. enacts its Money Laundering Control Act, codified at 18
U.S.C. Section 1956 and 1957, the first law in the world to make money laundering a crime.

1988

 Vienna Convention (UN Convention against Illicit Traffic in
Narcotic Drugs and Psychotropic Substances) is agreed to.

 Statement of principles is issued by Basel Committee on Banking
Regulations and Supervisory Practices.
1989

 Financial Action Task Force established at G-7 economic summit in Paris.

1990

 FATF issues its 40 Recommendations on Money Laundering.
 Caribbean Financial Action Task Force is established and issues
CFATF 19 Recommendations on Money Laundering.

 Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime is issued.
1991

 FATF members agree on “mutual assessment” process.
 Council of Europe Directive on Prevention of the Use of the
Financial System for the Purpose of Money Laundering (91/308/
EEC) is issued.

1992

 Organization of American States (OAS) model anti-money laundering regulations and legislation are adopted.

 Kingston (Jamaica) Declaration on Money Laundering of the
CFATF is issued.
1993

 UN model law on Money Laundering, Confiscation and
International Cooperation in Relation to Drugs is proposed.

1995

 Egmont Group of Financial Intelligence Units is formed.

1996

 The FATF 40 Recommendations are revised to extend predicate offenses beyond drugs to other serious crimes.

 The first FATF Typologies Report is released.
1997

 Asia/Pacific Group on Money Laundering (APG) is established.
 PC-R-EV (now MONEYVAL) is established, which conducts selfassessments of AML measures in European countries that are not
FATF members.

1998

 OAS Model Regulations Concerning Laundering Offenses
Connected to Illicit Drug Trafficking and Other Serious Offenses are amended.

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Year
1999

Important Developments in the International AML Arena

 FATF issued Interpretation to Recommendation 15 indicating that suspicious transactions should be reported by financial institutions regardless of whether they are also thought to involve tax matters.

2000

 Non-Cooperative Countries and Territories (NCCT) criteria are issued by FATF, which also publishes first NCCT list.

 Wolfsberg AML Principles on Private Banking are issued.
2001

 UN Security Council Resolution 1373 (S/RES/1373 (2001)) is passed calling on states to work together to prevent and surpress terrorist acts, through increased cooperation and full implementation of the relevant international conventions relating to terrorism and to, among other things, freeze terrorist assests without delay.

 Customer Due Diligence for Banks paper is issued by the Basel
Committee.

 Eight Special FATF Recommendations on Terrorist Financing are issued.  USA Patriot Act is enacted, which brought about substantial changes in U.S. money laundering controls.

 2nd EU Directive (Directive 2001/97/EC), amending the 1991
Directive, is promulgated.

 The International Monetary Fund Executive Board concludes that money laundering threatens financial system integrity.
2002

 Wolfsberg Statement on the Supression of the Financing of
Terrorism is issued.

 Wolfsberg issues its AML Principles on Correspondent Banking.
 Basel Report on Sharing Information on Terrorist Financing is issued.  Guidance for Financial Institutions on Detecting Terrorist
Financing is issued by FATF.

 Wolfsberg Group issues revised AML Principles for Private
Banking.

 IMF Report on the Outcome of the FATF Plenary Meeting and
Proposal for the Endorsement of the Methodology for Assessing
Compliance with Anti-Money Laundering and Combating the
Financing of Terrorism (AML/CFT) Standards is issued.

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Year
2003

Important Developments in the International AML Arena

 The Basel Committee issues its paper Customer Due Diligence for Banks.

 FATF revises its 40 Recommendations.
 Wolfsberg’s Statement on Monitoring Screening and Searching is issued.  UN Security Council Resolution 1455 (S/RES/1455 (2003) is passed condeming the terrorist acts of the Taliban and Al-Qaida and stressing the need for improved coordination and increased exchange of information concerning terrorism.
2004

 Member nations of FATF extend its charter by a record eight years, signaling the possibility that it may become a permanent institution.  FATF issues Special Recommendation IX, calling on countries to stop cross-border movements of currency and monetary instruments related to terrorism financing and money laundering and to confiscate such funds.

 The Basel Committee releases publication “Consolidated KYC
Risk Management.”

 Financial Action Task Force-style regional body MENAFATF is established.  FATF-style regional body, the Eurasian Group (EAG), is formed.
 UN Security Council Resolution 1526 (S/RES/1526 (2004) is passed urging all States to establish internal reporting requirements and procedures on the trans-border movement of currency based on applicable thresholds.
2005

 A Third EU Directive on the Prevention of the Use of the Financial
System for the Purpose of Money Laundering and Terrorist
Financing, based on elements of the Financial Action Task Force’s revised 40 Recommendations, is adopted.

 FFEIC releases first BSA/AML Examination Manual.
 Egmont Group of Financial Intelligence Units exceeds
100-member mark.

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Year
2006

Important Developments in the International AML Arena

 EU Commission issues implementing measures for 3rd Directive with regard to the definition of politically exposed persons and the criteria for simplified customer due diligence procedures.

 EU establishes the "EU Financial Intelligence Untis' Platform" as an informal group to facilitate cooperation among FIUs.

 Final regulation issued implementing the enhanced due diligence requirements for foreign correspondent bank accounts set forth in
Section 312 of the USA Patriot Act.

 Wolfsberg's Statement on Anti-Money Laundering Guidance for
Mutual Funds and Other Pooled Investment Vehicles Is Issued.

 Wolfsberg's Statement on Guidance on a Risk Based Approach to
Managing Money Laundering Risks is issued.
2007

 US agencies issue revised BSA/AML Examination Manual.
 Deadline for implementing the 3rd EU Directive is December 15,
2007.

 FATF issues "Guidance on the Risk-Based Approach to
Combating Money Laundering and Terrorist Financing."

 EU's regulation on cash controls at European Community borders becomes applicable.

 FATF issues new guidance on the implementation of financial prohibitions to combat the threat of Weapons of Mass Destruction proliferation.  Wolfsberg issues Statement Against Corruption.
 Wolfsberg issues Clearing House Statement on Payment
Message Standards.

 Wolfsberg issues Notification for Correspondent Bank Customers.
 Basel Committee issues Statement on Transparency in Payments
Messages.
2008

 FinCEN issues Guidance to Financial Institutions on Filing
Suspicious Activity Reports regarding the Proceeds of Foreign
Corruption.

 FATF revised mandate issued and extended to 2012.
2009

 Wolfsberg issues Trade Finance Properties.
 Wolfsberg Issues "AML Guidance on Credit/Charge Card Issuing and Merchant Acquiring Activities."

2010

 FinCEN issues Joint Guidance on Obtaining and Retaining
Beneficial Ownership Information.

 FFEIC updates BSA/AML Examination Manual.
2012

 FATF revises its 40 + 9 Recommendations

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Review Questions n Describe the FATF 40 Recommendations on Terrorist
Financing.
n Explain the Customer Due Diligence for Banks Paper of the
Basel Committee. n Are the European Union Directives on Money Laundering binding? If so, for whom? n How can FATF, with no enforcement authority, be the leading international organization in establishing global policies and measures in the AML field? n In which areas of money laundering controls has the
Wolfsberg Group issued guidelines? Are they binding? n How can members of the Egmont Group help improve a nation’s efforts against money laundering? n What is the role of the Basel Committee in the fight against money laundering and terrorism financing? n What is OFAC? n What are the due diligence requirements for foreign correspondent accounts with U.S financial institutions? n What implications could the extraterritorial reach of the U.S. laws have in the global commercial relationships of non-U.S. financial institutions and individuals? n How can the operations and customers of a non-U.S institution be affected by U.S. laws and regulations?

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A

4

Introduction n anti-money laundering program is an essential component of a financial institution’s compliance regime. The primary goal of every good program is to protect the organization against money laundering and to ensure that the organization is in full compliance with relevant laws and regulations. For that reason, designing, structuring and implementing these programs should be the top priorities of any institution.
An AML program should be risk-based, and should be designed to mitigate the money laundering and terrorist financing risks the organization may encounter. The risk-based nature of the program recognizes that not all aspects of an institution’s business present the same level of risk. Certain aspects of the business a financial institution conducts will pose greater money laundering risks than others and will require additional controls to mitigate these risks, while others will present a minimal risk and will not need the same level of attention. More detail will be provided on risk later.
Depending on the size of the organization, the anti-money laundering function may be a stand-alone department or may

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be performed by persons who have other compliance duties.
Regardless of the size of the organization, there should be some centralized aspect of control that has an organization-wide view of AML efforts within the organization. The AML program should establish minimum standards for the organization that are reasonably designed to comply with applicable laws and regulations. The organization-wide program may be supplemented by the policies and procedures of various lines of business or legal entities that address specific areas, such as private banking, trade finance, cash handling or investigations. Compliance programs should also include corporate governance and overall management of money laundering and terrorist financing risks.
Before designing an anti-money laundering program, it is imperative to understand what is required of an institution, its employees and customers by the laws and regulations of the jurisdiction where the institution is located. The financial institution’s internal policies and risks related to the business must also be taken into consideration. Anyone needing advice on the complexities of anti-money laundering legislation before building an anti-money laundering program should consult a competent advisor, even if it means seeking outside help.
In this section, we will discuss what to consider when designing a compliance program; how to assess risk; how to spot, manage, document and follow up on suspicious activities; how to know your customer and employee; how to audit your program effectively; and what you need to know about training and screening employees.

Assessing Risk and Developing a Risk-Scoring Model
Introduction
Understanding what is legally required of your institution, employees and customers is essential to a successful program.

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Whatever those legal requirements, however, FATF, along with numerous member countries, such as the United Kingdom and
United States, urge risk-based controls.
The theory is that no financial institution can reasonably be expected to detect all wrongdoing by customers, including money laundering. But if an institution develops systems and procedures to detect, monitor and report the riskier customers and transactions, it will increase its chances of staying out of harm’s way from criminals and from government sanctions and penalties.
A risk-based approach requires institutions to have systems and controls that are commensurate with the specific risks of money laundering and terrorist financing facing them. Assessing this risk is, therefore, one of the most important steps in creating a good anti-money laundering compliance program. As money laundering risks increase, stronger controls are necessary. However, all categories of risk — whether low, medium or high — must be identified and mitigated by the application of controls, such as verification of customer identity, CDD policies, suspicious activity monitoring and economic sanctions screening.
Governments around the world believe that the risk-based approach is preferable to a more prescriptive approach in the area of anti-money laundering and counter-terrorist financing because it is more:
 Flexible — as money laundering and terrorist financing risks vary across jurisdictions, customers, products and delivery channels, and over time.
 Effective — as companies are better equipped than legislators to effectively assess and mitigate the particular money laundering and terrorist financing risks they face.
 Proportionate — because a risk-based approach promotes a common sense and intelligent approach to fighting money laundering and terrorist financing as opposed to a “check the box” approach. It also allows

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firms to minimize the adverse impact of anti-money laundering procedures on their low-risk customers.

Factors to Determine Risk
The risks your organization faces depend on many factors, including the geographical regions involved, your customer types and the products and services offered.
Risk is dynamic and needs to be continuously managed. It is critical that risk ratings accurately reflect the risks present, provide meaningful assessments that lead to practical steps to mitigate the risks, are periodically reviewed and, when necessary, are updated.
Make sure you evaluate new business products for money laundering vulnerabilities and implement appropriate controls before launching them into the market.
But what exactly is a risk-based approach, and what might a riskscoring model look like? You can ask the following questions to assess an institution’s vulnerabilities to money laundering and terrorist financing:

What Risks Do Your Customers Pose?
Levels of Risk
Generally, all risk categories can be broken down into the following levels of risk:
 Prohibited — The company will not tolerate any dealings of any kind given the risk. Countries subject to economic sanctions or designated as state sponsors of terrorism, such as Sudan or Iran, are prime candidates for prohibited transactions. Prohibited customers would include shell banks.
 High-Risk – The risks here are significant, but are not necessarily prohibited. To mitigate the heightened risk presented, the firm should apply more stringent

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controls to reduce the risk, such as conducting enhanced due diligence and more rigorous transaction monitoring. Countries that are noted for corruption or drug trafficking are generally deemed high risk. Highrisk customers may include PEPs; high-risk products and services may include correspondent banking and private banking.
 Medium-Risk — Medium risks are more than a low- or standard-risk of money laundering, and merit additional scrutiny, but do not rise to the level of high-risk.
 Low- or Standard-Risk — This represents the baseline risk of money laundering; normal business rules apply. FATF member countries and domestic retail customers are frequently, but not always, considered to be standard- or low-risk.
A risk-scoring model generally uses numeric values to determine the category of risk (geography, customer type and products and services), as well as the overall customer risk. For example, each category could be given a score between 1 and 10, with 10 being the riskiest. The individual categories could be scored with 1-3 being standard risk, 4-8 being medium risk and 9-10 being high risk. This is particularly helpful when looking at product risk, as it will help determine appropriate controls for the products.
The three categories are then combined to give a composite score.
A simple model would just add the totals from the categories, which would yield a score between 3 and 30. The model can be made more complex by weighting each of the factors differently, such as putting more emphasis on the type of customer, as opposed to the product or country. The model can be made even more sophisticated by, for instance, creating combinations of factors that will determine the overall rating. The degree of complexity is up to the institution; the more complex, the more likely the rating will reflect the customer’s overall risk. However, the more complex the model is, the more difficult it may be to determine the risk rating on an on-going basis, particularly as customers add more products and services or, for business customers especially, as they expand into new markets.

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It is when the categories are combined that the customer’s risk picture becomes clearer. For instance, when you combine a product with a customer type, the combination can radically change the level of risk. If you have a small, foreign, private company seeking to open a checking account with online wire transfer capabilities, you may not have much information on the customer.
When such a customer has the ability to rapidly transfer funds, the resulting risk level may be higher. In this case, the customer may have higher risk ratings for geography, customer type and products and services. However, if a domestic company listed on a major stock market wants to establish an employee retirement plan, it must provide a lot of information as part of being listed on the major stock market and may not be very vulnerable to money laundering, so the risk will probably be much lower.
A “high” risk assessment number does not mean that a prospective customer should automatically be denied an account. The number is more useful in determining which individuals or groups might require greater scrutiny.
The next step is to determine, based on the scoring methodology chosen, what thresholds to establish for each risk category. The institution should be mindful that the high-risk relationships should not represent too large a segment of the population; this is not to say the scores should be adapted to fit the customer portfolio, rather, because high-risk customers truly do need more attention, which costs more money, the institution needs to be mindful that it needs to make a profit. In addition, if the portfolio is overly weighted toward high-risk, even if the institution appears to be making a profit, the overall risk level in the institution may be too great to support.
Generally, it is good to periodically reassess the risk-rating criteria to see if the customers that are scored as a higher risk are those that are more likely to create issues. If they aren’t, it may be time to reassess the risk-scoring model.

Geographical Location
A crucial step in devising any risk-scoring model involves jurisdictional risk. In what countries or jurisdictions do your

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individual customers reside and what are the customers’ countries of citizenship? Where are your corporate customers headquartered and where do they conduct the majority of their business?
Some might be located in countries with a higher risk of money laundering. There is no definitive, independent system for assessing the money laundering risks of various territories and countries.
Some firms will devise their own methods; others will look to a vendor solution. Whichever course is chosen, it is essential that the risk-rating methodology be documented. When looking specifically at money laundering risk, the terrorism and sanctions lists published by governments and international organizations can be a useful starting point. These include lists published by the United Kingdom’s Financial Services Authority, U.S. Office of
Foreign Assets Control, the U.S. Financial Crimes Enforcement
Network, the European Union, the World Bank and the United
Nations Security Council Committee. A model should also take into account whether the country is a member of FATF or of a
FATF-style regional body and has AML requirements equivalent to international best practices.
Companies might also consider the overall reputation of the countries in question. In some, cash may be a standard medium of exchange. Others may have politically unstable regimes and high levels of public or private sector corruption. Some may have a reputation as a bank secrecy haven. Still others may be widely known to have high levels of internal drug production or to be in drug transit regions. How can one identify such countries? The
U.S. State Department issues an annual “International Narcotics
Control Strategy Report” rating more than 100 countries on their money laundering controls. Transparency International publishes a yearly “Corruption Perceptions Index,” available at www.transparency.org, which rates more than 100 countries on perceived corruption. Monitoring major news media is also recommended, and care should be taken that all of the country lists are monitored on a regular basis for changes. Also, the quality of a country’s anti-money laundering laws and regulations, and the strength of its financial industry, can be factors in determining risk.

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Customer Type
This factor looks at the various types of clients, such as individuals, listed companies, private companies, joint ventures, partnerships, financial institutions and others who want to establish a relationship with the institution. To whom are you selling your products? Money remittance companies? Foreign public officials? Travel agencies?
Other financial institutions?
A vital step in risk assessment is the analysis of the users of the products and services that the institution or business offers. Based on the answers to these questions and others, to what extent is your institution or business at risk of money laundering and terrorist financing? Those who have a history of involvement in criminal activities receive the highest ratings. Political figures or those in political organizations score toward the top of the scale, higher than officials of multinational corporations. For example, when a bank is approached by a private company, the risk is higher than it would be with a corporation listed on a major stock exchange because the due diligence that can be conducted is more limited with the former.
If you have a considerable amount of publicly available information, there should be a lower risk than with a small company that is not listed and for which public information is not available.
Risks are generally higher if a money launderer can hide behind corporate veils such as trusts, charities, limited liability companies or structures where it is difficult to identify the beneficial owners of the money. The risk is even higher if corporations are based in countries with inadequate anti-money laundering requirements or strict corporate secrecy protections.
Regulators in various countries have said that the following types of customers might be considered high-risk for money laundering:
 Casinos;
 Offshore corporations and banks located in tax/banking havens;  Leather goods stores;
 Currency exchange houses, money remitters, check cashers; 188

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 Car, boat and plane dealerships;
 Used-car and truck-dealers and machine parts manufacturers;  Travel agencies;
 Brokers/dealers in securities;
 Jewel, gem and precious metals dealers;
 Import/ export companies; and
 Cash-intensive businesses (restaurants, retail stores, parking). While it may not work for all customer types, certain types of customers may merit special treatment when it comes to riskrating. For instance, not every non-bank financial institution presents the same level of risk. Accordingly, a more nuanced approach might be used to break down the various risk factors, such as the type of non-bank financial institution, the quality of supervision over the business, the strength and adequacy of the business’ AML program, the volume of activity the non-bank financial institution does with the institution and the nature of the relationship the customer has had with the institution.

What Risks Do Your Products or Services Pose?
An important element of risk assessment is to review new and existing products and services that the institution or business offers to determine how they may be used to launder money or finance terrorism. The compliance officer should be an active participant in project teams identifying appropriate control frameworks for new products and systems.
What products and services does your institution offer that may be vulnerable to money laundering or terrorist financing? Internet accounts? Private banking? Money transmittal services? Stock brokerage services? Annuities? Insurance products? Offshore services? Money orders? Correspondent banking? Sale of major nonfinancial goods and services, such as automobiles and real estate?

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This risk-rating, based on the type of product the customer seeks, is calculated using a number of product-related factors. Most notably, it depends on the likelihood that the product requested might be used for money laundering or terrorist financing. You probably won’t see interest-rate swaps being used to finance terror, but securities may be another matter. Product scoring is not universal because different financial institutions face varying degrees of risk.
Questions to ask include: Does a particular new or current product or service:
 Enable significant volumes of transactions to occur rapidly?  Allow the customer to engage in transactions with minimal oversight by the institution?
 Afford significant levels of anonymity to the users?
 Have an especially high transaction or investment value?  Allow payments to third parties?
 Have unusual complexity?
 Require government verification of customer eligibility?
In addition, certain specific banking functions or products are considered high-risk. These include:
 Private banking;
 Offshore international activity;
 Deposit-taking facilities;
 Wire transfer and cash-management functions;
 Transactions in which the primary beneficiary is undisclosed;  Loan guarantee schemes;

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 Travelers checks;
 Official bank checks;
 Money orders;
 Foreign exchange transactions;
 Trade-financing transactions with unusual pricing features; and
 Payable Through Accounts (PTAs).

The Elements of an AML Program
In general, the basic elements a financial institution or business must address in an anti-money laundering program are:
 A system of internal policies, procedures and controls;
 A designated compliance officer with day-to-day oversight over the AML program;
 An ongoing employee training program; and
 An independent audit function to test the AML program.

Internal Policies, Procedures and Controls
The first step in determining what policies, procedures and controls are necessary is to identify and understand the applicable laws and regulations. This will set the absolute minimum compliance standards for the institution. The institution should then look at its own risk assessment and gauge its risk appetite. For example, what countries, products and customers are prohibited because the institution has deemed them to be too risky? These should be prohibited by policy and should be supported by appropriate controls to enforce the policy. Institutions also need a process to stay on top of regulatory changes, which will keep the program current.

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Internal anti-money laundering policies should be established or approved by higher management or the board of directors, and should set the tone for the organization. While the organization’s policy may be a high-level statement of principles, it serves as the basis for procedures and controls that provides details as to how lines of business will achieve compliance with laws and regulations, as well as with the organization’s AML policies.

Example

The purpose of our AML policy is to establish the general framework for the fight against money laundering, terrorism, corruption and other financial crimes. Successful participation in this fight by the financial sector requires an unprecedented degree of global cooperation between governments and financial institutions. Our institution is committed to reviewing our AML strategies and objectives on an ongoing basis and to maintaining an effective AML program. We are committed to high standards of AML compliance and require management and employees to adhere to these standards in preventing the use of our products and services for money laundering purposes.
Adherence to this policy is absolutely fundamental for ensuring that all of our entities, regardless of geographic location, comply with applicable antimoney laundering legislation. We are required and committed to adhere to minimum standards of antimoney laundering compliance based on the applicable anti-money laundering laws and regulations and any additional standards from our regulatory supervisors which clarify the main statutory duties imposed on our institution. In any country/jurisdiction where the requirements of applicable anti-money laundering laws establish a higher standard, our entities located in those jurisdictions must meet those standards.
Our AML program is formulated and directed by the anti-money laundering department, but it is the responsibility of all employees to keep ill-gotten funds out of our institution.

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The standard AML operating procedures are often designed and drafted at a lower level in the organization and are modified as needed to reflect changes in products, personnel and promotions, and other day-to-day operating procedures. They are more detailed than the policies. Standard operating procedures translate policy into an acceptable and workable practice. In addition to policies and procedures, there should also be a process to support and facilitate effective implementation of procedures, and that process should be reviewed and updated regularly.
While policies and procedures provide important guidance, the
AML program also relies on a variety of internal controls, including management reports and other built-in safeguards that keep the program working. These internal controls should enable the compliance officer to recognize deviations from standard procedures and safety protocols. A matter as simple as requiring an officer’s approval or two signatures for transactions that exceed a prescribed amount could be a critical internal control element that, when ignored, seriously weakens an institution’s money laundering controls.
Similarly, a “second review” of actions considered to be departures from policy could be helpful if subsequent questions arise. For example, an employee who approves a seemingly innocuous exception from internal policy by allowing the purchase of certain monetary instruments for cash could inhibit detection of a pattern of money laundering activity. A second review could prevent this.
Other effective controls use technology, such as account opening systems that force the entry of required information; aggregation systems that detect reportable currency transactions; and automated account monitoring programs.
Policies and procedures should be in writing, and must be approved by appropriate levels of management. In general, institution-level policies should be approved by the board, while business unit procedures can be approved by business unit management. An AML compliance program should include policies, procedures, and processes that:

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 Identify high-risk operations (products, services, customers, and geographic locations); provide for periodic updates to the institution’s risk profile; and provide for an AML compliance program tailored to manage risks.
 Inform the board of directors (or a committee of the board) and senior management of compliance initiatives, known compliance deficiencies, suspicious transaction reports filed and corrective action taken.
 Assign clear accountability to persons for performance of duties under the anti-money laundering program.
 Provide for program continuity despite changes in management or employee composition or structure.
 Meet all regulatory requirements and recommendations for anti-money laundering compliance.
 Provide for periodic review as well as timely updates to implement changes in regulations. Generally, this should be done at least on an annual basis.
 Implement risk-based CDD policies, procedures and processes.  Provide sufficient controls and monitoring systems for the timely detection and reporting of suspicious activity.
(Institutions should consider centralizing their own review and report-filing functions.)
 Provide for dual controls and segregation of duties.
Employees who complete the reporting forms should not also be responsible for filing the reports or granting the exemptions.
 Comply with all recordkeeping requirements, including retention and retrieval of records.
 Provide sufficient controls and monitoring systems for the timely detection and reporting of activity, such as for large currency or large transaction reporting.

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 Provide for adequate supervision of employees who handle currency transactions, complete reports, grant exemptions, monitor for suspicious activity, or engage in any other activity covered by the anti-money laundering laws, including implementing regulations.
 Train employees to be aware of their responsibilities under anti-money laundering laws, regulations and internal policy guidelines.
 Incorporate anti-money laundering compliance into the job descriptions and performance evaluations of appropriate personnel.
 Develop and implement screening programs to ensure high standards when hiring employees. Implement sanctions for employees who consistently fail to perform in accordance with an AML framework.
 Develop and implement program testing to assess the effectiveness of the program's implementation and execution of its requirements. This is separate from the independent audit requirement, but serves a similar purpose — to assess the effectiveness of the program.
How to structure your anti-money laundering department is a critical issue. The solution depends on the size of your institution and staff, as well as the nature and range of the products and services you offer. A clear definition of how the anti-money laundering department should be administered and by whom are vital questions that must be answered at the start.

Compliance Officer
A person should be designated as the anti-money laundering compliance officer. This individual should be responsible for designing and implementing the program, making necessary changes and disseminating information about the program’s successes and failures to key staff members, constructing antimoney laundering-related content for staff training programs and staying current on legal and regulatory developments in the field.

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The exact structure of a money laundering prevention department varies with each institution. Sometimes, one person is responsible for strategic aspects of the program, and another person is responsible for its operational aspects, including suspected money laundering monitoring and reporting suspicious activity.
The department can be organized into subgroups. Examples include:  The Investigations Group: Monitors alerts generated on customer transactions, such as those from automated systems, as well as referrals from line of business staff.
The group also investigates such alerts and referrals and files Suspicious Transaction Reports (STRs) with the Financial Intelligence Unit (FIU) as required.
 Line of Business Support Group: Assigns a risk code to all clients based on scoring of the CDD risk assessment, performs additional due diligence on medium- and high-risk clients identified via the CDD process and provides a first line of contact for line of business questions on AML matters.
 The Program Oversight Group: Performs periodic reviews and updates of the program, coordinates implementation activities with the line of business support group to ensure that line of business procedures get updated to incorporate program changes, and monitors regulatory environment for changes to the program. Also may be involved in preparing training materials and providing guidance and advice on more complicated AML issues not addressed by the line of business support group. This group generally would have primary responsibility for coordinating regulatory examinations with the lines of business. Often, in addition to these three groups, other anti-money laundering tasks are conducted in the business lines, wherever there is customer contact. For example, CDD forms are often completed by account officers and others at the point where a

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new account is opened, and branch colleagues participate in periodic reviews of high-risk clients and may be required to provide additional information or explanation to support investigations into potentially suspicious activity. Sometimes, suspicious activity may be reported to the Corporate Security group which, upon determining that the activity may pose an AML risk, may refer the case to the Investigations Group. The compliance department may also direct anti-money laundering-related compliance efforts as a result of instructions from a regulatory authority or other research findings. Training
Regulations and laws require financial institutions to have formal, written AML compliance programs that include “training for appropriate personnel.” A successful training program not only should meet the standards set out in the laws and regulations that apply to an institution, but should also satisfy internal policies and procedures and should mitigate the risk of getting caught up in a money laundering scandal. Training is one of the most important ways to stress the importance of anti-money laundering efforts, as well as educating employees about what to do if they encounter potential money laundering. In this discussion of training, the term includes not only formal training courses, but it also includes communication that serves to educate and inform employees, such as e-mails, newsletters, periodic team meetings and anything else that facilitates the sharing of information.
Let’s explore some basic elements behind the development of effective compliance training.

Who to Train
The first step in designing an effective training program is to identify the target audience. Most areas of the institution should receive AML training, and the target audience should include most employees. But each segment should be trained on topics and issues that are relevant to them.

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Example
 Customer contact staff: This is your front line of defense against money laundering; the ones who need the deepest practical understanding of why antimoney laundering efforts are important and what they need to do to be vigilant against money laundering.
While a general course will often be able to address the importance of AML and to provide some basics, some additional training on specific unit procedures may be in order, depending on the nature of the course and the institution. For example, loans, credit and loan operations staff need training that reflects an understanding of the credit function and how money launderers might misuse credit products, how the staff might recognize potential money laundering and what they must do if they see it. Cash handlers often need special training, as many jurisdictions have imposed additional requirements to address the increased risk posed by cash. These employees need to know how to properly handle the cash transactions, especially those that trigger reporting requirements.
 Back office personnel: These employees may also need special training. Some, like proof operators, may not have a need for specialized training beyond some general training, but others, such as staff in the cash vault, wire transfer operations, and trade finance operations, may well need specialized training.
 Audit and compliance staff: These are the people charged with overseeing, monitoring and testing money laundering controls, and they should be trained about changes in regulation, money laundering methods and enforcement, and their impact on the institution.  AML Compliance staff: These are the people who run the AML program. While they likely do not need the general AML course that would be provided to most employees, this group needs specialized training to be able to stay on top of new trends or changes that

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impact the institution and the way it manages risk.
Often, this will require attending conferences or AMLspecific presentations that go into greater detail.
 Senior management and board of directors: Money laundering issues and dangers should be regularly and thoroughly communicated to the board. It is important that the compliance department has strong board support, and one way to ensure that is to keep board members aware of the reputational risk that money laundering poses to the institution.

What to Train On
After the target audience is defined, the next factor in designing an effective training program is identifying the topics to be taught. This will vary according to the institution and the specific products or services it offers.
Several basic matters should be factored into AML training:
 General information: background and history pertaining to money laundering controls, what money laundering and terrorist financing are, why the bad guys do it, and why stopping them is important;
 Legal framework: how AML laws apply to institutions and their employees;
 Penalties for anti-money laundering violations, including criminal and civil penalties, fines, jail terms, as well as internal sanctions, such as disciplinary action up to and including termination of employment;
 How to react when faced with a suspicious client or transaction;  How to respond to customers who want to circumvent reporting requirements;
 Internal policies, such as customer identification and verification procedures and CDD policies;

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 What are the legal recordkeeping requirements;
 Suspicious transaction reporting requirements;
 Currency transaction reporting requirements; and
 Duties and accountability of employees.
The person responsible for designing the training must identify which, if any, of these topics relate to the target audience.
Effective training should present real-life money laundering schemes, preferably cases that have occurred at the institution or at similar institutions, including, where applicable, how the pattern of activity was first detected, its impact on the institution and its ultimate resolution.

How to Train
Here are some steps that trainers can take to develop the “how” of an effective training program:
 Identify the issues that must be communicated and decide how best to do this. Sometimes a memo or e-mail message will accomplish what is needed without formal, in-person training. Sometimes, e-learning can efficiently do the job. Sometimes, classroom training is the best option.
 Identify the audience by functional area as well as by level of employee/management. This should be accompanied by a quick “why are they here” assessment. New hires should receive training different from that given to veteran employees.
 Determine the needs that should be addressed.
There may be issues uncovered by audits or exams, or created by changes to systems, products or regulations.  Determine who can best develop and present the training program.

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 Create a course abstract or curriculum that addresses course goals, objectives and desired results. Be sure to identify who the audience should be and how the material will be presented.
 To the extent possible, establish a training calendar that identifies the topics and frequency of each course.
 Consider whether to provide handouts. The purpose of most training handouts is either to reinforce the message of the training or to provide a reference tool after the fact. Keep them simple.
 If tests are used to evaluate how well the message is received, copies of the answer key should be made available. Similarly, if a case study is used to illustrate a point, provide a detailed discussion of the “preferred course of action.”
 Attention span is a factor to consider. Focus on small, easy to digest, easy to categorize issues.
 Track attendance. Ask attendees to sign in, and issue reminders if make-up sessions are needed. Unexcused absences may warrant disciplinary action and notation in employee personnel files.

When to Train
The location and time of day for training are also important. Try to minimize trainees’ time away from work. The time immediately after lunch is the “black hole” for compliance training. Factors unique to each institution will shape the schedule for training. For example, some have administrative policies that require training to be conducted during regular hours to minimize the expense of overtime pay. Other institutions allow for training on non-work days or before or after business hours to minimize disruptions.
Regular training scheduled at the end of a month or quarter may be inconvenient for certain departments and employees who have routine month- or quarter-end responsibilities. Training sessions

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that coincide with critical system conversions or other one-time labor-intensive events probably will not be well attended. While an institution’s training should be regular and ongoing, situations may arise that demand an immediate session. For example, an
“emergency” training session may be necessary right after an examination or audit that uncovers serious money laundering control deficiencies. Or a newspaper headline that names the institution might prompt quick-response training. Changes in software, systems, procedures or regulations may trigger the need for an unforeseen training session.

Where to Train
Some institutions have training centers that allow trainees to escape the distractions of daily work activity. Some types of training are more effective when conducted in small groups, such as the evaluation of a money laundering case study. Role-playing exercises, which may be used to complement a prepared lecture or panel discussions, also are more effective in small groups. These training sessions can be held anywhere. Large group training can be done via telephone conference calls, videos, Internet, auditorium teaching and other impersonal methods.

Audit
Putting your AML compliance program into motion is not enough.
The program must be monitored and evaluated. Institutions should assess their anti-money laundering programs regularly to ensure their effectiveness and to look for new risk factors.
The audit must be independent (i.e., performed by people not involved with the organization’s AML compliance staff), and individuals conducting the audit should report directly to the board of directors or to a designated board committee composed primarily or completely of outside directors. Those performing the audit must be sufficiently qualified to ensure that their findings and conclusions are reliable.
The independent audit should:

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 Address the adequacy of AML risk assessment.
 Examine the adequacy of CDD policies, procedures and processes, and whether they comply with internal requirements.  Determine personnel adherence to the institution’s
AML policies, procedures and processes.
 Perform appropriate transaction testing, with particular emphasis on high-risk operations (products, services, customers and geographic locations).
 Assess training adequacy, including its comprehensiveness, accuracy of materials, training schedule and attendance tracking.
 Assess compliance with applicable laws and regulations.  Examine the integrity and accuracy of management information systems used in the AML compliance program.  Evaluate the system’s ability to identify unusual activity by:  Reviewing policies, procedures, and processes for suspicious activity monitoring.
 Evaluating the system’s methodology for establishing and analyzing expected activity or filtering criteria.
 Evaluating the system’s ability to generate monitoring reports.
 Determining whether the system’s filtering criteria are reasonable.
 If an automated system is not used to identify or aggregate large transactions, the audit should include a sample test check of tellers’ cash proof sheets, tapes

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or other documentation to determine whether large currency transactions are accurately identified and reported.  Review Suspicious Transaction Reporting (STR) systems, which should include an evaluation of the research and referral of unusual transactions. Testing should include a review of policies, procedures and processes for referring unusual or suspicious activity from all business lines (e.g., legal, private banking, foreign correspondent banking) to the personnel or department responsible for evaluating unusual activity.
 Assess the effectiveness of the institution’s policy for reviewing accounts that generate multiple suspicious transaction report filings.
 Assess the adequacy of recordkeeping.
 Track previously identified deficiencies and ensure management corrects them.
 Decide whether the audit’s overall coverage and frequency are appropriate to the risk profile of the organization.  Consider whether the board was responsive to earlier audit findings.
 Determine the adequacy of the following, as they relate to the training program and materials:
 The importance the board and senior management place on ongoing education, training and compliance.
 Employee accountability for ensuring AML compliance.  Comprehensiveness of training, in view of specific risks of individual business lines.
 Training of personnel from all applicable areas of the institution.

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 Frequency of training.
 Coverage of internal policies, procedures, processes and new rules and regulations.
 Coverage of different forms of money laundering and terrorist financing as they relate to identifying suspicious activity.
 Sanctions for noncompliance with internal policies and regulatory requirements.
Make sure any self-assessments or external audits are accompanied by a written report to management outlining who conducted the assessment, the methods used to assess the program, the results and any suggested changes. The assessments or audits to identify deficiencies may be performed by employees of the institution or business, but not by persons who administer the program.
After an audit is complete, financial institutions must implement necessary changes. Share the findings with employees who are directly involved in the deficiencies that need to be corrected.
Solicit the advice of these employees on how they feel the program could work better. For record-keeping, you may want to set deadlines for each change and list the person who is primarily responsible for getting it done. Keep detailed records of audits and change implementations. Examiners may request them. Failure to properly address audit issues is a frequent criticism in cases where regulators levy fines on institutions.

Compliance Culture and
Senior Management’s Role
Embedding a compliance culture into the overall institutional culture is key to an effective AML program. Staff in the business lines sometimes feel that they are overwhelmed by other priorities.
Sometimes, the culture of immediate, short-term profit takes precedence over the culture of compliance with anti-money

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laundering laws and regulations. It is dangerous, though, when compliance staff is ignored, viewed as irrelevant, or is placed too far away from the business units. It is critical that firms establish a strong culture of compliance that guides and reinforces employees as they make decisions and choices each day. Raising awareness, to the point where everyone in the organization feels compelled to deter and detect money laundering, is vital.
Ultimate responsibility for the AML compliance program rests with the board of directors. Members must set the tone from the top by openly voicing their commitment to the program, ensuring that their commitment flows through all service areas and lines of business, and holding responsible parties accountable for compliance.
The board’s role in AML compliance consists of reviewing and approving the overall AML program and ensuring that there is on-going oversight. That does not mean that board members are expected to become anti-money laundering experts themselves, or that they are responsible for day-to-day program management.
Rather, it means that they should formally approve an institution’s
AML compliance program and then make sure the program is adequately implemented and maintained by staff.
The board’s oversight role also extends to the supervisor’s examination process. Examiners routinely converse with the board and management before and during an on-site exam; they wish to gauge the board’s commitment to compliance, its understanding of the law, and its knowledge of how the institution operates. A poor response by the board during these discussions will be a significant red flag and will likely lead to a more thorough examination.
Once an exam by a supervisor or auditor is conducted, it is the board’s duty to ensure that any necessary corrective action is taken. Specific duties can be delegated, but the board will be responsible if problems cited by the examiner or auditor are not corrected. In light of the fact that the cooperation of senior managers is crucial, as you develop your compliance program you must make sure they are kept informed of your progress and approve of each step along the way. Keep necessary parties informed and solicit

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their suggestions. Anti-money laundering compliance is not just one person’s job. Every manager and staff member is responsible in his or her own way for helping to prevent money laundering abuses. Disseminating that message from senior managers is vital to a successful program.
An adequate AML program costs money, which management may be reluctant to spend. The AML officer’s challenge is to convince management that, while an AML program may cost money, it is an indispensable expense to protect the institution and to avert legal problems and reputational harm for the institution. One only needs to look at the fines and penalties levied by regulators to see the costs of non-compliance. However, the cost of the fine is only part of the overall expense; significant additional costs include legal bills, potential loss of business due to reputational damage, extensive compliance review charges, consulting fees, costs for system and other compliance program enhancements, as well as the opportunity costs as the compliance staff and others will be spending the bulk of their time addressing the consent order. It is far better to be able to build the system your institution needs at a more relaxed pace than within the timeframes dictated by a formal consent order.
Senior management must show its commitment to compliance by:
 Establishing a strong compliance plan that is approved by the board of directors and is fully implemented.
 Insisting that it be kept informed of compliance efforts, audit reports and any compliance failures, with corrective measures instituted.
 Communicating compliance expectations to the institution personnel.
 Including regulatory compliance within the job descriptions and job performance evaluations of institution personnel.
 Implementing procedures, processes and controls to ensure compliance with the AML program.

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 Conditioning employment on regulatory compliance.
Anti-money laundering units generally are considered cost centers required to protect financial institutions from regulatory risks. A compliance officer who is trying to obtain approval by the board of directors and senior management of the anti-money laundering program can point out that the information collected during the
CDD process can be used to sell additional products. The key to maximizing the AML unit’s usefulness is to share valuable data with other areas of the firm, not just with law enforcement agencies, regulators and senior management. As AML units build their CDD files, they can identify information other departments can use to sell products and to expand profits. For example, marketing departments that better understand the activity of certain retail or business customers can more effectively cross-sell products and analyze the overall customer relationship.
Before releasing customer information, it is important to review applicable privacy laws and the firm’s privacy policy to understand any limitations. Generally, there are no regulatory problems with sharing customer information with other internal departments.
However, some firms restrict the sharing of customer information outside the organization or allow customers to “opt-out” of the right for the firm to provide their information to third-party companies.
Compliance staff should generally also be sufficiently independent of the line of business they support so that potential conflicts of interest are minimized. The compliance staff should not be provided an incentive based on the profitability of the line of business they support. While this does not mean the compliance staff shouldn't get bonuses, it means that incentives should not be structured in a way that might create a conflict of interest. While the compliance staff may sit within the line of business and report to line management, it should have the ability to escalate issues without fear of recrimination to a compliance or risk management function outside the line of business. This is not to say that the compliance staff should not be close to the line of business; on the contrary, a close working relationship with the line of business is crucial to successful execution of the AML program. Ultimately, the compliance staff should be seen as a trusted advisor by the line,

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so that the line will come to the compliance staff when they have questions and will follow the advice provided.

Customer Due Diligence
Many experts say that a sound Customer Due Diligence (CDD) program is the best way to prevent money laundering. Knowledge is what the entire anti-money laundering compliance program is built upon. The more you and your institution know, the better money laundering abuses can be prevented.

Main Elements of a CDD Program
A sound CDD program should include these 7 elements:
 Full identification of customer and business entities, including source of funds and wealth when appropriate.
 Development of transaction and activity profiles of each customer’s anticipated activity.
 Definition and acceptance of the customer in the context of specific products and services.
 Assessment and grading of risks that the customer or the account present.
 Account and transaction monitoring based on the risks presented.  Investigation and examination of unusual customer or account activity.
 Documentation of findings.

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Account Opening, Customer
Identification and Verification
A sound CDD program should have reliable customer identification and account opening procedures. Institutions should adopt account opening procedures that allow them to determine the true identity of customers. Institutions should set identification standards tailored to the risk posed by particular customers. In some countries, authorities have issued specific regulations and laws that set out what institutions are required to do regarding customer identification. What follows includes account opening and customer identification guidelines from the February 2003 General Guide to Account
Opening and Customer Identification, an Attachment to the Basel
Committee publication Customer Due Diligence for Banks, a guide to good practices related to customer identification.
This document, which was developed by the Working Group on
Cross-Border Banking, does not cover every eventuality, but, instead, focuses on some of the mechanisms banks can use in developing effective customer identification programs.
Each new customer who opens a personal account should be asked for:
 Legal name and any other names used (such as maiden name).
 Correct permanent address (the full address should be obtained; a postal box number is usually not sufficient).
 Telephone and fax numbers and e-mail address.
 Date and place of birth.
 Nationality.
 Occupation, position held and name of employer.
 An official personal identification number or other unique identifier contained in an unexpired, official, government-issued document (e.g., passport,

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identification card, residence permit, driver's license) that bears a photograph of the customer.
 Type of account and nature of the banking relationship.
 Signature.
The institution should verify this information by at least one of the following methods:
 Confirming the date of birth from an official document
(e.g., birth certificate, passport, identity card).
 Confirming the permanent address using an official document (e.g., utility bill, tax assessment, bank statement, letter from a public authority).
 Contacting the customer by telephone, letter or e-mail to verify the information supplied after an account has been opened (a disconnected phone, returned mail, or incorrect e-mail address should warrant further investigation).  Confirming the validity of the official documentation either by physical verification of the original or through certification by an authorized person (e.g., embassy official). These examples are not the only possibilities. In some jurisdictions, other documents of an equivalent nature may be offered as satisfactory evidence of a customer’s identity.
When appropriate, institutions should also obtain information about the source of wealth, source of funds and the customer’s line of business, and should investigate the source of funds of large deposits, especially when they are made in cash or are disproportionate to the customer’s declared source of income.
Officials should consider the proximity of the customer’s residence or place of business to the branch where the account is opened, and, if it is not close by, determine why the customer is opening an account at that location.

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Financial institutions should apply equally effective customer identification procedures for non-face-to-face customers as for those available for interview.
For corporate entities (e.g., corporations and partnerships), the following information should be obtained:
 Name of institution.
 Principal place of its business operations.
 Mailing address.
 Names of primary contact people or those authorized to use the account.
 Contact people’s telephone and fax numbers.
 Some form of official identification number, if available
(e.g., tax identification number).
 The original or certified copy of the Certificate of Incorporation, Memorandum and Articles of
Association.
 The resolution of the Board of Directors to open an account and identification of those who have authority to operate the account, including beneficial owners.
 Nature and purpose of business, and its legitimacy.
The institution should verify this information by at least one of the following methods:
 For established corporate entities, review a copy of the latest report and accounts (audited, if available).
 Conduct an inquiry by a business information service, or obtain an undertaking from a reputable firm of lawyers or accountants (or, in some countries, verifying officers) confirming the documents submitted.

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 Undertake a company search or other commercial inquiries to see that the institution has not been, or is not in the process of being, dissolved or terminated.
 Use an independent information verification process, such as by accessing public and private databases.
 Obtain prior bank references.
 Visit the corporate entity, where practical.
 Contact the corporate entity by telephone, mail or e-mail. The institution should also take reasonable steps to verify the identity and reputation of any agent who opens an account on behalf of a corporate customer, if that agent is not an officer of the customer. For more details, please see the reference materials.
The exact account opening procedures and customer acceptance policies depend on the type of customer, the risk and the local regulations. Once the customer is identified and the account is opened, the institution should monitor the account as part of its CDD process.
The frequency of monitoring depends on the risk of the customer.
The institution should categorize the customers (see section on “Risk Assessment”) depending on the risk they present and should monitor accordingly. Some categories of customer will not require frequent monitoring because their activities are routine and unexceptional, while other customers that pose a heightened risk of money laundering will require greater due diligence and monitoring. Institutions should implement ongoing monitoring systems to identify suspicious activity, including transactions that are not compatible with the profile or stated business purpose of that particular customer.
In conducting your CDD, in certain circumstances, you may want to identify the major clients and suppliers of your high-risk customers, especially those with large and frequent transactions.

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Real Life Case

The New York branch of Jordan-based Arab Bank was assessed a $24 million civil money penalty in
August 2005 for inadequate money laundering and terrorist financing controls in its funds transfer and clearing operations. The penalty, issued jointly by the
U.S. Financial Crimes Enforcement Network (FinCEN) and Office of the Comptroller of the Currency (OCC), followed two other enforcement actions against the branch — the bank’s sole presence in the United
States — in February 2005 by the OCC. The earlier actions required the branch to preserve asset levels, pay off depositors and improve its compliance program and internal controls. They also required the branch to convert to an uninsured agency office with limited banking activities and to shut down its wire transfer operations. Arab Bank New York acted mainly as an intermediary institution, clearing funds transfers for members of the Arab Bank Group in other countries and for domestic and foreign correspondent banks outside the Arab Bank Group. But the bank monitored the transactions of its direct customers only, FinCEN said. Following the penalty assessment, Arab Bank stated that it “did not believe the law required [the same money laundering controls it had applied to its direct customers] to be applied to wire transfers in which the branch had only an intermediary role.”
But the customer base and geographic locations of the Arab Bank Group and correspondent institutions, and the volume of funds transfers of the branch, posed heightened risks of money laundering and terrorist financing, FinCEN said. The branch did not have mechanisms to identify, investigate and report potentially suspicious activity related to funds transfers by non-accountholders appropriate for its risk, which resulted in the non- and late filing of suspicious transaction reports. FinCEN also criticized the branch for not using publicly available information and Office of Foreign Assets Control lists to monitor transactions.

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A written Customer Identification Program (CIP) must be included within the institution’s AML compliance program and must include, at a minimum, policies, procedures and processes for the following:
 Identifying information required to be obtained
(including name, address, taxpayer identification number and, for individuals, date of birth), and riskbased identity verification procedures (including procedures that address situations in which verification is not possible).
 Complying with recordkeeping requirements.
 Checking new accounts against prescribed government lists, if applicable.
 Providing adequate notice about customer identification requirements.
 Covering the institution’s reliance on other financial institutions or third parties, if applicable.
 Determining whether and when suspicious transaction reports should be filed.
 Conducting a risk analysis of customers for account opening purposes, which consider the types of accounts offered, methods of account opening, and the institution’s size, location and customer base.
 Opening new accounts for existing customers.
 Obtaining the approval of the board of directors, either separately for the CIP or as part of the AML compliance program.
 Conducting audit and training programs to ensure that the CIP is adequately incorporated.
 Verifying that all new accounts are checked on a timely basis against prescribed government lists for suspected terrorists or terrorist organizations.

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Name Checking Lists
Before a financial institution starts doing business for the first time with a new customer, it should check published lists of known or suspected terrorists for a potential match.
One of the best-known lists is the U.S. Treasury’s Office of Foreign
Assets Control’s Specially Designated Nationals and Blocked
Persons list. Updated often, it contains hundreds of names of individuals and businesses the U.S. government considers to be terrorists or international narcotics traffickers and others that are covered by U.S. foreign policy and trade sanctions. Many other sanctions are based on United Nations and other international mandates. In the United States, compliance with OFAC rules must be a top priority. Although OFAC is not a financial institution supervisory agency, it works closely with them at federal and state levels. Bank examiners routinely ask to see the OFAC compliance manual during examinations, and they conduct tests for OFAC compliance.
U.S. financial institutions are alert to transactions that involve
OFAC-designated names. When they spot such a transaction, they are obligated not only to block or reject it, but also to notify OFAC.
Be advised, however, that even thorough due diligence procedures and OFAC searches do not always detect suspicious high-risk individuals and businesses your organization needs to avoid.
Financial institutions and businesses that receive lists of suspected terrorists from government agencies have learned that screening customer lists for suspected terrorists from Middle Eastern countries is not easy. Most of the names of “designated terrorists” on the OFAC lists numerous “Also Known As” alternative names.
An understanding of Arab naming customs and protocols could alleviate the confusion. While some multiple names may be aliases, others are confusing because the customs are not understood.  All names are transliterated from an Arabic script in which short vowels are most often left out. So the

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name Mohammed might be written on a financial account as Mohamed or Mohamad.
 Arabic names are typically long. A person’s second name is the father’s name. If a “bin” or “ibn” precedes the name, it indicates “son of.” If a family name is included at the end, it will sometimes have “al” preceding it.
 There is widespread use of certain names such as
“Mohamed,” “Ahmed,” “Ali,” or any name with the prefix
“Abd-” or “Abdul,” which means “servant of,” and is followed by one of 99 suffixes used to describe God.
 Many Arabic names begin with the word “Abu.” If it is a first name, it is probably not the person’s given name, because “Abu” means “father of.” “Abu,” followed by a noun, means something like “freedom” or “struggle,” and is used by both terrorists and legitimate political leaders. Only when “Abu” is a prefix of a surname should it be accepted as a given name.
Even with all the precautions your compliance program may take to know your customer, the best program can fail. For example, there still is no clear way to designate and identify Politically Exposed
Persons (PEPs). Accepting corruption proceeds from PEPs may be money laundering under some countries’ laws as it is in the United
States. The Financial Action Task Force makes explicit reference to
PEPs in its 40 Recommendations.
But a practical issue remains in the view of many AML professionals: How can this high-risk category of customer and the possible corrupt source of his or her money be identified? The problem is the lack of available and useful information about the identity of PEPs around the world. Currently, there are dozens of private providers, that offer a PEPs database, however, the information contained in them and the ability to positively match your customer with a PEP on a database can be a challenge. In addition, as additional scrutiny has been placed on PEPs, they have gotten more creative in finding ways to avoid detection, such as opening accounts in the names of corporations instead of in

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their own names or the names of close family members. (On the other hand, looking at geographical issues, the size and nature of an account, and the purpose of the account may by themselves raise PEP-related issues.)
The “Corruption Perceptions Index” published by Transparency
International, an international non-governmental organization devoted to combating corruption, could be useful in focusing on high-risk jurisdictions. However, not every customer from a country in the top 10 list of perceived corrupt countries is a PEP. Moreover, even a PEP from a low-risk jurisdiction may not be above bribery, extortion and other corruption.
Some government agencies, such as the U.S. Central Intelligence
Agency, already publish lists of Heads of State and Cabinet
Members of Foreign Governments. Lists are on its website at www.cia.gov. But this list does not provide all relevant information because, for instance, there is no unique identifier, such as a date of birth or address. This results in significant operational constraints, particularly at large retail financial institutions.

Consolidated CDD
According to the Basel Committee, a global risk management program for CDD should incorporate consistent identification and monitoring of customer accounts globally across business lines and geographical locations, as well as oversight at the parent level, in order to capture instances and patterns of unusual transactions that might otherwise go undetected.
Such comprehensive treatment of customer information can significantly contribute to a bank’s overall reputational, concentration, operational and legal risk management through the detection of potentially harmful activities, says the Committee.
Firms should aim to apply their customer acceptance policy, procedures for customer identification, process for monitoring higher risk accounts and risk management framework on a global basis to all of their branches and subsidiaries. The firm should

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clearly communicate these policies and procedures to ensure that they are fully adhered to.
Each office of the group should be in a position to comply with minimum identification and accessibility standards applied by the head office. However, some differences in information collection and retention may be necessary across jurisdictions to conform to local requirements or relative risk factors.
Where the minimum CDD standards of the home and host countries differ, offices in host jurisdictions should apply the higher standard of the two. Where this appears not to be possible, the institution should confer with its home office and attorneys.

Know Your Employee
Institutions and businesses have learned at great expense that an insider can pose the same money laundering threat as a customer.
It has become clear in the AML field that having equal programs to know your customer and to know your employee are essential.
A Know Your Employee (KYE) program means that the institution has a program in place that allows it to understand an employee’s background, conflicts of interest and susceptibility to money laundering complicity. Policies, procedures, internal controls, job descriptions, code of conduct/ethics, levels of authority, compliance with personnel laws and regulations, accountability, monitoring, dual control, and other deterrents should be firmly in place.
Background screening of prospective and current employees, especially for criminal history, is essential to keeping out unwanted employees and identifying those to be removed.
The Federal Deposit Insurance Corporation (FDIC), a U.S. regulator, has provided guidance on employee screening in its paper “Pre-Employment Background Screening: Guidance on
Developing an Effective Pre-Employment Background Screening
Process,” issued in June 2005.

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Background screening can be an effective risk-management tool, providing management with some assurance that the information provided by the applicant is true and that the potential employee has no criminal record. Used effectively, the pre-employment background checks may reduce turnover by verifying that the potential employee has the requisite skills, certification, license or degree for the position; may deter theft and embezzlement; and may prevent litigation over hiring practices. An institution should verify that contractors are subject to screening procedures similar to its own.
Costs are associated with developing and implementing an effective screening process. However, absent such a process, a bank may incur significant expenses in recruiting, hiring, training and ultimately terminating unqualified individuals.
Sometimes, regulations prohibit any person who has been convicted of a crime involving dishonesty or money laundering from becoming or continuing as an institution-affiliated party; owning or controlling, directly or indirectly, an institution; or otherwise participating, directly or indirectly, in the conduct of the affairs of an institution without the prior written consent of the regulator.
Consultants who take part in the affairs of a financial institution may be subject to this requirement too.
Therefore, pre-employment background screening should be established by all financial institutions that, at a minimum, reveals information regarding a job applicant’s criminal convictions.
Sometimes, the level of screening should be raised. The sensitivity of the position or the access level of an individual employee may warrant additional background screening, which should include verification of references, experience, education and professional qualifications, according to the FDIC.
Furthermore, just as management verifies the identity of customers, it should verify the identity of job applicants. Once the person is hired, an ongoing approach to screening should be considered for specific positions, as circumstances change, or as needed for a comprehensive review of departmental staff over a period of time. Management should also have policies that address what to do when a screening uncovers information contrary to what the applicant or employee provided, according to the FDIC.

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An institution may perform fingerprint checks periodically for employees in sensitive positions, or it may contract with a vendor to conduct an extensive background check when the employee is being considered for promotion to a high-level position. Without such screening procedures in place, financial institutions risk running afoul of the prohibition against employing statutorily disqualified individuals. The extent of the screening depends on the circumstances, with reasonableness being the standard.

Real Life Case

The Bank of New York case speaks volumes about the vulnerability of financial institutions to the problems that their own employees can cause. Lucy Edwards, a vice president of BONY’s Eastern European Division, introduced her husband, Peter Berlin, to the bank. In
1996, Berlin opened two accounts at BONY for Benex
International Co. Inc., and BECS International L.L.C., which he controlled and in which Edwards had an undisclosed interest. In 1998, Berlin opened another account at BONY for Lowland Inc., which he also controlled. Combined, the three companies deposited more than $7 billion at BONY in a 42-month period and transmitted nearly all the funds shortly afterwards to offshore locations at the request of Russian banks and other customers who were evading Russian taxes, duties and other government requirements.
The three Berlin companies had no commercial purpose. Their only function was to receive wire transfers from Russian banks and other customers, deposit the money in the BONY accounts and transmit the money to offshore accounts or suppliers of the
Russian customers. Benex, BECS and Lowland, all of which had offices in BONY’s primary service area, were not registered under New York law as money transmitters. In addition, the New York mailing address for Benex and BECS was the office of Torfinex, another unlicensed money transmitter controlled by a Russian bank that was under indictment in Russia. Since 1992, it has been a federal crime in the United States to

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conduct a money transmitting business without a state license (Title 18, USC Sec. 1960).

Using a shell bank registered in the South Pacific island of Nauru, a well-known money laundering haven, more than $3 billion in wire transfers flowed through the correspondent accounts of two Russian banks at BONY to the Benex and BECS accounts. The
Russian customers that Berlin and Edwards served told BONY that the Nauru shell bank had offices in
Australia and New Jersey, which was not true. In a 41-month period, Berlin and Edwards received about $1.8 million in commissions from their Russian customers for the funds deposited in the Benex, BECS and Lowland accounts at BONY. These amounts were paid through accounts at BONY in the name of Benex, a Russian company and a Russian correspondent bank of BONY. Berlin and Edwards pled guilty to money laundering, among other charges, were fined, were required to make restitution and received a suspended sentence.

Suspicious or Unusual Transaction
Monitoring and Reporting
Proper due diligence may require management to gather further information regarding a customer or his transaction before deeming it suspicious and deciding to report it as part of a compliance program. While there are no hard and fast rules as to what constitutes suspicious activity, financial institution employees should watch for activity that is not consistent with a customer’s source of income or regular business.
Because financial institutions must sort through thousands of transactions each day, a firm’s system for monitoring and reporting suspicious activity should be risk-based, and should be determined by factors such as the firm’s size, the nature of its business, its

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location, frequency and size of transactions and the types and geographical location of its customers.
Many financial institutions create internal reports that can be used to discover possible money laundering and terrorist financing.
Some of the reports include:
 Daily cash activity in excess of the country’s reporting threshold.  Daily cash activity just below the country’s reporting threshold (to identify possible structuring).
 Cash activity aggregated over a period of time (e.g., individual transactions over a certain amount, or totaling more than a certain amount over a 30-day period) to identify possible structuring.
 Wire transfer reports/logs (with filters using amount and geographical factors).
 Monetary instrument logs/reports.
 Check kiting/drawing on uncollected funds (significant debit/credit flows).
 Significant change reports.
 New account activity reports.
While reporting procedures vary from country to country, a typical suspicious or unusual transaction reporting process within a financial institution includes:
 Procedures to identify potential suspicious transactions or activity.
 A formal evaluation of each instance, and continuation, of unusual transactions or activity.
 Documentation of the suspicious transaction reporting decision, whether or not filed with the authorities.
 Procedures to periodically notify senior management or the board of directors of suspicious transaction filings.

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 Employee training on detecting suspicious transactions or activity.
Most countries that require suspicious transaction reporting prohibit disclosing the filing to the subject of the report.
Most laws also provide immunity from civil liability to the filing institution and its employees.
Good recordkeeping procedures are a key to managing any regulatory or legal implications of the filing. National laws or regulations usually dictate the length of time financial institutions and businesses must maintain records, the types of records that must be on hand and how they must be provided to regulatory or law enforcement personnel upon request.
There is no international clearinghouse for keeping STRs, but
Financial Intelligence Units in various countries often publish reports on how many STRs are filed each year, which areas are filing the most reports and what the suspicious activity trends are. This information can be shared country to country through agreements the FIUs sign with each other.

Red Flags or Indicators of Money Laundering
While there is no exhaustive list of tried-and-true suspicious activity indicators for businesses, there are many common indicators of financial crime and money laundering activity that your institution can be ready for.
One expert, Michael Kelsey, who has more than 25 years experience in bank compliance and has taught banking and AML at
Widener University School of Law and the University of Delaware, says financial institutions should look out for suspicious trends that might be caught by other systems already in place, including:

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 ATM Usage: The convenience of ATMs makes them ideal financial services delivery points for launderers and terrorists. Launderers can use an account in the
U.S. to deposit funds within the U.S. and have another person withdraw them outside the country. Domestic terrorists might find ATMs convenient to access accounts as they travel. Deposit accounts with multiple access devices might be indicators of illegal abuse of
ATMs. Institutions should consider analyzing their data to identify multinational transactions via ATMs.
 Moving Customers: A customer who moves frequently could be suspicious, particularly if there is nothing in that person’s information suggesting that frequent changes in residence is normal.
 Opening Deposits or Investments: In addition to asking new customers about sources of funds, when appropriate, institutions should consider determining the background of customer’s first transaction. Of particular interest would be a wire transfer from outside the country, monetary instruments and, of course, large cash transactions.
 Out-of-Market Windfalls: If you think a customer who just appeared at your institution sounds too good to be true, you might be right. Pay attention to one whose address is far from your institution, especially if there is no special reason why you are to receive the business. If the customer is a business, the distance to its operations may be an attempt to prevent you from verifying that there is no legitimate business after all.
Do not be persuaded by sales personnel who might follow a “no questions asked” philosophy of taking in new business.
 Credit balances: Customers may “over pay” on their credit line or card accounts prior to vacations or when other circumstances may prevent them from making payments, or when they anticipate numerous upcoming transactions. But large or

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frequent credit balances may also be red flags for money laundering. Institutions should consider periodic evaluation of their credit products for unusual overpayments.  Common addresses, phone numbers, IP addresses and other data: While household members often bank at the same institution, unrelated customers who share street or IP addresses, or who have the same phone number or email account, could be using their accounts for suspicious or fraudulent purposes. Customers who change their information after opening their accounts to common locations may be especially suspicious.
Institutions should consider evaluation of customers who have these common data characteristics.
These are just some factors an institution can use to identify highrisk accounts that merit closer scrutiny. Look for ways your antimoney laundering program can be ready for these activities and can potentially thwart them before they occur.
Methods of money laundering have become more sophisticated as the complexity of financial relationships has grown and paths through which funds move worldwide through financial institutions have multiplied.
In the October 2005 issue of FinCEN’s “SAR Activity Review
— Trends, Tips and Issues,” money laundering indicators in a securities broker-dealer setting were discussed. One was the intentional abuse of accounts, reflecting individuals trying to use brokerage accounts in a manner inconsistent with the stated investment objective.

Example

The predominant activity reported in this category was funding an account, but allowing the money to remain idle. Because some investment accounts do not bear interest, failure to invest assets is actually considered a loss in most cases. Therefore, lack of activity in an investment account may serve as a red flag to broker-

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dealers. The decision to file a Suspicious Transaction
Report usually is made after long periods of inactivity followed by a sudden liquidation of the account, through check writing, debit card use at ATMs, and outbound fund transfers, without obvious economic benefit. Excessive outbound wire activity was common in Suspicious Transaction Reports (STRs) filed by the securities and futures industries. Preliminary indicators are that individuals who engage in this activity within one year of establishing a brokerage account were more likely to send funds abroad. Several filers near the Canadian or Mexican borders reported strong suspicions that funds in idle brokerage accounts were being wired to foreign institutions in Canada and
Mexico to evade taxes.

Suspicious Customer Behavior
The following situations may indicate money laundering. These lists are not exhaustive, but may be helpful.
 Customer has an unusual or excessively nervous demeanor.  Customer discusses your record-keeping or reporting requirements with the apparent intention of avoiding them.  Customer threatens an employee in an effort to discourage required recordkeeping or reporting.
 Customer is reluctant to proceed with a transaction after being told it must be reported.
 Customer suggests paying a gratuity to an employee.
 Customer appears to have a hidden agenda or behaves abnormally, such as turning down the chance to obtain a higher interest rate on a large account balance. 227

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 Customer, who is a public official, opens account in the name of a family member who begins making large deposits not consistent with the known sources of legitimate family income.
 Customer makes large cash deposit without having counted the cash.
 Customer frequently exchanges small bills for large bills.  Customer’s cash deposits often contain counterfeit bills or musty or extremely dirty bills.
 Customer, who is a student, uncharacteristically transfers or exchanges large sums of money.
 Account shows high velocity in the movement of funds, but maintains low beginning and ending daily balances.
 Transaction involves offshore institutions whose names resemble those of well-known legitimate financial institutions.  Transaction involves unfamiliar countries or islands that are hard to find on an atlas or map.
 Agent, attorney or financial advisor acts for another person without proper documentation, such as a power of attorney.
 Customer indulges in foreign exchange transactions/ currency swaps without caring about the margins.
 Customer submits account documentation showing an unclear ownership structure.

Suspicious Customer Identification Circumstances
 Customer furnishes unusual or suspicious identification documents or declines to produce originals for verification. 228

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 Customer is unwilling to provide personal background information when opening an account.
 Customer tries to open an account without identification, references or complete local address.
 Customer’s permanent address is outside of the institution’s service area.
 Customer’s home or business telephone is disconnected.  Customer does not wish a statement of his account or any mail sent to him.
 Customer asks many questions about how the financial institution disseminates information about the identification of its customers.
 A business customer is reluctant to reveal details about the business activities or to provide financial statements or documents about a related business entity.  Customer provides no record of past or present employment on a loan application.
 Customer claims to be a law enforcement agent conducting an undercover operation when there are no valid indicators to support that claim.

Suspicious Cash Transactions
 Customer comes in with another customer and they go to different tellers to conduct currency transactions under the reporting threshold.
 Customer makes large cash deposit containing many larger denomination bills.

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 Customer opens several accounts in one or more names, and then makes several cash deposits under the reporting threshold.
 Customer withdraws cash in amounts under the reporting threshold.
 Customer withdraws cash from one of his accounts and deposits the cash into another account the customer owns.
 Customer conducts unusual cash transactions through night deposit boxes, especially large sums that are not consistent with the customer’s business.
 Customer makes frequent deposits or withdrawals of large amounts of currency for no apparent business reason, or for a business that generally does not generate large amounts of cash.
 Customer conducts large cash transactions at different branches on the same day, or coordinates others to do so in his behalf.
 Customer deposits cash into several accounts in amounts below the reporting threshold and then consolidates the funds into one account and wire transfers them abroad.
 Customer attempts to take back a portion of a cash deposit that exceeds the reporting threshold after learning that a currency transaction report will otherwise be filed.
 Customer conducts several cash deposits below the reporting threshold at ATMs.
 Corporate account has deposits or withdrawals primarily in cash, rather than checks.
 Customer frequently deposits large sums of cash wrapped in currency straps.

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 Customer makes frequent purchases of monetary instruments with cash in amounts less than the reporting threshold.
 Customer conducts an unusual number of foreign currency exchange transactions.

Suspicious Non-Cash Deposits
 Customer deposits a large number of traveler’s checks, often in the same denominations and in sequence.
 Customer deposits large numbers of consecutively numbered money orders.
 Customer deposits checks and/or money orders that are not consistent with the stated purpose of the account or nature of business.
 Customer deposits a large number of third party checks.  Funds withdrawn from the accounts are not consistent with the normal business or personal activity of the account holder or include transfers to suspicious international jurisdictions.
 Funds deposited are moved quickly out of the account via payment methods inconsistent with the established purpose of the account.

Suspicious Wire Transfer Transactions
 Non-accountholder sends wire transfer with funds that include numerous monetary instruments, each in an amount under the reporting threshold.
 An incoming wire transfer has instructions to convert the funds to cashier’s checks and to mail them to a non-accountholder. 231

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 A wire transfer directs large sums to secrecy havens.
 An incoming wire transfer, followed by an immediate purchase by the beneficiary of monetary instruments for payment to another party.
 An increase in international wire transfer activity in an account with no history of such activity or where the stated business of the customer does not warrant it.
 Customer frequently shifts purported international profits by wire transfer out of the country.
 Customer receives many small incoming wire transfers and then orders a large outgoing wire transfer to another country.
 Customer deposits bearer instruments followed by instructions to wire the funds to a third party.
 Account in the name of a currency exchange house receives wire transfers or cash deposits under the reporting threshold.

Suspicious Safe Deposit Box Activity
 Customer spends an unusual amount of time in the safe deposit box area, possibly indicating the safekeeping of large amounts of cash.
 Customer often visits the safe deposit box area immediately before making cash deposits of sums under the reporting threshold.
 Customer rents multiple safe deposit boxes.

Suspicious Activity in Credit Transactions
 A customer’s financial statement makes representations that do not conform to accounting principles. 232

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 A transaction is made to appear more complicated than it needs to be by use of impressive but nonsensical terms such as emission rate, prime bank notes, standby commitment, arbitrage or hedge contracts.
 Customer requests loans either made to offshore companies or secured by obligations of offshore banks.
 Customer suddenly pays off a large problem loan with no plausible explanation as to the source of funds.
 Customer purchases certificates of deposit and uses them as collateral for a loan.
 Customer collateralizes a loan with cash deposits.
 Customer uses cash collateral located offshore to obtain a loan.
 Customer’s loan proceeds are unexpectedly transferred offshore.

Suspicious Commercial Account Activity
 Business customer presents financial statements noticeably different from those of similar businesses.
 Large business presents financial statements that are not prepared by an accountant.
 Retail business that provides check-cashing services does not make withdrawals of cash against check deposits, possibly indicating that it has another source of cash.
 Customer maintains an inordinately large number of accounts for the type of business purportedly being conducted.  Corporate account shows little or no regular, periodic activity. 233

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 A transaction includes circumstances that would cause a banker to reject a loan application because of doubts about the collateral.

Suspicious Trade Financing Transactions
 Customer seeks trade financing on the export or import of commodities whose stated prices are substantially more or less than those in a similar market situation or environment.  Customer makes changes to a letter of credit beneficiary just before payment is to be made.
 Customer changes the place of payment in a letter of credit to an account in a country other than the beneficiary’s stated location.
 Customer’s standby letter of credit is used as a bid or performance bond without the normal reference to an underlying project or contract, or designates unusual beneficiaries.  Letter of Credit is inconsistent with customer’s business.  Letter of Credit covers goods that have little demand in importer’s country.
 Letter of Credit covers goods that are rarely if ever produced in the exporter's country.
 Documents arrive without title documents.
 Letter of Credit is received from countries with a high risk for money laundering.
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 Transaction involves the use of repeatedly amended or frequently extended letters of credit.
 Size of the shipment appears inconsistent with the regular volume of business of the importer or of the exporter. Suspicious Investment Activity
 Customer uses an investment account as a passthrough vehicle to wire funds to off-shore locations.
 Investor seems uninterested in the usual decisions to be made about investment accounts, such as fees or the suitability of the investment vehicles.
 Customer wants to liquidate a large position through a series of small transactions.
 Customer deposits cash, money orders, traveler’s checks or cashier’s checks in amounts under the reporting threshold to fund an investment account.
 Customer cashes out annuities during the “free look” period or surrenders the annuities early.

Suspicious Employee Activity
 Employee exaggerates the credentials, background or financial ability and resources of a customer in written reports the bank requires.
 Employee is involved in an excessive number of unresolved exceptions.
 Employee lives a lavish lifestyle that could not be supported by his or her salary.
 Employee frequently overrides internal controls or established approval authority or circumvents policy.

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 Employee uses company resources to further private interests.  Employee assists transactions where the identity of the ultimate beneficiary or counter party is undisclosed.
 Employee avoids taking periodic vacations.

Suspicious Activity in a Money Remitter/
Currency Exchange House Setting
 Unusual use of money orders, traveler’s checks or funds transfers.
 Two or more persons working together in transactions.
 Transaction altered to avoid filing a Currency
Transaction Report (CTR).
 Customer comes in frequently to purchase less than $3,000 in instruments each time (or the local threshold).  Transaction altered to avoid completion of record of funds transfer, money order or traveler’s checks of
$3,000 or more (or the local threshold).
 Same person uses multiple locations in a short time period.  Two or more persons use the same identification.
 One person uses multiple identification documents.

Suspicious Activity in an Insurance Company Setting
 Cash payments on insurance policies.
 Refunds requested during a policy’s “legal cancellation period.” 236

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 Policy premiums paid from abroad, especially from an offshore financial center.
 A policy calling for the periodic payment of premiums in large amounts.
 Changing the named beneficiary of a policy to a person with no clear relationship to the policyholder.
 Lack of concern for significant tax or other penalties assessed when canceling a policy.
 Redemption of insurance bonds originally subscribed to by an individual in one country by a business entity in another country.

Suspicious Activity in a Broker-Dealer Setting
In 2002, the U.S. National Association of Securities Dealers
(NASD), a self-regulatory organization that oversees the NASDAQ
Stock Market under the authority of the U.S. Securities and
Exchange Commission, offered in its “Special NASD Notice to
Members” signs of suspicious activity to the securities field:
 The customer appears to be acting as an agent for an undisclosed principal, but declines or is reluctant, without legitimate commercial reasons, to provide information, or is otherwise evasive regarding that person or entity.
 For no apparent reason, the customer has multiple accounts under a single name or multiple names, with a large number of inter-account or third-party transfers.
 The customer’s account has unexplained or sudden extensive wire activity, especially in accounts that had little or no previous activity.
 The customer makes a funds deposit for the purpose of purchasing a long-term investment followed shortly thereafter by a request to liquidate the position and transfer the proceeds from the account.

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 The customer engages in excessive journal entries between unrelated accounts without any apparent business purpose.
 The customer requests that a transaction be processed in such a manner so as to avoid the firm’s normal documentation requirements.
 The customer, for no apparent reason or in conjunction with other “red flags,” engages in transactions involving certain types of securities, such as penny stocks, Regulation “S” (Reg S) stocks, and bearer bonds, which, although legitimate, have been used in connection with fraudulent schemes and money laundering activity. (Such transactions may warrant further due diligence.)
 The customer’s account shows an unexplained high level of activity with very low levels of securities transactions. Suspicious Activity Indicators of Black
Market Peso Exchange Money Laundering Method
A 1999 U.S. Customs “trade advisory” titled “The Black Market
Peso Exchange” to businesses dealing in Latin America described the mechanics of the BMPE and provided guidance on reporting suspected laundering activity. The advisory describes these “red flags” as indicators of BMPE:
 Payment made in cash by a third party with no connection to the underlying transaction.
 Payment made by wire transfers from third parties unconnected to the underlying transaction.
 Payment made with checks, bank drafts or money orders not drawn on the account of the purchaser.

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A 1997 FinCEN advisory offered financial institutions these
“potential indicators” that an institution or business is being abused by peso brokers:
 Structured currency deposits to individual checking accounts with multiple daily deposits to multiple accounts at different branches of the same bank on the same day.
 Consumer checking accounts which are used for a period of time and then become dormant.
 Personal checking accounts opened by foreign nationals who come to the bank together.
 Multiple accounts opened on the same day or held by the same foreign nationals at various banks.
 Increases in the frequency or amounts of currency deposits by U.S. business account holders who export to Colombia.

Electronic Anti-Money
Laundering Solutions
Many financial institutions would agree that anti-money laundering compliance is nearly impossible without some help from technology. The sheer number of people and the volume of regulations and data involved in complying with regulations make manual compliance difficult if not impossible. Many institutions have computer systems to automate their compliance activities, while a few still undertake their efforts manually.
Although technology forms one of a number of components in an overall AML solution, good technology will equip organizations with improved defenses in the fight against financial crime by providing:
 Transaction monitoring: scanning and analyzing data for potential money laundering activity.

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 Watch list filtering: screening new accounts, existing customers, beneficiaries and transaction counterparties against terrorist, criminal and other blocked-persons watch lists.
 Automation of regulatory reporting: filing suspicious transaction reports (STRs), currency transaction reports (CTRs), or other regulatory reports with the government.  A detailed audit trail: demonstrates compliance efforts to regulators.
Many software companies can sell an institution dedicated systems to combat laundering, while some organizations have internally generated electronic systems. Before designing your
AML compliance program or purchasing new technology, review the feasibility, costs and benefits to be derived from each course of action. Here are some ways financial institutions use technology that is already in place to assist them in their AML goals:
 Profiling system;
 Large cash transaction reporting;
 Recordkeeping;
 Background checks;
 Corporate “hot file”;
 Case management tracking system; and
 Incident reporting database.
Some financial institutions choose to take the plunge and opt for anti-money laundering software packages. Many will use a
Request For Proposal (RFP) method. The institution will send out RFPs to software providers that it believes may be qualified to participate. An RFP lists project specifications and application procedures. The objective of the RFP is to select a system that

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may assist the institution in completing its responsibilities under applicable money laundering regulations. The system(s) may help identify potentially high-risk customers, accounts and transactions and may aid in conducting, managing, documenting any resulting investigations, as well as streamlining the completion and filing of any required STRs.
Most institutions seek a partner with a longstanding commitment to stay ahead of the rapidly changing regulatory landscape and with a track record that reflects flexibility, agility and urgency in delivering features that improve clients’ efficiency in monitoring the right transactions and investigating the right clients. Ideally, the system must be flexible, fast and efficient to deploy over multiple branches.
It should allow the institution to navigate seamlessly around client relationships, accounts, and transactions across a variety of product lines and systems, including deposits, wires, loans, trust, brokerage, letters of credit and check imaging applications. A single view into clients’ relationships is of paramount importance in delivering efficient, reliable and instant access to information.
Each institution will have to identify the vendor that best meets its needs. During the RFP process, most institutions form evaluation teams composed of management from compliance, operations, technology and business. The team, facilitated by the project manager, will be responsible for reviewing and scoring all responses to the RFP.
Which automated tool is right for your organization? Each case will be different, depending on customer base, size and services offered. In general, however, if your organization decides to buy software, look for these functional components:
 Ability to monitor transactions and identify anomalies that might indicate suspicious activity.
 Ability to gather CDD information for new and existing customers, score customer responses and store CDD data for subsequent use.
 Ability to conduct advanced evaluation and analysis of suspicious/unusual transactions identified by the

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monitoring system in the context of each client’s risk profile and that of their peer group.
 Ability to view individual alerts within the broader context of the client’s total activity at the institution.
 Workflow features, including the ability to create a case from an alert or series of alerts, and collaboration
(simultaneous or serial) among multiple interested parties to view and update information, and the ability to share AML-related information across monitoring and investigating units and throughout the bank as needed.  Ability to use data from the institution’s core customer and transaction systems and databases to inform/ update monitoring and case management activities.
 Ability to store and recall at least 12 months’ data for trend analysis.
 Ability to manage the assignment, routing, approval and ongoing monitoring of suspicious activity investigations.  Automated preparation and filing of STRs to the financial intelligence unit.
 Standard and ad-hoc reporting on the nature and volume of suspicious activity investigations and investigator productivity for management and other audiences.  Enhanced ability to plan, assign and monitor the caseload per employee of AML-related investigations.
 Ability to provide comprehensive and accurate reporting of all aspects of AML compliance, including reporting to management, reporting to regulators, productivity reporting and ad-hoc reporting.
 User-friendly updating of risk-parameter settings without need for special technical computing skills.

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In addition to these functionalities, evaluate the following aspects:
 Ease of use of the application, as well as the configuration of new and changed transaction monitoring rules.
 Ease of data integration, system implementation and configuration.  Scalability of application – the ability of the system to grow with the institution.
 Extent to which the system(s) can be supported with internal resources.
 User satisfaction with hardware and software support.
 Price, including initial cost, ongoing costs to sustain the system or to expand the capabilities of the system, both in terms of what the vendor will charge and how much the institution will need to spend in terms of dollars, personnel and technology capacity.
In addition to providing possible regulatory compliance solutions, automated tools may help an institution analyze how customers and users are using its products and services. For marketing purposes, patterns of activity among types of clients and different business lines can also be represented by graphs and statistical reports. Depending on an institution’s needs, a variety of software products can automate these tasks — from the more standard analytical systems to sophisticated artificial intelligence.
Automated tools may also help with documentation management, which can be a large burden for many institutions. Historically, imaging systems offered quick and paperless access to records.
Convenience is not enough anymore, and technology has gone one step further. New systems can track and report the status of all documents, including those that are missing or expired. One-stop access systems can provide images as well as standardization and control for documents that must be accounted for and produced for compliance purposes.

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Automation is used for more than increased efficiency and control.
It also may reflect a company’s commitment to meet or exceed compliance requirements. A byproduct of this commitment is that regulators can receive prompt, concise and formatted information.

Summary
An institution’s commitment to play its part in preventing money laundering is shown in a sound AML program, demonstrating compliance with both the letter and spirit of requirements imposed by laws and regulations.
Many regulators now require that financial institutions have systems and controls in place that are commensurate with their specific risks of being used for money laundering and terrorist financing. Assessing your institution’s money laundering risks is one of the most important steps in creating a good AML program.
The program should be consistent with the risks associated with the institution’s customer base, location, size and the products and services it offers.
Designing and structuring these programs should be top priorities.
Implementation and maintenance of the program is equally important. These steps must be undertaken with a clear view of what the legal requirements are in the jurisdiction where the financial institution or business is located, and what the internal policies and specific vulnerabilities of the entity are.
This section illustrated what to consider when designing a compliance program, how to spot, manage, document and follow up on suspicious activities, how to maintain your program effectively and efficiently, and what you need to know about properly training and screening employees who use the system.

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Review Questions
 What are the key elements of a customer identification program?  What is risk-scoring, and what are the factors that determine the risk for a product or customer?
 What are the indicators of money laundering in a broker-dealer setting?
 What are the elements to consider when selecting money laundering monitoring software?
 You spot a long-time colleague at work conducting a transaction you know is considered suspicious. It is never reported. How should you handle the situation?

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Chapter

Conducting and Responding to Investigations

5

Introduction
This chapter will discuss conducting and responding to law enforcement investigations, and when and how financial institutions should conduct their own internal investigations.

L

Law Enforcement Investigations aw enforcement investigations, in the United States and in many other jurisdictions, can be triggered by any number of factors, including the receipt of what is commonly known as a suspicious transaction report or STR, tips from other sources
(inside and outside of the government) and information gleaned from other cases. Once such an investigation is commenced, the relevant law enforcement agency might request information from a financial institution in order to obtain evidence. Requests for information can come in several forms, including subpoenas and search warrants.
Subpoenas are usually issued by grand juries, operating under the purview of a court and empowering a law enforcement agency to compel the production of documents and testimony.

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The documents and testimony are designed to allow the law enforcement agency to investigate suspicious transactions, develop evidence and, ultimately, put together a case for prosecution. A search warrant is a grant of permission from a court for a law enforcement agency to search certain designated premises and to seize specific categories of items or documents. Generally, the requesting agency is required to establish that probable cause exists to believe that evidence of a crime will be located. The warrant is authorized based on information contained in an affidavit submitted by a law enforcement officer.
It should be noted here that, in the United States and several other jurisdictions, the banking regulatory agencies do not need to use subpoenas or search warrants. Their authority to conduct examinations includes the ability to inspect all books and records of a regulated institution.
Steps that law enforcement agencies can or should take in conducting a money laundering investigation include:
 Follow the money. If the agency is aware of where the laundered money originated and/or where it ended up, it is appropriate for the agency to attempt to bring the two ends together and to compile a complete understanding of the flow of the funds.
 Identify the unlawful activity. Most countries define money laundering in terms of predicate offenses or
“specified unlawful activities.” These usually are very extensive and include many felony crimes. So for a money laundering case, prosecutors need to establish the flow of money as well as the existence of a predicate offense.
 Document the underlying activity and transactions.
This involves documenting not only the underlying predicate offense, but also the flow of funds through various banks and accounts.

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 Review databases. Financial Intelligence Unit’s (FIU) databases and commercial databases can provide very useful and extensive financial information. Also, records such as “Social Security” information In the
United States (i.e., tax related information) can be useful for investigators.
 Review public records. Court records, as well as corporate filings and credit reports, can provide useful background information. Also, phone records, real estate Multiple Listing Services (MLS) and newspapers can prove useful.
 Review licensing and registration files. Files, such as records held by motor vehicle departments and other registration databases, can provide background information and useful leads.
 Analyze the financial transactions and account activity of the target. Look for the normal and expected transactions of the individual or entity based on selfdisclosures, income and typical flows of funds by similarly situated persons. If the transactions are outside of the norm or professed anticipated level of activity, then analyze where the additional funds come from and the composition of the unusual activity.
 Review STRs that might involve any potential individual linked to the target or the transactions or activity.  Conduct computer-based searches, discussed below.
 In cross-border cases, seek international assistance, discussed below.

Decision to Prosecute
When considering whether - or to what extent - to bring a case against an institution involving money laundering-related charges, prosecutors typically will look at many factors, including whether:

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 The institution has a criminal history.
 The institution has cooperated with the investigation.
 The institution discovered and self-reported the money laundering-related issues.
 The institution has had a comprehensive and effective
AML program.
 The institution has taken timely and effective remedial action.  There are civil remedies available that can serve as punishment.  Deterring wrongdoing by others is needed and will be served by a prosecution.
In the end, however, assuming the case is not simple (“cut and dry”) or egregious, the decision to prosecute will frequently be determined by what the prosecutors believe was the intent of the institution when it undertook the action in question.

Responding to a
Law Enforcement Investigation
The first rule when confronted with a law enforcement investigation is to respond quickly and completely to all requests. Failure to do so will only get the institution into more difficulty. If a request is overly broad or unduly intrusive, the institution can attempt to narrow the request or can even seek to contest the request, or portions of the request, in court. However, under no circumstances should an institution ignore, defer or otherwise put aside or delay responding to a law enforcement inquiry or request for documents.
When confronted with a law enforcement inquiry, the financial institution needs to ensure that the appropriate senior management is informed and that someone is designated as being responsible for responding to all law enforcement requests, for monitoring the

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progress of the investigation and for keeping senior management informed of the nature and progress of the investigation. If the inquiry appears to be focused on the institution and not just an account or customer, then the Board of Directors should be kept apprised as well. Of course, reports or information about an investigation should not be provided to any employees, officers or directors of the institution who might be implicated in the investigation. Upon notification of a law enforcement investigation, especially one directed at the institution, consideration should be given to the retention of qualified, experienced legal counsel. Such counsel can guide the institution through the inquiry, contest requests that are perceived to be improper and, ultimately, assist in negotiating settlements if necessary. If the law enforcement inquiry is merely focused on a particular account or is only seeking to obtain financial evidence about a customer and there is no apparent wrongdoing by the institution, there is a less pressing need to obtain counsel. Each case, however, requires individualized review and analysis. This issue is discussed at greater length below.
As set forth below, whenever an institution receives a subpoena, search warrant, or similar law enforcement demand or becomes aware of a government-related investigation involving the institution or one of its accounts or customers, the institution should conduct an inquiry of its own to determine the underlying facts, the institution’s exposure and what steps, if any, the institution should take.

Summonses and Subpoenas
If an institution is served with a summons or subpoena compelling the production of certain documents, the institution should have its senior management and/or counsel review the summons or subpoena. If there are no grounds for contesting the summons or subpoena, the institution should take all appropriate measures to comply with the summons or subpoena on a timely and complete basis. Failure to do so can result in adverse action and penalties for the institution.
Also, the financial institution should not notify the customer who is being investigated. If the government asks the bank to keep certain

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accounts open, such a request should be obtained in writing under proper letterhead and authority from the government.

Search Warrants
In some instances, a financial institution may receive a warrant from law enforcement authorities to search its premises.
When a search warrant is served, it is important that everyone present remain calm. Every employee should know that, generally, a search warrant is not an open-ended demand. Instead, it gives the agents the right to enter the premises and to look for and seize certain items or documents. A search warrant does not compel testimony. When presented with a search warrant, an institution should consider taking the following steps:
 Call the financial institution's in-house or outside counsel.  Review the warrant to understand its scope.
 Ask for and obtain a copy of the warrant.
 Ask for a copy of the affidavit that supports the search warrant. The agents are not obligated to provide a copy of the affidavit, but, if a financial institution is allowed to see the affidavit, the financial institution can learn more about the purpose of the investigation.
 Remain present while the agents record an inventory of all items they seize and remove from the premises.
Keep track of the records taken by the agents.
 Ask for a copy of law enforcement's inventory of what they have seized.
 Write down the names and agency affiliations of the agents who conduct the search.

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Documents and computer records that are protected by the attorney-client or other legal privilege should be so marked and retained separately from general records. Privileged records should be stored in an area (e.g., cabinet) marked “Attorney-Client
Privilege.”
If the agents want to seize these records, institution representatives may object and suggest, as an alternative, that the records be given to the court for safekeeping. All employees should be trained on how to behave in a search, and someone should be designated to communicate with the agents.

Orders to Restrain or Freeze Accounts or Assets
If the law enforcement agency or a prosecutor obtains a court order to freeze an account or to prevent funds from being withdrawn or moved, the institution should obtain a copy of the order and should comply with it. Generally, the order is obtained based on a sworn affidavit, which is sometimes included with the order. If the affidavit is not part of the order, the financial institution can ask to see the affidavit, which should provide clues about why a customer’s information is being requested. Whether law enforcement authorities are obligated to provide the affidavit depends on each country’s laws and regulations.

Monitoring the Institution’s Response to a Law Enforcement Investigation
When an institution receives a subpoena, summons or other government request, the institution should do more than just produce the records or information being sought. Financial institutions should ensure that all grand jury subpoenas, as well as other information requests from government agencies, are reviewed by senior management, an investigations group or counsel to determine how best to respond to the inquiry and to determine if the inquiry or the underlying activity might pose a risk to the institution. In addition, the institution should maintain a centralized control over all requests and responses in order

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to ensure that the requests are responded to on a complete and timely basis and to establish a complete record of what is provided. This centralized record will also assist with regard to the institution’s own internal investigation.

Dealing with Investigators and Prosecutors
Typically, the most effective strategy is to cooperate with investigators and prosecutors. Providing investigators with the information they need to reach an investigative conclusion may be the most effective way to terminate the investigation before it has a devastating effect on the resources and reputation of the institution.
Cooperation may include making employees, including corporate officers, available for interviews, and producing documents without the requirement of a subpoena. It can also include a voluntary disclosure by providing investigators with any report written by counsel regarding the subject under investigation.
The institution should make every effort to stay on good terms with the investigators and prosecutors. At a minimum, a good working relationship will help the institution conduct an effective parallel internal investigation and thereby position the institution to respond more effectively to investigative or prosecutorial inquiries.
It is also important for the institution to try to learn how the investigators and prosecutors view the facts. If they happen to be wrong about some of the facts, the institution will have an opportunity to rectify the situation. At a minimum, if the institution is aware of the investigators’ and prosecutors’ concerns, it will be in a better position to respond to them.

Obtaining Counsel for the Investigation
With regard to particularly large, important or serious investigations, it may be appropriate for the institution to retain counsel to assist in responding to the investigation or advising the institution during the course of the investigation. Many financial institutions, such as large banks and securities dealers, have legal counsel on their staff. But many other financial institutions, such

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as small money services businesses, do not ordinarily have legal counsel on their payroll. In either case, it is recommended that institutions hire or consult experienced outside legal counsel if confronted with a government investigation of the institution itself.
Using in-house counsel will, of course, cost less, and in-house counsel will start out with a better knowledge of the institution, its personnel, its policies and procedures. However, if the conduct under investigation could involve or lead to a criminal investigation or indictment, outside counsel may be more appropriate.
If the institution determines that it is necessary or appropriate to involve counsel with regard to an investigation, it should take appropriate measures to ensure that the counsel, in-house or outside, is sufficiently experienced and knowledgeable with regard to the factual and legal issues involved. In addition, the institution should determine the nature and scope of the role of counsel and should ensure that senior management is aware of and supports the involvement of counsel.
If the institution is actually facing imminent criminal prosecution or indictment, it needs an experienced criminal litigator. If, however, the investigation appears only to be preliminary or is focused on a single account or customer without necessarily adversely affecting the institution, then obtaining counsel may not be essential.

Notices to Employees
With regard to investigations conducted by the government, employees should be informed of the investigation and should be instructed not to produce corporate documents directly, but, rather, should inform senior management or counsel of all requests for documentation and should provide the documents to them for production. In that way, the institution will know what is being requested and what has been produced. In addition, the institution can determine what, if any, requests should be contested. The same procedure should be followed with regard to requests for employee interviews.

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Media Relations
People often mistakenly overlook the importance of public and media relations in defending an organization or officer. Public perception is vital to the organization’s success in maintaining public trust.
If the facts are not on the institution’s side, “no comment” may be the best response it can offer. Misleading or false statements such as — “We have no problems and have done nothing wrong.” — can worsen the situation. When such statements are made by a publicly traded company, they can invite additional scrutiny by the
SEC and law enforcement agencies.

Internal Investigations
The need for an internal investigation may become apparent as the result of different things, including the following:
 A report of examination from the regulators.
 Information from third parties, such as customers.
 Information derived from surveillance or monitoring systems.  Information from employees or a company hotline.
 Receipt of a governmental subpoena or search warrant.  Learning that government investigators are asking questions of institution employees, business associates, customers or even competitors.
 The filing of a civil lawsuit against the institution or a customer of the institution.
The threshold for conducting an internal investigation should be relatively low. Whenever there is unusual or potentially suspicious

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activity, an institution should examine the circumstances. The institution may want to develop parameters and thresholds for such internal investigations and may want to sketch out the nature and scope of such investigations, but the institution should always be alert to need to conduct an investigation, especially when one of the above-listed factors is present.
The need to learn the nature and extent of the problem, and the desire to remedy it, and to avoid reputational risk, as well as the need to avoid violating regulatory requirements, all weigh heavily in favor of conducting an internal investigation. The purpose of the investigation will be to learn the nature and extent of any potential wrongdoing, to develop information sufficient to report - when necessary - to the authorities, to enable the institution to minimize its liability, and to stop any potential money laundering.
An internal investigation may help the institution to prepare and respond to any civil, administrative or criminal proceedings. In addition, the fact that an internal investigation was conducted may help mitigate the institution’s exposure to administrative or criminal fines. Further, self-reporting by the institution may also reduce the impact of any administrative or criminal action. As always, the institution should document the purpose of any investigation, the scope of any investigation, how the investigation is conducted, the conclusions reached as a result of the investigation and any followup actions taken.
If an investigation is undertaken in response to a government investigation, it is, by definition, reactive in nature, but it should not be otherwise limited. In conducting the investigation, the institution needs to follow the transactions and activity where they lead and needs to make sure at all times that the institution’s AML policies, procedures and controls are sufficient and up-to-date.
If the investigation is generated by internal concerns or reports pertaining to suspicious conduct or potential money laundering, the investigation should similarly be as broad-based as necessary to review not only the underlying activity, transactions and the facts which triggered the investigation, but also to enable the institution to analyze the adequacy of its AML policies, procedures and controls. If any deficiencies are uncovered during the course

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of an internal investigation, they should be remedied as soon as possible. Closing the Account
Based on its internal investigation, the institution should make an independent determination as to whether to close the account in issue. Some of the factors that the institution should consider are as follows:
 The legal basis for closing an account.
 The institution’s stated policies and procedures for closing an account.
 How serious is the underlying conduct. If the conduct is serious and rises to the level where the account would ordinarily be closed, then the institution should consider closing the account.
 As stated above, if law enforcement requests the institution to keep the account open, the institution should request that the investigator or prosecutor make that request in writing on proper government agency letterhead with the appropriate authorized signature.

Filing an STR
In addition, based on its internal investigation, the institution should determine whether or not to file a suspicious transaction report. If the institution decides that it should file an STR, it should notify the investigators or prosecutors as soon as possible.

Conducting the Investigation
In the course of conducting an internal investigation, it will nearly always be necessary to: (a) review documents; (b) interview

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employees; and (c) generate a written report. Further, it may become necessary to deal with law enforcement investigators and prosecutors. In addition, a determination should be made as to whether and to what extent to involve counsel. Also, procedures should be established to keep senior management - and, when necessary, the board of directors - apprised of the scope and progress of the internal investigation.

Documents
The Importance of Gathering and Producing Documents
A financial investigator’s main objective is to track the movement of money, whether through a bank, broker-dealer, money services business or casino.
Financial institutions have a wealth of information at their fingertips because they are in the business of taking in, paying out, accounting for and recording the movement of money.
For example, banks maintain signature cards, which are collected at the opening of an account, account statements, deposit tickets, checks and withdrawal items and credit and debit memorandums.
Banks also keep records on loans, cashier’s checks, certified checks, traveler’s checks and money orders. They exchange currency, cash third-party checks, and conduct wire transfers, as do most money services businesses. Banks also keep safe-deposit boxes and issue credit cards.
Often, banks are required to keep records of customer accounts for five years. While that rule might vary in different countries, it is important for compliance officers at financial institutions to be aware of these legal requirements. Account records and records of other non-account activities can be essential to tracking possible money laundering.
Other financial institutions keep similar records of transactions and the ability to exert control over an account, such as the ability to

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trade stocks in a brokerage account. These records are valuable to an investigator.
In any money laundering investigation, the relevant documents should be examined thoroughly, covering the time frame of the suspected activity, as well as for several months before and after it is thought to have occurred.
According to statements by the U.S. Treasury and Internal
Revenue Service (IRS), here are some patterns financial institutions can look for as they investigate possible money laundering:  Unusually high monthly balances in comparison to known sources of income.
 Unusually large deposits, deposits in round numbers or deposits in repeated amounts that are not attributable to legitimate sources of income.
 Multiple deposits made under reportable thresholds.
 The timing of deposits. This is particularly important when dates of illegal payments are known.
 Checks written for unusually large amounts (in relation to the suspect’s known practices).
 A lack of account activity. This might indicate transactions in currency or the existence of other unknown bank accounts.
(For a more complete list of red flags, see also the chapter on AML programs.) Frequently, it is a review of documents that turns up information that helps to uncover wrongdoing. Vital information can be found in a wide variety of document types, including internal memos, transactional documents, calendars, e-mails, financial records, travel records, phone logs, signature cards, deposit tickets, checks, withdrawal items, credit and debit memoranda, loan records, etc.
The institution must ensure that relevant documents are not altered, lost or destroyed and that all employees are advised of this

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fact. This can be done by a memo sent to all relevant employees.
However, if there is concern that such a memo might prompt a particular employee to alter or destroy documents, that situation must be dealt with separately.
The institution should also address its document destruction policy to ensure that no documents are destroyed pursuant to that policy during the investigation. It would not be a serious concern if documents relevant to a government investigation were destroyed, pursuant to a legitimate policy, prior to obtaining knowledge of the investigation or receiving a subpoena. It could, however, be a serious concern if such documents were destroyed, for whatever reason (even pursuant to a legitimate policy), once the institution had been notified about an investigation, even if no subpoena had yet been received.

Finding and Reviewing the Documents
An institution should start by identifying an employee with knowledge of the institution’s files, who will be in charge of retrieving documents for the institution. A system must be put in place to ensure that all documents are located, whether they be in central files, department files, and even individual files. In addition, copies of the same document in different hands should be retrieved. This is important because some copies may have handwritten notes written by the employees who received them.

Organization of Documents
The institution should ensure the integrity of original documents, while at the same time minimizing disruption to the institution’s business. It must ensure that an appropriate system is put in place to organize, maintain, number, secure and copy the documents, and to prepare them for production to the government (or to the opposing party in a civil litigation). The documents should be listed in an index, so that they can be found when needed.
A “detailed privilege” log should be created as the documents are gathered, and privileged documents should be kept separate from other documents to help avoid inadvertent disclosure.

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Interviewing Employees
In addition to securing and reviewing all relevant documentation, it is important to interview all knowledgeable employees. It is important to interview these employees as soon as practicable so that their memories are the freshest and so that they can direct management or counsel to relevant documents and people on a timely basis.
In addition, the institution - usually counsel - should prepare employees who expect to be interviewed by law enforcement investigators and should debrief them after their interviews.
The former will help the employee to understand how to handle the process and the latter will assist the institution in better understanding the scope and direction of the government investigation. As stated above, all requests for employee interviews by law enforcement investigators should go through a single person or centralized location.
Most employees are not accustomed or comfortable with being interviewed - either by law enforcement investigators or counsel for the institution. Therefore, care should be given to try and put them at ease to the extent possible.
It is also helpful to have interviews as non-contentious as possible.
Background and open-ended questions should be used at the beginning of the interview, together with a non-confrontational review of documents. More contentious questions, if necessary, should be held off for later.

Attorney - Client Issues
Attorney-Client Privilege,
Applied to Entities and Individuals
In an internal investigation, all parties should be aware that attorneys for the organization represent the entity and not its employees. Counsel should understand these issues and should conduct the internal investigation accordingly.

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There may be major consequences if the interests of an entity and its employees diverge or conflict, or if an employee might implicate the employer or vice versa. In such cases, separate counsel may be required.

Dissemination of a Written Report by Counsel
If counsel for the institution prepares a written report of an investigation, the institution should take steps to not inadvertently waive the attorney-client privilege by distributing the report to persons who should not receive it. Every page of the report should contain a statement that it is confidential and is subject to the attorney-client privilege and work-product privilege.
Copies of the report should be numbered, and a list of persons who are given copies to read should be maintained. After a set period of time, all copies should be returned. Persons obtaining the report should be instructed not to make notes on their copies. All copies should be maintained in a file separate from regular institution files in a further effort to maintain the highest level of protection.

Exploiting the Internet for
Money Laundering Investigations
The investigator should start with a metasearch1 — using a number of different search engines — and then move to specific search engines with different capabilities. From the metasearch, the investigator can also start narrowing the parameters using keywords. That enables the investigator to focus on opportunities, identifying an individual’s habits, education, interests and use of the Internet.2
1 A metasearch engine is a search tool that sends user requests to several other search engines and/or databases and aggregates the results into a single list or displays them according to their source.

2 The following section is based on material from John Pyrik, CAMS, a Canadian AML expert with a broad range of analytical and investigative experience.

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To know your customer and perform due diligence, you will need information from internal and external sources. Right now, on your computer, you have access through the Internet to perhaps
10 billion pages of external information. This is an amazing resource, but to exploit it, you need two things: thinking skills and technical skills.

Too Much Money
Take, for example, the case of a gas station owner who deposits
$50,000 in cash per week. Is this money laundering? Many people would simply plug the owner’s name into Google (or other search engine) and consider that search sufficient. A better approach would be to ask: How much cash do gas stations of that size and location typically deposit? This leads to a very different line of inquiry. If you are lucky, your internal sources may provide an answer, but, if not, perhaps the Internet could lead you to news stories, marketing studies, or businesses for sale which might provide useful clues about the cash flow of comparable gas stations.
The Internet might also reveal useful information about the area where the gas station is located: population statistics, income levels, ethnicity, crime rates, etc. Is it located on a commuting corridor? Are there competitors nearby? Does it have a car wash or a convenience store attached?
By comparing the suspect business with others and examining the context, it becomes possible to argue that there is “…a high level of cash deposits atypical of the expected business profile” — a classic indicator of money laundering.

Unknown Business
Often, the thinking skills of a savvy Internet investigator involve creatively combining information from different websites. This was how an unknown business was identified.
The case involved a bank client who was depositing large amounts of cash in his personal account. The bank suspected that its client

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was operating an unlicensed money remittance service out of the back of his restaurant. They were about to file a suspicious transaction report when they realized that they were missing a key piece of information: the name of the client’s restaurant. How did they solve the mystery? They began by assuming that the client’s restaurant was near the bank. Using a simple online telephone directory they were able to generate a list of all the restaurants within one mile of the bank.

But which one belonged to the client? They needed a way to look up incorporation records for each of the businesses that they had identified. Not wanting to use a commercial service like LexisNexis, they went to a free online public records provider. Clicking on the jurisdiction, then the link for corporations, led them to the right government department, where they inputted the name of each one of the area restaurants until they found one with their client listed as a director.
What is the moral of the story? It is a common mistake to think that the Internet will jump you straight to the information you need. Often, as in the case above, there are several steps and lots of dead ends. Success usually depends on taking what you learn from one site and using it to refine your search on

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another. This particular case had an interesting twist at the end. A
Google or other search engine search for the restaurant found an advertisement in an online business directory. The advertisement contained a “dead link” to the website for the restaurant.
Undaunted, the investigator realized two things:
 Someone registered the site.
 A copy might still exist somewhere.
It was a simple matter to look up the domain name registration.
Finding an old version of the website required a visit to an internet archive provider, where inputting the website address uncovered over a dozen copies, each one a snapshot preserving what the website looked like at a specific moment in time.
For someone conducting due diligence on a business, it could be quite useful to look back in time using one of these sites to see how the business evolved. How did the business change? Who were their former suppliers and clients? Where was it located?
Who has left the company?

Weird Wires
What technical skills are useful for Know Your Customer (KYC) and due diligence? Let’s say, for example, that you had to research a woman named Cynthia Jenkins in Albuquerque, New Mexico, who has received 13 wire transfers, each for $9,900, in the last two weeks. Your first step might be to confirm that Cynthia actually exists, using “high value” sites.
 Is she listed in the telephone directory? Try a website that collects results from all the leading search engines.  Is she mentioned in any public records? Try a public records search engine.
Could this be a case of identity theft? Imposters often use the
Social Security Numbers of dead people. Fortunately, in the United
States, it is possible to check the Social Security Death Index by

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searching for “Social Security Death Index” using your favorite search engine.

Your second step might be to search the web for any mention of
Cynthia.
But, do you use a directory or a search engine? How do you structure your searches? What keywords do you use?
There are good tutorials on the web for those who want to improve their search skills. There are also sites that tell you about search engines and others for professional searchers. The easiest and most effective way to improve your web-searching skills is to read the “Help” pages of major search engines and to try out their advanced features.
Some tips on search engines:
 Using multiple search engines is a good idea, since no single engine covers the entire web.
 If you are searching in a foreign country, use a local search engine.

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 Use metasearch engines.
A third step might be accessing a commercial database.
While these databases require the payment of a fee, public record aggregators can be worth the fee, as they cross-reference a huge number of records.

The Final Word
It’s one thing to have technical competency; it’s another to be able to sift through all the information you can find online and come up with something meaningful.
Hopefully, these three scenarios demonstrate that there is more to using the web than simply being a proficient searcher. To be successful, you must also bring to the keyboard your area knowledge and your thinking skills.

AML Cooperation
Between Countries
Practices that restrict international cooperation between supervisory authorities or Financial Intelligence Units in analyzing and investigating suspicious transactions or money laundering crimes, confiscating assets or extraditing accused money launderers are serious obstacles to combating money laundering.
Here are some methods for international AML cooperation.
International Money Laundering Information Network — The
International Money Laundering Information Network (IMoLIN) serves as a clearinghouse of money laundering information for the benefit of national and international anti-money laundering agencies. It was developed and is administered by the Global
Program against Money Laundering of the United Nations Office on Drugs and Crimes (UNODC) on behalf of the UN and other

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international organizations, including Interpol. IMoLIN has five main features, all but one accessible to the public:
 AMLID: Anti-Money Laundering International Database
- A compendium and analysis of national AML laws and regulations, as well as information on national contact and authorities. The database is password-protected.
 Reference Data: Research and analysis, bibliography, conventions, legal instruments and model laws.
 Country Page: Includes full text of AML legislation where available, and links to national FIUs.
 Calendar of Events: Chronological listing of training events, conferences, seminars, workshops and other meetings in the AML field.
 Current Events: Current news of recent AML initiatives. Mutual Legal Assistance Treaties
The classic gateway, usually embodied in a treaty for mutual legal assistance (MLAT), provides a legal basis for transmitting evidence that can be used for prosecution and judicial proceedings.
If evidence is required from another jurisdiction, a request can be made for mutual legal assistance. Procedures vary, but, generally, the following happens:
 The central authority of the requesting country sends a “commission rogatoire” (letters rogatory, or letter of request) to the central authority of the other country.
The letter includes the information sought, the nature of the request, the criminal charges in the requesting country and the legal provision under which the request is made.
 The central authority that receives the request sends it to a local financial investigator to find out if the information is available.

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 An investigator from the requesting country then visits the country where the information is sought, and accompanies the local investigator during visits or when statements are taken.
 The investigator asks the central authority for permission to remove the evidence to the requesting country.  The central authority sends the evidence to the requesting central authority, thereby satisfying the request for mutual legal assistance.
 Local witnesses may need to attend court hearings in the requesting country.

Financial Intelligence Units
The second official gateway involves a communication between
Financial Intelligence Units (FIUs) or other bodies set up to fight money laundering and other financial crimes.
Generally, FIUs are agencies that receive reports of suspicious transactions from financial institutions and other persons and entities, analyze them, and disseminate the resulting intelligence to local law-enforcement agencies and foreign FIUs to combat money laundering. The first few FIUs were established in the early 1990s in response to the need for a central agency to receive, analyze and disseminate financial information to combat money laundering.
Over the following years, the number of FIUs increased to the point where the Egmont Group, the informal international association of
FIUs, now has more than 100 members.
In 2003, the Financial Action Task Force (FATF) adopted a revised set of recommendations on combating money laundering that, for the first time, included explicit recommendations for the establishment and functioning of FIUs.

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Although the FIU members of the Egmont Group share the same core functions of receiving, analyzing, and disseminating financial information to combat money laundering and financing of terrorism, they often differ in how they are established and how they function.
A 2004 Report “Financial Intelligence Units: An Overview” by the
International Monetary Fund said that although, in establishing an FIU, authorities may feel the need to respond to the calls of the international community, their decisions as to the FIU’s functions and the modalities of its operations need to be based on the country’s own crime-fighting policy objectives, resources and priorities. The responsibilities of the FIU also need to be harmonized with those of existing national agencies involved in the fight against financial crime, including law enforcement, supervisory agencies and policy-setting government bodies. Moreover, the establishment of an FIU will entail the use of budgetary resources.
When establishing an FIU, the IMF said that the following needs to be kept in mind:
 Objectives to be pursued by the establishment of the
FIU need to be defined.
 The FIU must be given the means to successfully pursue these objectives, for which it will become accountable.  Care should be taken not to give the FIU more responsibilities than it can handle, given its expected resources. In some cases, other agencies that have resources and experience may be in a position to exercise certain functions, such as the supervision of
AML/CFT requirements, in a more effective way than an FIU.
 Overlapping functions should be avoided to the extent possible, and, to the extent such overlap is unavoidable, coordination mechanisms should be established to minimize conflicts and to maximize cooperation between the concerned agencies.

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In many countries, it has been found productive to discuss the proposed FIU and the draft law with the representatives of the segments of the private sector that will be most directly affected by the establishment of the new AML/CFT regime. Early consultations with the private sector will also provide an opportunity for the government authorities to explain the benefits of the new system to firms that will have to begin reporting transactions to the FIU.
The FIUs, with the task of receiving and analyzing suspicious transaction reports and maintaining close links with police and customs authorities, share information among themselves informally in the context of investigations, usually on the basis of memoranda of understanding (MOU). The Egmont Group of
FIUs has established a model for such MOUs. Unlike the MLAT, this gateway is not ordinarily used for obtaining evidence, but for obtaining intelligence that might lead to evidence.
The FIUs participating in the Egmont Group want to encourage cooperation among and between themselves in the interest of combating money laundering and terrorist financing. The members issued a document on “Principles of Information Exchange
Between Financial Intelligence Units," adopted in June 2001 and incorporated into the Group’s Statement of Purpose.
Some countries may restrict the exchange of information with other FIUs or the access to information requested by an FIU.
This document describes practices that maximize cooperation between FIUs and can be useful to government authorities when considering anti-money laundering legislation.
Furthermore, to address practical issues that impede mutual assistance, the document provides guidelines in terms of best practices for the exchange of information between FIUs. When dealing with international information requests, FIUs are urged to try to take these best practices into account to the greatest possible extent.
Here are some principles included in the document:
 The Egmont principle of free exchange of information at the FIU level should be possible on the basis of reciprocity, including spontaneous exchange.

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 Differences in the definition of offenses that fall under the competence of FIUs should not be an obstacle to free exchange of information at the FIU level. To this end, the FIU’s competence should extend to all predicate offenses for money laundering, as well as terrorist financing.
 The exchange of information between FIUs should take place as informally and as rapidly as possible and with no excessive formal prerequisites, while guaranteeing protection of privacy and confidentiality of the shared data.
 Should an FIU still need a Memorandum of
Understanding to exchange information, it should be negotiated and signed by the FIU without undue delay.
To that end, the FIU should have the authority to sign
MOUs independently.
 It should be possible for communication between FIUs to take place directly, without intermediaries.
 Providing an FIU’s consent to disseminate the information for law enforcement or judicial purposes should be granted promptly and to the greatest extent possible. The FIU providing the information should not deny permission to disseminate the information unless doing so would fall beyond the scope of its AML/CFT provisions, could impair a criminal investigation, would be clearly disproportionate to the legitimate interests of an individual or legal person or the country of the providing FIU, or would otherwise not be in accord with basic principles of national law. Any refusal to grant consent should be appropriately explained.
The following practices should be observed by the FIU requesting the information:
 All FIUs should submit requests for information in compliance with the Principles for Information
Exchange set out by the Egmont Group. Where

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applicable, the provisions of information-sharing arrangements between FIUs should also be observed.
 Requests for information should be submitted as soon as the precise assistance required is identified.
 When an FIU has information that might be useful to another FIU, it should consider supplying it spontaneously as soon as the relevance of sharing this information is identified.
 The exchange of information between Egmont FIUs should take place in a secure way. To this end, the
Egmont FIUs should use the Egmont Secure Web
(ESW) where appropriate.

Explanation of FIU sharing process within the EU

In 2004, the European Commission awarded a grant to the Ministry of Justice in the Netherlands to create the FIU.NET and to take on the development of highly sophisticated electronic connections among
European Union Member State Financial Intelligence/
Investigations Units. FIU.NET is a decentralized computer network designed to connect FIUs of the EU using modern technology and computers to bilaterally exchange financial intelligence information. FIU.
NET encourages co-operation and enables FIUs to exchange intelligence quickly, securely and effectively.
This, in turn, further helps encourage sharing of information. The main purpose of this increased cooperation is to further the fight against organized crime and against the misuse of the financial system for the purpose of money laundering and terrorist financing. The Egmont Group has developed a form for requesting information. The use of this form should be encouraged when exchanging information. Requests should contain sufficient background information to enable the requested FIU to conduct a proper analysis/investigation. Requests should be accompanied

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by a brief statement of relevant facts known by the requesting FIU.
Unless indicated otherwise, all requests for information originating from another FIU should be answered as soon as possible. FIUs should assign unique case reference numbers to both outgoing and incoming requests to facilitate tracking. In acknowledging a request, the responding FIU should provide the requesting unit with the name and contact details, including telephone and fax numbers, of the contact person and the case or reference number assigned to the case. The FIU should strive to reply within one week if the request involves information it has direct access to or if it is unable to provide an answer due to legal impediments.
Whenever the requested FIU needs to have external databases searched or must query third parties (such as financial institutions), it should reply within one month of getting the request. The FIU may consider contacting the requesting unit within a week of receipt to state that it has no information directly available and that external sources are being consulted or that it is experiencing difficulties answering the request. That response can be made orally. If the results of the inquiries are still not all available after a month, the requested FIU should provide the information it already has in its possession or at least indicate when it will be able to answer completely.
FIUs should consider establishing mechanisms to monitor requestrelated information, enabling them to detect new information they receive regarding transactions, STRs, etc., that are involved in previously received requests. Such a monitoring system would enable FIUs to inform requestors of new and relevant material related to their earlier requests.
Where the requested FIU wants to know how the information it provided was used, it should request this explicitly. When the requesting FIU is not able to give this feedback, it should reply with the reasons why it cannot be provided. If appropriate, especially in case of urgent requests, and in order to speed up proceedings, prior consent for further use of information can be granted with the reply itself.
All FIUs should use the greatest caution when dealing with supplied information in order to prevent any unauthorized use resulting in a breach of confidentiality.

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The Supervisory Channel
The Basel Committee on Banking Supervision, in its April 2002
“Report on Sharing of Information between Jurisdictions in
Connection with the Fight against Terrorism,” cites the supervisory channel as the third official gateway. It says that with regard to banking, information from supervisory agencies is normally of a general character and is designed to monitor the financial soundness of a banking group. Increasingly, however, inquiries relate more to specific assets or accounts because of concerns about reputational and legal risks.
One example concerns accounts for Politically Exposed Persons
(PEPs), a term used for public officials in the civil or military arms of government, who can be recipients of funds derived from public corruption. The ability to share information is often defined by the legal framework under which the supervisory agency operates, but it may also be supported by an MOU. Unlike an MLAT, an MOU is not a treaty and usually is not binding on governments. Instead, it reflects an agreement among supervisory authorities. An MOU may be especially valuable with such entities as securities or trading firms, which fall within the jurisdiction of a specific regulatory authority. Information communicated through this gateway usually is provided for supervisory purposes only, and may not ordinarily be used as evidence or shared widely among governmental entities.
The Committee also indicated that enforcement agents should reach out through proper channels to FIUs, central banks and banking superintendents to determine the filing, reporting and licensing requirements applicable to the subjects of their investigations. In this way, they can determine what records they can reach through legal process, where to get the witnesses to introduce them into evidence, document compliance (or lack of) and rebut defenses.

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FATF Recommendations on
Cooperation Between Countries
The FATF developed its 40 Recommendations or best practices as a basic framework for establishing and maintaining effective
AML programs worldwide. They cover the criminal justice system and law enforcement, the financial system and its regulation, and international cooperation. (For more, see the chapter on
International Standards.)
Recommendations 36 – 40 from the FATF’s 40 Recommendations pertain specifically to the international aspects of money laundering and terrorist financing investigations. They deal with mutual legal assistance treaties, extradition, confiscation of assets and mechanisms to exchange information internationally.

Summary
It is important, and in most cases legally mandated, for financial institutions to establish and follow a comprehensive and adequate anti-money laundering (AML) program. In addition, institutions must be aware of the possibility of investigations by law enforcement agencies and how to respond to them. Also, institutions need to be aware of the potential need to conduct their own internal investigations. In connection with this, institutions should be aware of the investigatory and search capabilities of the Internet, which is constantly changing. Last, institutions need to be familiar with the international bases and mechanisms for cross-border sharing.

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Review Questions
 What are the basic situations in which an internal investigation might be appropriate?
 When a financial institution is served with a search warrant, what should it do?
 How can you do research on the Internet for money laundering investigations?
 What are gateways for cross-border information sharing in money laundering investigations or cases?

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6

A
Account Monitoring Order
In the United Kingdom and several other countries, an order from a government authority requiring a financial institution to provide transaction information on a suspect account for a specified time period.
Affidavit
A written statement given under oath before an officer of the court, notary public, or other authorized person. It is commonly used as the factual basis for an application for a search, arrest or seizure warrant.
Alternative Remittance System (ARS)
Underground banking or informal value transfer systems.
Often associated with ethnic groups from the Middle East,
Africa or Asia, and commonly involves the transfer of values among countries outside of the formal banking system. The remittance entity can be an ordinary shop selling goods that has an arrangement with a correspondent business in another

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country. There is usually no physical movement of currency and a lack of formality with regard to verification and recordkeeping. The money transfer takes place by coded information that is passed through chits, couriers, letters or faxes, followed by telephone confirmations. Almost any document that carries an identifiable number can be used by the receiver to pick up the values in the other country. The systems are referred to by different names depending upon the country: Hawala (an
Arabic word meaning “change” or “transform”), Hundi (a Hindi word meaning “collect”), Chiti banking (referring to the way the system operates), Chop Shop banking (China), and Poey Kuan
(Thailand).
Anti-Money Laundering International Database (AMLID)
A compendium of analyses of anti-money laundering laws and regulations, including two general classes of money laundering control measures—domestic laws and international cooperation—as well as information on national contacts and authorities. A secure, multilingual database, AMLID is an important reference tool for law enforcement officers involved in cross-jurisdictional work. (See www.imolin.org/amlid/index.html.)
Anti-Money Laundering Program
The system designed to assist institutions in their fight against money laundering and terrorist financing. In many jurisdictions, government regulations require financial institutions, including banks, securities dealers and money services businesses, to establish such programs. At a minimum, the anti-money laundering program should include:
1. Written internal policies, procedures and controls;
2. A designated AML compliance officer;
3. On-going employee training; and
4. Independent review to test the program.
Arrest Warrant
A court order directing a law enforcement officer to seize and detain a particular person and require them to provide an answer to a complaint or otherwise appear in court.

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Asia/Pacific Group on Money Laundering (APG)
A Financial Action Task Force (FATF)-style regional body consisting of jurisdictions in the Asia/Pacific Region. See www.apgml.org.
Asset Manager
A person appointed through a written contract by a company or trust to direct the entity’s investment program. The program can be a fully discretionary account, or the contract can impose limitations on it. Fees to the asset manager can be based on performance achieved, trading commissions or a percentage of the valuation of the estate under his or her management. High fees and a close relationship with the owners or beneficiaries can expose the asset manager to potential conflicts between a duty to report unusual or suspicious activity and the fiduciary duty to the client.
Asset Protection
A process that includes reorganizing how assets are held so as to make them less vulnerable should a claim be made against a person. Asset protection is also a term used by tax planners for measures taken to protect assets from taxation in other jurisdictions. Asset Protection Trusts (APTs)
A special form of irrevocable trust usually created (i.e., settled) offshore for the principal purposes of preserving and protecting part of one’s wealth from creditors. Title to the asset is transferred to a person named the trustee. APTs are generally used for asset protection and are usually tax neutral.
Their ultimate function is to provide for the beneficiaries.
Some proponents advertise APTs as allowing foreign trustees to ignore U.S. court orders and to simply transfer the trust to another jurisdiction in response to legal action threatening the trust’s assets (so-called “flying trusts”).
Automated Clearing House (ACH)
An electronic banking network that processes large volumes of both credit and debit transactions that originate in batches.
ACH credit transfers include direct deposit payroll payments

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and payments to contractors and vendors. ACH debit transfers include consumer payments on insurance premiums, mortgage loans and other kinds of expenses. The system is used for bulk orders made days in advance—for example, a large corporation’s entire payroll. Both governments and commercial sectors can use the ACH system. The ACH system was designed to transfer a high volume of low-dollar domestic transactions, which pose lower money laundering risks.
Nevertheless, the ability to send high-dollar and international transactions through the ACH may expose financial institutions to higher money laundering risks. Firms without a robust AML monitoring system may be exposed to additional risk, particularly when accounts are opened over the Internet without face-to-face contact.

B
Bank Draft
Vulnerable to money laundering because it represents a reputable international monetary instrument drawn on a reputable institution, and is often made payable—in cash— upon presentation and at the issuing institution’s account in another country.
Bank for International Settlements (BIS)
An international organization that serves as a bank for central banks and which fosters international monetary and financial cooperation with the purpose of attaining stability in the world economy. It hosts the Secretariat of the Basel Committee on
Banking Supervision. The Committee has formulated broad supervisory standards and guidelines on Know Your Customer issues. See www.bis.org.

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Bank Secrecy
Refers to laws and regulations in countries that prohibit banks from disclosing information about an account—or even revealing its existence—without the consent of the account holder. Impedes the flow of information across national borders among financial institutions and their supervisors. One of
FATF’s 40 Recommendations states that countries should ensure that secrecy laws do not inhibit the implementation of the FATF Recommendations.
Bank Secrecy Act (BSA)
The primary U.S. anti-money laundering regulatory statute
(Title 31, U.S. Code Sections 5311-5355) enacted in 1970 and most notably amended by the USA Patriot Act in 2001. Among other measures, it imposes money laundering controls on financial institutions and many other businesses, including the requirement to report and to keep records of various financial transactions. Bank Secrecy Act (BSA) Compliance Program
A program that U.S.-based financial institutions—as defined by the Bank Secrecy Act—are required to establish and implement in order to control money laundering and related financial crimes. The program’s components include at a minimum: the development of internal policies, procedures and controls; the designation of a compliance officer; ongoing employee training; and an independent audit function to test the program.
Bare Trust
Also known as a dry, formal, naked, passive, or simple trust, in which the trustees have no duties other than to convey the trust property to beneficiaries when called upon to do so. Bare trusts are vulnerable to money laundering because the final beneficiary is unknown.
Basel CDD Paper
A guidance paper on Customer Due Diligence (CDD) for banks issued by the Basel Committee on Banking Supervision
(BCBS) in October 2001. The paper includes sound Know

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Your Customer policies and procedures that, according to the Committee, are critical to protecting the safety and soundness of banks and the integrity of banking systems. In
February 2003, the Basel Committee on Banking Supervision issued “General Guide to Account Opening and Customer
Identification.” This document is an attachment to the Basel
CDD Paper. See www.bis.org/bcbs.
Basel Committee on Banking Supervision (Basel Committee)
The Basel Committee was established by the G-10’s central bank of governors in 1974 to promote sound supervisory standards worldwide. Its secretariat is appointed by the Bank for International Settlements in Basel, Switzerland. It has issued, among others, papers on customer due diligence for banks, consolidated KYC risk management, transparency in payment messages, due diligence and transparency regarding cover payment messages related to cross-border wire transfers, and sharing of financial records among jurisdictions in connection with the fight against terrorist financing. See www.bis.org/bcbs. Batch Processing
A type of data processing and data communications transmission in which related transactions are grouped together and transmitted for processing, usually by the same computer and under the same application.
Batch Transfer
Transfer comprising a number of individual wire transfers that are sent to the same financial institution, and which may be ultimately intended for different persons.
Bearer Form
In relation to a certificate, share transfer or other document, a bearer form enables a designated investment or deposit to be sold, transferred, surrendered or addressed to a bearer without the need to obtain further written instructions.

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Bearer Negotiable Instruments
Include monetary instruments in bearer form such as: negotiable instruments (including checks, promissory notes and money orders) that are either in bearer form, are endorsed without restriction, are made out to a fictitious payee, or are otherwise in such form that title thereto passes upon delivery.
Bearer Share
Negotiable instruments that accord ownership in a corporation to the person who is in physical possession of the bearer share certificate. Bearer Share Certificate
A negotiable corporate share certificate made out to “Bearer” and not in the name of an individual or organization.
Benami Account
Also called a nominee account. Held by one person or entity on behalf of another or others, Benami accounts are associated with the hawala underground banking system of the Indian subcontinent. A person in one jurisdiction seeking to move funds through a hawaladar to another jurisdiction may use a
Benami account or Benami transaction to disguise his/her true identity or the identity of the recipient of the funds.
Beneficial Owner
The natural person who ultimately owns or controls an account through which a transaction is being conducted. It also incorporates those persons who exercise ultimate effective control over a legal person or arrangement.
Beneficiary
All trusts (other than charitable or statutory-permitted noncharitable trusts) must have beneficiaries, which may include the settlor. Trusts must also include a maximum time frame, known as the “perpetuity period,” which normally extends up to 100 years. While trusts must always have some ultimately ascertainable beneficiary, they may have no defined existing beneficiaries. Trusts may only have objects of a power until

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some person becomes entitled as beneficiary to income or capital on the expiry of a defined period, known as the
“accumulation period.” The latter period is normally coextensive with the trust perpetuity period, which is usually referred to in the trust deed as the “trust period.”
Biometrics
The science of identifying features that distinguish one person from another. Fingerprinting, voice recognition and iris (eye) scans are three forms of biometrics technology that may someday render pen-to-paper signatures outdated.
Certain institutions use biometrics to verify the identity of their customers. With the advent of customer identification regulations, biometric tools may become more common in financial institutions.
Black Market Peso Exchange (BMPE)
The Colombian Black Market Peso Exchange (BMPE) is an example of a complex method of trade-based money laundering. The BMPE originally was driven by Colombia’s restrictive policies on currency exchange. To circumvent those policies, Colombian businesses bypassed the government levies by dealing with peso brokers that dealt in the black market or parallel financial market. Colombian drug traffickers took advantage of this method to receive Colombian pesos in Colombia in exchange for U.S. drug dollars located in the
United States. According to the U.S. State Department’s 2007
INCSR, similar black market exchange systems are found in
Venezuela and in the tri-border region of Argentina, Brazil, and Paraguay. Trade goods in Dubai, as well as Chinese and
European manufactured trade items, are being purchased through narcotics-driven systems similar to the BMPE. The
Black Market Peso Exchange system operates through brokers who purchase narcotics proceeds in the United States from the cartels and transfer pesos to the cartels from within Colombia.
The dollars are placed — that is, “laundered” — into the United
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Glossary of Anti-Money Laundering Terms

The dollars are then “sold” by the brokers to businessmen in
Colombia (or other country) who need dollars to buy United
States goods for export.
Goods ready for export are often actually paid for by the peso broker, using the purchased narcotics dollars, on behalf of the
Colombian (or other country’s) importer.
Blank Check Company
A type of company designed to be used by private corporations intending to issue publicly traded shares through “reverse mergers” without the high expenses involved in making their own initial public offering. Blank check companies often have few assets, engage in little business activity, and have no business plan or experienced management.
Bookmaker
A bookmaker accepts bets from individuals on a variety of matters, mostly sporting events. Bookmakers are vulnerable to money laundering, since launderers may offer their customers money for winning betting slips, often 7 to 10 percent above the value of the winnings. The launderer then collects clean money from the bookmaker.
Branch
A place of business that forms a legally dependent part of a financial institution and carries out directly all or some of the transactions inherent in the business of that financial institution.
Bureau de Change
Also called “casa de cambio” or “exchange office,” a bureau de change offers a range of services that are attractive to money launderers: currency exchange and consolidation of small denomination bank notes into larger ones; exchange of financial instruments such as travelers checks, money orders and personal checks; and telegraphic transfer facilities. In some countries, such businesses are not as heavily scrutinized for money laundering as are traditional financial institutions. Also, their customers are often occasional, making it more difficult for these businesses to “know their customers.”

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Bust-Out
A scheme in which the use or extension of credit is obtained and is increased fraudulently while the perpetrators avoid having to pay back the illegally obtained credit or goods.
Typically, a bust-out ring will operate a shell or front business that accepts credit purchases on stolen or fraudulently obtained credit cards. The criminals run the cards or numbers through credit card terminals, but either do not provide any goods or services or provide stolen or non-licensed goods. The innocent credit card company credits the account of the front business.
Before the transactions can be reversed, the criminals have moved the funds from the accounts of the front business.
The cardholders who knowingly participate in these bust-out schemes generally refuse to pay the credit card companies for their “purchases.” These people have either obtained cards with fraudulent or stolen identification or otherwise cannot be found. Bust-out schemes have been very popular in creating large bankruptcy frauds in which business entities secure loans in excess of the actual value of the company or property and then disappear with the money, leaving the lender to take a substantial loss.

C
Cardholder
Person to whom a financial transaction card is issued, or an additional person authorized to use the card.
Caribbean Financial Action Task Force (CFATF)
A FATF-style regional body comprising Caribbean states, including Aruba, the Bahamas, the British Virgin Islands, the
Cayman Islands and Jamaica. See www.cfatf.org.

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Casa de Cambio
See Bureau de Change.
Cash-Based Business
Any business in which customers usually pay with cash for the products or services provided, such as restaurants, pizza delivery services, taxi firms, coin-operated machines or car washes. Some money launderers run or use cash-based businesses to commingle illegally obtained funds with cash actually generated by the business.
Cash Collateralized Loans
A cash collateralized loan has cash deposits as the loan’s collateral. The cash deposits can sometimes reside in another jurisdiction. Cash Deposits
Sums of money placed in a financial institution’s accounts.
Vulnerable to money laundering in the “placement phase,” as criminals move their cash into the non-cash economy by making deposits into accounts at financial institutions.
Cashier’s Check
Common monetary instrument often purchased with cash.
Used for laundering purposes, cashier’s checks provide an instrument drawn on a reputable institution, such as a bank or credit union.
CDD
See Customer Due Diligence.
CDPC (French: Comité Européen pour les Problèmes
Criminels)
European Committee on Crime Problems of the Council of
Europe. A subcommittee of the CDPC is MONEYVAL, formerly
PC-R-EV, the select committee of experts on the evaluation of anti-money laundering measures in European countries that are not members of FATF.

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Certification
A formal assertion in writing which, under the USA Patriot
Act, is used by U.S. regulators in different contexts, including a written statement by a respondent bank signed by its duly authorized representative certifying that the bank does not do business with shell banks (under Section 313 of the USA
Patriot Act). It can also be a written representation provided by a U.S. federal agent stating that the matter for which he or she is seeking information from financial institutions under Sec.
314(a) of the USA Patriot Act regulations is linked to money laundering or terrorist financing.
Chain Referral Scheme
See Pyramid Scheme.
Chiti Banking
See Alternative Remittance System.
Chop Shop Banking
See Alternative Remittance System.
CICAD (Spanish: Comisión Interamericana para el Control del
Abuso de Drogas)
See Organization of American States—Inter-American Drug Abuse
Control Commission.
Clearing Account
Also called an “omnibus” or “concentration account.” Held by a financial institution in its name, a clearing account is used primarily for internal administrative or bank-to-bank transactions in which funds are transmitted and commingled without personally identifying the originators. The USA Patriot Act prohibits the use of such accounts for customer transactions.
Collection Accounts
Immigrants from foreign countries deposit many small amounts of currency into one account where they reside, and the collected sum is transferred to an account in their home country without documentation of the sources of the funds. Certain

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ethnic groups from Asia or Africa may use collection accounts to launder money.
Collective Knowledge
The sum of the knowledge held separately by a financial institution’s directors, officers and employees regarding a certain issue, customer or account. The notion of collective knowledge can be used to suggest corporate responsibility for compliance and liability for non-compliance. For example, the financial institution’s knowledge is the totality of what all of the employees know within the scope of their employment. So, if
Employee A knows one facet of a customer’s information, B knows another facet of it, and C a third facet of it, the institution knows all the facets of the customer’s information.
Commission Rogatoire
Also known as letters rogatory, commission rogatoires are written requests for legal or judicial assistance sent by the central authority of one country to the central authority of another when seeking evidence from the foreign jurisdiction. The letter typically specifies the nature of the request, the relevant criminal charges in the requesting country, the legal provision under which the request is made, and the information sought.
Concentration Account
See Clearing Account.
Concentration Risk
Concentration risk primarily applies to the asset side of the balance sheet. As a common practice, supervisors not only require banks to have information systems to identify credit concentrations, but also set limits to restrict bank exposure to single borrowers or groups of related borrowers. Without knowing exactly who the customers are (through Know Your
Customer policies) and their relationship with other customers, the bank is not able to measure its concentration risk, which is particularly relevant in the context of related counter-parties and connected lending. On the liability side, concentration risk

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is associated with funding risk, especially the risk of early and sudden withdrawal of funds by large depositors that could harm an institution’s liquidity.
Confidentiality
Keeping certain facts, data and information out of public or unauthorized view. In the U.S., U.K. and many other jurisdictions, confidentiality is required when filing suspicious transaction or activity reports — the filing institution’s employees cannot notify a customer that a report has been filed. In another context, a breach of confidentiality can occur when an institution discloses client information to enforcement agencies or a financial intelligence unit in violation of the jurisdiction’s bank secrecy laws.
Confiscation
Includes forfeiture where applicable, and means the permanent deprivation of funds or other assets by order of a competent authority or a court. Confiscation or forfeiture takes place through a judicial or administrative procedure that transfers the ownership of specified funds or other assets to the state. Upon transfer, the person(s) or entity(ies) that held an interest in the specified funds or other assets at the time of the confiscation or forfeiture lose all rights, in principle, to the confiscated or forfeited assets. Confiscation or forfeiture orders are usually linked to a criminal conviction or a court decision whereby the confiscated or forfeited property is determined to have been derived from or intended for use in a violation of the law. Confiscation is a central strategic tool that is required in order to take effective action against money laundering and terrorist financing. It is crucial that criminal justice systems make provisions for efficient and effective methods of tracing, freezing and eventually confiscating proceeds of criminal activity. Mutual legal assistance treaties can provide for confiscation of assets in one jurisdiction based upon prosecutions elsewhere.
Constructive (Involuntary) Trust Liability
The imposition of trustee obligations upon a financial institution deemed to “know” that property in its possession belongs to

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a person other than its client. A financial institution can face the risk of breach of trust if it handles or transfers the funds in a manner detrimental to the interests of the rightful owner.
Anti-money laundering specialists should be especially vigilant when there is suspicion that funds may have been derived from a victim of crime, resulting in the victim’s loss of funds or property. Core Principles
Core Principles for Effective Banking Supervision issued by the
Basel Committee on Banking Supervision, the Objectives and
Principles for Securities Regulation issued by the International
Organization of Securities Commissions, and the Insurance
Supervisory Principles issued by the International Association of Insurance Supervisors.
Corporate Vehicles
Defined in FATF’s Consultation Paper as:
1. Corporations:
(a) Private limited companies and public limited companies whose shares are not traded on a stock exchange. (b)International business companies/exempt companies. 2. Trusts.
3. Foundations.
4. Limited partnerships and limited liability partnerships.
Occasionally it is difficult to identify the persons who are the ultimate beneficial owners and controllers of corporate vehicles, which makes the vehicles vulnerable to money laundering.
FATF has several recommendations that deal with customer due diligence on corporate vehicles and the transparency and beneficial ownership of legal persons and arrangements.

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Correspondent Banking
The provision of banking services by one bank (the
“correspondent bank”) to another bank (the “respondent bank”).
Large international banks typically act as correspondents for thousands of other banks around the world. Respondent banks may be provided with a wide range of services, including cash management (e.g., interest-bearing accounts in a variety of currencies), international wire transfers of funds, check clearing services, payable-through accounts and foreign exchange services. Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime
The Convention was adopted by the Committee of Ministers of the Council of Europe in September 1990, which addressed all types of criminal offenses and thereby has greater impact than the Vienna Convention. The offense of money laundering was extended to include money laundering associated with all serious offenses, not just drug trafficking. In May 2005, a revised convention was adopted.
Counter-Terrorism Committee (CTC)
A United Nations Committee established in 2001 pursuant to
Security Council Resolution 1373 (2001). Concerning counterterrorism, the CTC consists of all 15 Security Council members.
The committee monitors the implementation of UN Security
Council Resolution 1373, and aims to increase the capacity of member states to fight terrorism financing.
Credit Cards
A plastic card with a credit limit used to purchase goods and services and to obtain cash advances on credit. The cardholder is subsequently billed by the issuer for repayment of the credit extended. Credit cards may be used to launder money when payments of the amounts owed on the card are made with criminal money. Credit Finance
The use of credit to buy expensive items, and the subsequent payment of the borrowed credit with criminal funds. The criminal borrows funds to purchase a high value asset, such as a yacht,

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pays off the loan promptly with cash from illegal proceeds, sells the boat and starts all over again. By paying the credit loans off with illicit money, money launderers can use credit to finance criminal activity.
Criminal Proceeds
Any property derived from or obtained, directly or indirectly, through the commission of a crime.
Cross Border
Used in the context of activities that involve at least two countries, such as wiring money from one country to another or taking currency across a border.
Cross-Border Transfer
Any wire transfer in which the originator and beneficiary institutions are located in different jurisdictions. A cross-border transfer also refers to any chain of wire transfers that has at least one cross-border element.
Cuckoo Smurfing
A form of money laundering linked to alternative remittance systems in which criminal funds are transferred through the accounts of unwitting persons who are expecting genuine funds or payments from overseas. The term cuckoo smurfing first originated in investigations in the U.K., where it is a significant money laundering technique.
Currency
Banknotes and coins that are in circulation as a medium of exchange. Currency Smuggling
The illicit movement of large quantities of cash across borders, often into countries with strict banking secrecy, poor exchange controls or poor anti-money laundering legislation.

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Currency Transaction Report (CTR)
A report that documents a currency transaction that exceeds a certain monetary threshold. A CTR can also be filed on multiple currency transactions that occur in one day that add up to or are greater than the required reporting amount.
In some countries, including the U.S., currency transaction reports must be filed with government authorities under specific circumstances. Custodian
A bank, financial institution or other entity that is responsible for managing or administering or safekeeping assets for other persons or institutions. Typically, custodians are not active, aggressive managers of the assets in question, but, instead, serve to passively conserve them.
Custody
The act or authority of safeguarding and administration of clients’ investments or assets.
Customer Due Diligence (CDD)
In terms of money laundering controls, it means implementing adequate policies, practices and procedures that promote high ethical and professional standards for dealing with customers and are designed to prevent banks from being used, intentionally or unintentionally, by criminal elements. Customer due diligence includes not only establishing the identity of customers, but also monitoring account activity to identify those transactions that do not conform with the normal or expected transactions for that customer or type of account.
Customer Identification Program (CIP)
The policies and procedures of an institution that aim to identify and verify the identity of its customers. In general, the program must be in writing, have senior board approval and include procedures for customer notification.

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Customer Information Order
Requires all financial institutions—or a targeted sample of banks and other financial institutions—to provide the details of any accounts held by the person under investigation, thus enabling an investigator to find out where the suspect’s accounts are held.

D
Debit Card
A card issued by a financial institution that permits an accountholder to draw funds from a pre-existing account in his or her name for the purpose of paying obligations or for making purchases in other locations or businesses. Debit cards have been found to be convenient tools to launder criminal proceeds, especially if they are issued by financial institutions in secrecy havens because they leave few, if any, traces of the debited sources of funds.
Debit Transaction
A transaction that involves the use of a bankcard to purchase goods and services or to obtain cash. The transaction automatically debits the cardholder’s deposit account.
Designated Categories of Offense
In its 40 Recommendations of 2003, FATF issued for the first time a list of “designated categories of offense” that enumerates crimes that may lead to money laundering prosecutions. Each country may decide how it will define those offenses and their elements. Many nations do not specify which crimes can serve as predicates for laundering prosecutions and merely state that all serious felonies may be predicates. Others, such as the
U.S., specify long lists of crimes that must be present in order

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for a money laundering prosecution to proceed. Under the
FATF definition, the designated categories are:
 Participation in an organized criminal group and racketeering;  Terrorism, including terrorist financing;
 Trafficking in human beings and migrant smuggling;
 Sexual exploitation, including sexual exploitation of children;
 Illicit trafficking in narcotic drugs and psychotropic substances;  Illicit arms trafficking;
 Illicit trafficking in stolen and other goods;
 Corruption and bribery;
 Fraud;
 Counterfeiting currency;
 Counterfeiting and piracy of products;
 Environmental crime;
 Murder, grievous bodily injury;
 Kidnapping, illegal restraint, and hostage-taking;
 Robbery or theft;
 Smuggling;
 Extortion;
 Forgery;
 Piracy; and
 Insider trading and market manipulation.

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Designated Non-Financial Businesses and Professions
With its 2003 revisions, FATF indicated the following businesses should comply with the 40 Recommendations.
 Casinos (including Internet casinos).
 Real estate agents.
 Dealers in precious metals.
 Dealers in precious stones.
 Lawyers, notaries, other independent legal professionals

and accountants. Refers to sole practitioners, partners and employed professionals within professional firms. It is not meant to refer to “internal” professionals who are employees of other types of businesses, or to professionals working for government agencies who may already be subject to measures that would combat money laundering.
 Trust and company service providers. Refers to all persons

or businesses that are not covered elsewhere under the
Recommendations, and which provide any of the following services to third parties:
 Acting as a formation agent of legal persons.
 Acting as (or arranging for another person to act as) a director or secretary of a company, a partner of a partnership, or a similar position in relation to other legal persons.  Providing a registered office, business address or accommodation, correspondence or administrative address for a company, a partnership or any other legal person or arrangement.  Acting as (or arranging for another person to act as) a trustee of an express trust.
 Acting as (or arranging for another person to act as) a nominee shareholder for another person.

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Disclosure Order
A document that requires a person who has information relevant to an investigation to answer questions at an interview, to provide information, or to produce documentation. The order can be exercised not only against a person whose assets are under investigation, but also against a third party, such as a financial institution.
Domestic Transfer
Wire transfer in which the originator and beneficiary institutions are located in the same jurisdiction. A domestic transfer therefore refers to any chain of wire transfers that takes place entirely within the borders of a single jurisdiction, even though the system used to send the wire transfer may be located in another jurisdiction.
Downstream Correspondent Clearer
A correspondent banking client who receives correspondent banking services from one institution and provides correspondent banking services to other financial institutions in the same currency as the account it maintains with the institution.
Dry Trust
See Bare Trust.

E
Eastern and Southern African Anti-Money Laundering Group
(ESAAMLG)
A FATF-style regional body comprising fourteen countries from the Eastern region of Africa down to the Southern tip of Africa.
It was established in 1999. See www.esaamlg.org.

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Glossary of Anti-Money Laundering Terms

Egmont Group of Financial Intelligence Units
In 1995, a number of national financial intelligence units (FIUs) began working together in an informal organization known as the Egmont Group, named for the site of its first meeting in the
Egmont-Arenberg Palace in Brussels. The goal of the group is to provide a forum for FIUs to improve support to their national anti-money laundering programs and to develop protocols for information sharing. The FIUs’ support includes expanding and systematizing the exchange of financial intelligence, improving expertise and capabilities of the personnel of such organizations, and fostering improved communications among
FIUs through application of new technologies and sharing of information for financial crimes investigations.
Electronic Banking
A form of banking in which funds are transferred through an exchange of electronic signals among financial institutions rather than through an exchange of cash, checks or other negotiable instruments.
Electronic Cash (E-Cash)
A payment mechanism designed for the Internet, electronic cash represents a series of monetary value units electronically stored on the hard drive of a computer or microchip of a plastic card. It is anonymous like cash, and has immediate value. E-cash is attractive to money launderers because of its anonymity and the ease it provides in “transporting” large sums quickly and easily via the Internet. It is also called “e-money.”
Electronic Funds Transfer (EFT)
The movement of funds between financial institutions electronically. The two most common electronic funds transfer systems in the U.S. are FedWire and CHIPS. (SWIFT is often referred to as the third EFT system, but in reality it is an international messaging system that carries instructions for wire transfers between institutions, rather than the wire transfer system itself.) Other systems that facilitate funds movement, but are not technically EFT systems, include automated

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clearing houses (ACH), which are networks that conduct batch processing of messages for book transfers between institutions.
Electronic Money (E-Money)
See Electronic Cash.
Enhanced Due Diligence (EDD)
Additional examination and cautionary measures aimed at identifying customers and confirming that their activities and funds are legitimate.
Eurasian Group on Combating Money Laundering and
Terrorist Financing (EAG)
A FATF-style regional body formed in October 2004 in Moscow.
Member countries include Belarus, China, Kazakhstan,
Kyrgyzstan, Russia, Tajikistan, Turkmenistan and Uzbekistan.
See http://www.eurasiangroup.org/.
European Union (EU)
The European Union is a family of democratic European countries. Its member states have set up common institutions to which they delegate part of their sovereignty so that decisions on specific matters of collective interest can be made democratically at the European level. See http://europa.eu/ index_en.htm. European Union Directive on Prevention of the Use of the
Financial System for the Purpose of Money Laundering and
Terrorist Financing
First adopted by the European Union in June 1991, the directive requires EU member states to achieve certain results by amending national laws, if necessary, to prevent their domestic financial systems from being exploited for money laundering. The directive was confined to drug trafficking as defined in the Vienna Convention. The scope of the directive was also confined to credit and financial institutions as the most vulnerable to abuse by money launderers, but member states were encouraged to cover other sectors too that might become involved in laundering. The directive was revised in
December 2001 by extending the money laundering offenses

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beyond credit and financial institutions to corporate service providers, casinos, lawyers and accountants. A third directive in September 2005 replaced the previous two. In line with the FATF money laundering recommendations, the Third EU
Directive extended the scope of the earlier directives by:
 Defining “money laundering” and “terrorist financing” as separate crimes.
 Extending customer identification and suspicious transaction reporting obligations to trusts and company service providers, life insurance intermediaries and dealers selling goods for cash payments above a certain amount.
 Detailing a risk-based approach to customer due diligence.
 Protecting employees who report suspicions of money laundering or terrorist financing.
 Obligating member states to keep comprehensive statistics regarding the use of and results obtained from suspicious transaction reports.
 Requiring all financial institutions to identify and verify the
“beneficial owner” of all accounts held by legal entities or persons. Europol
European Law Enforcement Organization, which aims to improve the effectiveness and cooperation of competent authorities in member states in preventing and combating terrorism, unlawful drug trafficking and other serious forms of international organized crime. In the area of anti-money laundering, Europol provides European Union member states’ law enforcement authorities with operational and analytical support via the ELOs (Europol Liaison Officers) and its analysts. Exchange Office
See Bureau de Change.

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Exempt Account
In some countries, a distinction is granted to certain customers of a financial institution permitting the institution to waive its responsibility to report certain transactions that are otherwise required. Exempt accounts must be documented and the financial institutions that secure the exemptions must still monitor their transactions.
Express Trust
A trust created by the settlor, usually in the form of a document such as a written deed of trust. An express trust contrasts with trusts that come into being through the operation of the law and do not result from the clear intent or decision of a settlor to create a trust or similar legal arrangements (e.g., constructive trust). Extradition
The surrender by one country to another of an accused or convicted person under a bilateral agreement that specifies the terms of such exchanges, such as the persons subject to being exchanged and the crimes for which exchanges will be permitted. The 1988 Vienna Convention against Illicit Traffic in Narcotics and Psychotropic Substances makes money laundering an internationally extraditable offense.
Extraterritorial Reach
The extension of one country’s policies and laws to the citizens and institutions of another. U.S. money laundering laws contain several provisions that extend its prohibitions and sanctions into other countries. For example, the “extraterritorial jurisdiction” of the principal U.S. anti-money laundering law can apply to a nonU.S. citizen if the “conduct” occurs “in part” in the U.S. (Title 18,
USC Sec. 1956(f)).

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F
Financial Action Task Force (FATF)
FATF was chartered in 1989 by the Group of Seven industrial nations to foster the establishment of national and global measures to combat money laundering. It is an international policy-making body that sets anti-money laundering standards and counter-terrorist financing measures worldwide. Its
Recommendations do not have the force of law. Thirty-four countries and two international organizations are members. In
2012, FATF substantially revised its 40 + 9 Recommendations and reduced them to 40. FATF develops annual typology reports showcasing current money laundering and terrorist financing trends and methods. See www.fatf-gafi.org.
Financial Action Task Force on Money Laundering in
South America (GAFISUD - Grupo de Acción Financiera de
Sudamérica)
A FATF-style regional body for South America, established in 2000. Members include: Argentina, Bolivia, Brazil, Chile,
Colombia, Costa Rica, Ecuador, Mexico, Panama, Paraguay,
Peru, and Uruguay. See http://www.gafisud.info/home.htm.
Financial Action Task Force-Style Regional Body (FSRB)
FSRBs have forms and functions similar to those of FATF.
However, their efforts are targeted to specific regions.
Examples include the Caribbean Financial Action Task Force, the Eastern and Southern African Anti-Money Laundering
Group, and the Middle East North Africa Financial Action Task
Force.
Financial Institution
According to the FATF’s 40 Recommendations, a financial institution is any person or entity that conducts as a business one or more of the following activities or operations on behalf of customers:

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 Acceptance of deposits and other repayable funds from the public.  Lending.
 Financial leasing.
 The transfer of money or value.
 Issuing and managing means of payment (e.g., credit and debit cards, checks, traveler’s checks, money orders and bankers’ drafts, electronic money).
 Financial guarantees and commitments.
 Trading in: q money market instruments (checks, bills, CDs,

derivatives etc.); q foreign exchange; q exchange, interest rate and index instruments; q transferable securities and q commodity futures trading.
 Participation in securities issues and the provision of

financial services related to such issues.
 Individual and collective portfolio management.
 Safekeeping and administration of cash or liquid securities

on behalf of other persons.
 Otherwise investing, administering or managing funds or

money on behalf of other persons.
 Underwriting and placement of life insurance and other

investment-related insurance.
 Money and currency changing.

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Financial Intelligence Unit (FIU)
A central governmental office that obtains information from financial reports, processes it and then discloses it to an appropriate government authority in support of a national antimoney laundering effort. The activities performed by an FIU include receiving, analyzing and disseminating information and, sometimes, investigating violations and prosecuting individuals indicated in the disclosures.
Financial Sector Assessment Program (FSAP)
Established in 1999 by the International Monetary Fund and the
World Bank, the FSAP assesses jurisdictions for their financial systems’ strengths and vulnerabilities with an aim to reducing the potential for crises.
Forensic Accountant
Specializes in analyzing financial evidence and testifying as an expert witness in cases of white-collar crime, including money laundering. Forfeiture
The permanent loss of private property or assets as a result of legal action by a government authority. Generally, the owner of the property has failed to comply with the law or the property is linked to some sort of criminal activity.
Freeze
To prevent or restrict the exchange, withdrawal, liquidation, or use of assets or bank accounts by governmental action.
As defined by FATF’s “General Glossary” as they relate to the revised Recommendations of 2012: In the context of confiscation and provisional measures (e.g., Recommendations
4, 32 and 38), the term freeze means to prohibit the transfer, conversion, disposition or movement of any property, equipment or other instrumentalities on the basis of, and for the duration of the validity of, an action initiated by a competent authority or a court under a freezing mechanism, or until a forfeiture or confiscation determination is made by a competent authority. 307

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For the purposes of Recommendations 6 and 7 on the implementation of targeted financial sanctions, the term freeze means to prohibit the transfer, conversion, disposition or movement of any funds or other assets that are owned or controlled by designated persons or entities on the basis of, and for the duration of the validity of, an action initiated by the United Nations Security Council or in accordance with applicable Security Council resolutions by a competent authority or a court.
In all cases, the frozen property, equipment, instrumentalities, funds or other assets remain the property of the natural or legal person(s) that held an interest in them at the time of the freezing and may continue to be administered by third parties, or through other arrangements established by such natural or legal person(s) prior to the initiation of an action under a freezing mechanism, or in accordance with other national provisions. As part of the implementation of a freeze, countries may decide to take control of the property, equipment, instrumentalities, or funds or other assets as a means to protect against flight.
Front Company
A business that commingles illicit funds with revenue generated from the sale of legitimate products or services. Criminals use front companies to launder illicit money by giving the funds the appearance of legitimate origin. Organized crime has used pizza parlors to mask proceeds from heroin trafficking. Front companies may have access to substantial illicit funds, allowing them to subsidize front company products and services at levels well below market rates or even below manufacturing costs.
Front companies have a competitive advantage over legitimate firms that must borrow from financial markets, making it difficult for legitimate businesses to compete with front companies.
Futures
Contracts that require delivery of a commodity of specified quality and quantity at a specified price on a specified future date.

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G
GAFISUD (Spanish: Grupo de Acción Financiera de
Sudamérica)
See Financial Action Task Force on Money Laundering in South
America.
Gatekeepers
Professionals such as lawyers, notaries, accountants, investment advisors, and trust and company service providers who assist in transactions involving the movement of money, and are deemed to have a particular role in identifying, preventing and reporting money laundering. Their role is important because they can block or facilitate the entry of illicit money into the financial system. Some countries, such as the U.K. and the Cayman Islands, impose due diligence requirements on gatekeepers that are similar to those of financial institutions. Two critical milestones in international gatekeeper regulation have been the European Union’s revised anti-money laundering directive of 2001 and the FATF
40 Recommendations of 2012, both containing anti-money laundering provisions for these professionals.
Giro House
See Remittance Services.
Global Program against Money Laundering (GPML)
Key instrument of the United Nations Office of Drug Control and
Crime Prevention in its fight against organized crime. Through
GPML, the UN helps member states introduce legislation against money laundering and helps the countries develop and maintain mechanisms that combat the crime. The program encourages anti-money laundering policy development, monitors and analyzes problems and responses, raises public awareness, and acts as a coordinator of joint anti-money laundering initiatives between the UN and other international organizations.

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Grantor
Creator and fund provider of a trust, usually for the benefit of another. Group of Eight Industrialized Nations (G-8)
Entity composed of the U.S., Japan, Germany, France, Italy, the U.K., Canada and Russia.
Group of Eleven Industrialized Nations (G-10)
The group is made up of the original G-7 group of industrialized nations, plus Sweden, Belgium, the Netherlands, and
Switzerland, which was the 11th country to join in 1964.
Although it now has 11 members, the group continues to be called the G-10.
Group of Seven Industrialized Nations (G-7)
Body made up of seven countries: U.S., Japan, Germany,
France, Italy, the U.K. and Canada.
Gulf Cooperation Council (GCC)
Formed in 1981, the GCC promotes cooperation between its member states in the fields of economy and industry. These member states include Kuwait, Bahrain, Qatar, Saudi Arabia,
Oman and the United Arab Emirates. The GCC is a member of
FATF, although its individual members are not.

H
Harmful or Preferential Tax Regimes
The United Nations and the Organization for Economic
Cooperation and Development have taken the controversial position that a country that has no or low tax rates to encourage

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foreign business development is engaged in “harmful tax practices.” Their position is that offshore tax regimes are not maintained with the intent to attract real business and direct foreign investment, but to foster predatory tax policies that divert business from another country and encourage tax evasion.
Hawala
A funds exchange system in Indian and Chinese civilizations used to facilitate the secure and convenient cross-border movement of funds. Hawala was born centuries before Western financial systems. Merchant traders wishing to send funds to their homelands would deposit them with a hawala broker or hawaladar who normally owned a trading business. For a small fee, the banker would arrange for the funds to be available for withdrawal from another banker, normally also a trader, in another country. The two bankers would settle accounts through the normal process of trade. Today, the technique works much the same, with businesspersons in various parts of the world using their corporate accounts to move money internationally for third parties. Deposits and withdrawals are made through hawaladars, rather than traditional financial institutions. The practice is vulnerable to terrorist financing and money laundering—funds do not actually cross borders, and transactions tend to be confidential, as records are not stringently kept. In Pakistan, the system is called hundi. See Alternative Remittance System.
Hedge Fund
A hedge fund is a privately offered investment vehicle—typically high-risk— in which participants’ contributions are pooled and invested in a portfolio of securities, commodity futures contracts or other assets. Investors are usually of high net-worth, and can generally redeem investments on a quarterly, semi-annual, or annual basis.
Hundi
See Hawala.

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I
Identity Theft
The assumption of another person’s identity without authorization for use in fraudulent transactions that results in a loss to the financial institution or the victim whose identity was used. Informal Value Transfer System (IVTS)
See Alternative Remittance System.
Integration
The integration phase, often referred to as the third and last stage of the classic money laundering process, places laundered funds back into the economy by re-entering the funds into the financial system and giving them the appearance of legitimacy.
Intermediary Financial Institution
Receives funds from a wire transfer transmitter’s financial institution and relays or transmits the order of payment to the recipient’s financial institution. In an international funds transmission, intermediary financial institutions are usually located in different countries.
Internal Controls
Policies and procedures in place within an institution that are designed to detect suspicious activity and criminal activity of a financial nature, including money laundering. Internal controls are one of the essential components of an effective anti-money laundering compliance program.
International Association of Insurance Supervisors (IAIS)
The IAIS issues global insurance principles, standards and guidance papers on issues, including money laundering.
Established in 1994, IAIS represents insurance supervisory authorities in about 180 jurisdictions. See www.iaisweb.org.

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International Bank for Reconstruction and Development
(IBRD) and the International Development Association (IDA)
See World Bank.
International Business Company (IBC)
A variety of offshore corporate structures, alternately called
“exempt companies,” which are dedicated to business use outside the incorporating jurisdiction, rapid formation, secrecy, broad powers, low cost, low to zero taxation, and minimal filing and reporting requirements.
International Finance Corporation (IFC)
Established in 1956, IFC is the largest multilateral source of loan and equity financing for private sector projects in the developing world. It is a member of the World Bank Group and is headquartered in Washington, D.C. The IFC promotes sustainable private sector investment in developing countries as a way to reduce poverty. Its contribution to anti-money laundering efforts includes helping countries address structural and institutional weaknesses that may contribute to the lack of market integrity and potential for financial abuse. See www.ifc.org.
International Financial Institutions (IFIs)
IFIs are financial institutions that have been established or chartered by more than one country. The best known IFIs are the International Monetary Fund and the World Bank. IFIs have an important role in protecting the integrity of the international financial system from abuse. Strengthening a country’s capacity to combat money laundering is an integral part of their agenda. International Monetary Fund (IMF)
An organization of more than 180 member countries, the
IMF was established to promote monetary cooperation, to foster economic growth and high levels of employment, and to provide countries with temporary financial assistance. The organization’s objectives have remained unchanged since it was established. Its operations, which involve surveillance, financial assistance and technical support, have adjusted to

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meet the changing needs of member countries. Since 1999, the IMF has taken a more active role in the global anti-money laundering effort, primarily through helping assess the progress of member countries in meeting laundering control standards, such as those issued by FATF.
International Money Laundering Abatement and Anti-Terrorist
Financing Act
The Act represents Title III of the USA Patriot Act of 2001, which contains most, but not all, of the provisions of that landmark law that deal directly with anti-money laundering matters. International Narcotics Control Strategy Report (INCSR)
Issued annually by the U.S. Department of State, the report includes a lengthy section on the status of money laundering efforts in most nations.
International Police Organization (Interpol)
Based in Lyon, France, Interpol provides services to national law enforcement agencies in international criminal and money laundering matters, through such means as issuance of alerts or “flags” that seek the assistance of member countries in locating fugitives or identifying financial activity connected to international crimes. Each member nation of Interpol designates a National Central Bureau (NCB) through which requests for assistance are processed.
Internet Banking
A banking business model that uses the Internet to execute its business plan, and whose marketing efforts, execution of transactions and customer service functions are heavily reliant on advanced electronic technology. The main money laundering concern that arises in Internet banking is the difficulty of identifying the “faceless” customer that establishes a relationship with a financial institution, and in applying
Customer Due Diligence procedures.

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Investment Banking
Self-standing department or unit within a financial institution that provides strategic capitalizations, amassing huge amounts from diverse sources for corporate deal making, and other alternatives to traditional banking instruments.
IVTS
Informal Value Transfer System. See Alternative Remittance
System.

K
Kingston Declaration on Money Laundering
In 1992, the U.S., U.K., France, Canada, and the Netherlands spearheaded a gathering of 17 Caribbean nations in Jamaica.
At its conclusion, the nations issued the Kingston Declaration on Money Laundering, which expressed solidarity with the
1988 United Nations Convention on Illicit Trafficking in Narcotic
Drugs. The declaration also agreed to implement the FATF 40
Recommendations and the 19 Recommendations issued at the 1990 Aruba meeting that created the Caribbean Financial
Action Task Force. See www.cfatf.org.
Knowledge
Mental state accompanying a prohibited act. The Interpretive
Notes to Recommendation 3 of the FATF 40 Recommendations of 2012 says that countries should ensure that the intent and knowledge required to prove the offense of money laundering is consistent with the standards set forth in the Vienna and
Palermo Conventions, including the concept that such a mental state may be inferred from objective factual circumstances. The exact definition of knowledge that accompanies an anti-money laundering act varies by country. Knowledge can be deemed,

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under certain circumstances, to include willful blindness, i.e.,
“the deliberate avoidance of knowledge of the facts,” as some courts have defined the term: for example, when a bank officer proceeds with a transaction while deliberately ignoring the potential illegal origin of the funds involved.
Know Your Correspondent Bank (KYCB)
A set of anti-money laundering control policies and procedures employed in determining the beneficial owners of a respondent bank and the type of activity that is “normal and expected” for the bank. Know Your Correspondent Bank is a key tool in detecting suspicious activity and money laundering because correspondent accounts are often used as conduits to launder criminal proceeds internationally. The USA Patriot Act included statutory provisions that bear directly on the procedures U.S. financial institutions must follow in connection with foreign correspondent banks.
Know Your Customer (KYC)
Anti-money laundering policies and procedures used to determine the true identity of a customer and the type of activity that is “normal and expected,” and to detect activity that is
“unusual” for a particular customer. Many experts believe that a sound KYC program is one of the best tools in an effective antimoney laundering program.
Know Your Employee (KYE)
Anti-money laundering policies and procedures for acquiring a better knowledge and understanding of the employees of an institution for the purpose of detecting conflicts of interests, money laundering, past criminal activity and suspicious activity.
KYE is a key tool in detecting suspicious activity because employees can be accomplices of money launderers.

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L
Layering
The second phase of the classic three-step money laundering process between placement and integration, layering involves distancing illegal proceeds from their source by creating complex levels of financial transactions designed to disguise the audit trail and to provide anonymity.
Legal Risk
Defined by the 2001 Basel Customer Due Diligence for Banks
Paper as the possibility that lawsuits, adverse judgments or contracts that cannot be enforced may disrupt or harm a financial institution. In addition, banks can suffer administrative or criminal penalties imposed by the government. A court case involving a bank may have graver implications for the institution than just the legal costs. Banks will be unable to protect themselves effectively from such legal risks if they do not practice due diligence in identifying customers and understanding and managing their exposure to money laundering.
Letter of Credit
A credit instrument issued by a bank that guarantees payments on behalf of its customer to a third party when certain conditions are met. Letters of Credit (L/Cs) are commonly used to finance exports. Exporters want assurance that the ultimate buyer of its goods will make payment, and this is given by the buyer’s purchase of a bank letter of credit. The L/C is then forwarded to a correspondent bank in the city in which the payment is to be made. The L/C is drawn on when the goods are loaded for shipping, received at the importation point, clear customs and are delivered. L/Cs can be used to facilitate money laundering by transferring money from a country with lax exchange controls, thus assisting in creating the illusion that an import transaction is involved. L/Cs can also serve as a façade when laundering money through the manipulation of import and

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export prices. Another laundering use for L/Cs is in conjunction with wire transfers to bolster the legitimate appearance of nonexistent trade transactions.
Letter Rogatory
See Commission Rogatoire.
Loan Back Method of Money Laundering
With a loan-back, the criminal puts the illicit funds in an offshore entity that he owns and then “loans” them back to himself or a company he owns. This technique works because it is hard to determine who actually controls offshore accounts in some countries. This process allows the launderer to “clean” illicit money and to generate tax benefits by deducting purported interest payments.
Lockbox
Service offered by banks to companies in which the company receives payments by mail to a post office box and the bank picks up the payments several times a day, deposits them into the company’s account, and notifies the company of the deposits. The service enables the company to put the money to work as soon as it is received, but the amounts must be large in order for the value obtained to exceed the cost of the service.
In the insurance industry there is also widespread use of “lock boxes” for payment of life insurance and annuities products.

M
Mail-Forwarding or Mail-Drop Service
A legal commercial enterprise that uses a stable, physical address as a delivery destination for letters or parcels on behalf of fee-paying clients who do not live on the premises.

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Mail can be held or forwarded at the client’s request. Some mail-drops provide similar services for faxes as well. Money launderers often use mail drop addresses as their address, sometimes referring to their box number as either a “suite” or an “apartment” number. Often, “shell” or unlicensed banks are found to have mail drop addresses.
Manipulation of Import and/or Export Prices
A money laundering method that uses the overpricing or underpricing of products or services traded in international commerce to move money from one country to another.
Memorandum of Understanding (MOU)
Agreement between two parties establishing a set of principles that govern their relationship on a particular matter. An MOU is often used by countries to govern their sharing of assets in international asset-forfeiture cases or to set out their respective duties in anti-money laundering initiatives. Financial
Intelligence Units (FIUs), with the task of receiving and analyzing suspicious transaction reports on an ongoing basis and maintaining close links with police and customs authorities, share information among themselves informally in the context of investigations, usually on the basis of an MOU. The Egmont
Group of FIUs has established a model for such MOUs. Unlike the Mutual Legal Assistance Treaty (see below), this gateway is ordinarily used not for obtaining evidence, but for obtaining intelligence that might lead to evidence.
Middle East and North Africa Financial Action Task Force
(MENAFATF)
A FATF-style body established for the Middle Eastern and North
African regions in 2004. See www.menafatf.org.
Mock Trial on Money Laundering
Program launched by the United Nations Office on Drugs and
Crime (UNODC) and the Organization of American States
Inter-American Drug Abuse Control Commission (CICAD) in various Latin American countries. The program’s objective is to equip investigators, prosecutors and judges with the know-

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how to crack money laundering cases. It uses cases that are built around authentic events. Since the program was launched in Ecuador in September 2002, a number of mock trials have been conducted.
Monetary Instruments
Travelers checks, negotiable instruments, including personal checks and business checks, official bank checks, cashier’s checks, promissory notes, money orders, securities or stocks in bearer form. Monetary instruments are normally included, along with currency, in the anti-money laundering regulations of most countries, and financial institutions must file reports and maintain records of customer activities involving them.
Money Laundering
The process of concealing or disguising the existence, source, movement, destination or illegal application of illicitlyderived property or funds to make them appear legitimate. It usually involves a three part system: Placement of funds into a financial system, layering of transactions to disguise the source, ownership and location of the funds, and integration of the funds into society in the form of holdings that appear legitimate. The definition of money laundering varies in each country where it is recognized as a crime.
Money Laundering Reporting Officer (MLRO)
A term used in various international rules to refer to the person responsible for overseeing a firm’s anti-money laundering activities and program and for filing reports of suspicious transactions with the national FIU. The MLRO is the key person in the implementation of anti-money laundering strategies and policies. Money Order
A monetary instrument usually purchased with cash in small
(generally under Euro/$500) denominations. It is commonly used by people without checking accounts to pay bills or to pay for purchases in which the vendor will not accept a personal check. Money orders may be used for laundering because they

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represent an instrument drawn on the issuing institution rather than on an individual’s account.
Money Services Business (MSB)
Term used in the U.S. and elsewhere for money remittance companies; check cashers; issuers, sellers and redeemers of money orders and travelers checks; currency exchange houses; and stored value product companies.
Money Transfer Service or Value Transfer Service
Financial service that accepts cash, checks other monetary instruments that can store value in one location and pay a corresponding sum in cash or other form to a beneficiary in another location by means of a communication, message, transfer or through a clearing network to which the money/ value transfer service belongs. Transactions performed by such services can involve one or more intermediaries and a third-party final payment. A money or value transfer service may be provided by persons (natural or legal) formally through the regulated financial system (for example, bank accounts), informally through non-bank financial institutions and business entities or outside of the regulated system. In some jurisdictions, informal systems are referred to as alternative remittance services or underground (or parallel) banking systems. MONEYVAL
Council of Europe Select Committee of Experts on the
Evaluation of Anti-Money Laundering Measures. Formerly PCR-EV, the committee was established in 1997 by the Committee of Ministers of the Council of Europe to conduct self and mutual assessments of anti-money laundering measures in place in Council of Europe countries that are not FATF members.
MONEYVAL is a sub-committee of the European Committee on
Crime Problems of the Council of Europe (CDPC).
Monitoring
An element of an institution’s anti-money laundering program in which customer activity is reviewed for unusual or suspicious

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patterns, trends or outlying transactions that do not fit a normal pattern. Transactions are often monitored using software that weighs the activity against a threshold of what is deemed
“normal and expected” for the customer.
Mutual Fund
An investment company that continually offers new shares and buys existing shares back on demand, using its capital to invest in diversified securities of other companies. Money is collected from individuals and is invested on their behalf in varied equity or debt portfolios.
Mutual Legal Assistance Treaty (MLAT)
Agreement among countries allowing for mutual assistance in legal proceedings and access to documents and witnesses and other legal and judicial resources in the respective countries, in private and public sectors, for use in official investigations and prosecutions. N
Naked Trust
See Bare Trust.
NCCT
See Non-Cooperative Countries and Territories (NCCT) List.
NCCT Criteria
Criteria published in the FATF Report on Non-Cooperative
Countries and Territories issued in February 2000 used to determine which countries to designate as NCCTs. See NonCooperative Countries or Territories (NCCTs) list.

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Glossary of Anti-Money Laundering Terms

Nesting
The practice that involves the use of a foreign correspondent bank account by another foreign bank to conduct its own transactions. Nominee Account
See Benami Account.
Nominee Company
A corporation that is formed for the express purpose of holding securities and other assets in its name on behalf of others, or providing nominee directors and/or officers on behalf of clients.
Non-Cooperative Countries and Territories (NCCT) List
Countries and territories that were designated starting In 1999 by the Financial Action Task Force as being non-cooperative in the global anti-money laundering effort or as lacking adequate anti-money laundering controls. The last country was removed from this list in October 2006.
Non-Financial Trades and Businesses
See Designated Non-Financial Businesses and Professions.
Non-Governmental Organization (NGO)
International organizations that are not directly linked to the governments of specific countries, such as Doctors without
Borders and the International Red Cross. Some countries’ antimoney laundering regulations for NGOs still have loopholes that some worry could be exploited by terrorists or terrorist sympathizers trying to secretly move money.
Non-Profit Organizations (NPO)
These can take on a variety of forms, depending on the jurisdiction and legal system, including associations, foundations, fund-raising committees, community service organizations, corporations of public interest, limited companies and public benevolent institutions. FATF has suggested practices to help authorities protect organizations that raise or disburse funds for charitable, religious, cultural, educational,

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social or fraternal purposes from being misused or exploited by financiers of terrorism.
Nostro Account
Nostro and vostro accounts are mirror correspondent accounts maintained by two banks in different jurisdictions to facilitate transactions in each other’s local currency—essentially, clearing accounts that balance foreign currency transactions between the two institutions. For example, Bank X from
Brazil might open a U.S.-dollar account at Bank Y in the U.S., called a “nostro” (literally “our”) account; Bank Y might open a mirror account in Brazilian reals with Bank X in Brazil—a
“vostro” (“your”) account. Financial regulators have expressed concern over the transparency of nostro and vostro account relationships, especially when there are multiple layers of accounts within primary relationships.

O
Office of Foreign Assets Control (OFAC)
Office within the U.S. Department of the Treasury that administers and enforces economic and trade sanctions against targeted foreign countries, terrorism-sponsoring organizations, terrorists, international narcotics traffickers, and others based on U.S. foreign policy and national security goals. After September 11, 2001, OFAC became a significant player in the anti-money laundering field as well. The office issues various lists, including “Specially Designated Narcotics
Traffickers” and “Specially Designated Terrorists,” and its regulations require U.S. persons, including financial institutions, to block and file reports on accounts, payments or transfers in which an OFAC-designated country, entity or individual has an interest. OFAC requirements have an extraterritorial

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reach because they require U.S. persons and entities located outside of the U.S. to comply. Independent of origin or final destination, if a U.S. financial institution acts as an intermediary for a transaction that involves an OFAC-designated entity, the funds must be blocked. See http://www.treasury.gov/about/ organizational-structure/offices/Pages/Office-of-Foreign-AssetsControl.aspx. Offshore
Literally, away from one’s own home country—if one lives in Europe, the U.S. is “offshore.” In the money laundering lexicon, the term refers to jurisdictions deemed favorable to foreign investments because of low or no taxation or strict bank secrecy regulations.
Offshore Bank
Though licensed to conduct banking activities, an offshore bank is prohibited from doing business with local citizens or in local currency as a condition of its license.
Offshore Financial Center (OFC)
Institutions that cater to or otherwise encourage banks, trading companies, and other corporate or legal entities to physically or legally exist in a jurisdiction but limit their operations to
“offshore,” meaning outside the jurisdiction (see Offshore).
OFCs have historically been located in the Caribbean or on
Mediterranean islands to be in reasonable proximity to the major financial centers of the U.S. and Europe.
Offshore Group of Banking Supervisors (OGBS)
Organization that promotes the supervision of banks in their jurisdictions and furthers international cooperation among
Offshore Banking Supervisors, Basel Committee member nations, and other banking supervisors. The OGBS was established in 1980 at the instigation of the Basel Committee on Banking Supervision, with which it maintains close contact.
Through the Working Group on Cross-Border Banking, the
Offshore Group joined with the Basel Committee in preparing a paper on Customer Due Diligence for Banks, which the Basel

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Committee issued in 2001. This paper reinforces principles set out in earlier Basel Committee papers by providing more precise guidance on the essential elements of Know Your
Customer standards and their implementation. Offshore Group members are fully committed to the KYC standards contained in the paper. The Working Group also has produced as an annex to the Customer Due Diligence paper a General Guide to Account Opening and Customer Identification. See www. ogbs.net. Omnibus Account
See Clearing Account.
Operational Risk
The risk of direct or indirect loss of operations due to inadequate or failed internal processes, people or systems, or as a result of external events. Public perception that a bank is not able to manage its operational risk effectively can disrupt or harm the business of the bank.
Organization for Economic Cooperation and Development
(OECD)
International organization that assists governments on economic development issues in the global economy. OECD houses the FATF secretariat in Paris. See http://www.oecd.org/ home/0,2987,en_2649_201185_1_1_1_1_1,00.html. Organization of American States: Inter-American Drug Abuse
Control Commission (Comisión Interamericana para el Control del Abuso de Drogas) (CICAD)
OAS has issued several sets of anti-money laundering recommendations through its Inter-American Drug Abuse
Control Commission (CICAD). They include amendments to the
OAS Model Regulations issued in 1992. CICAD has sponsored and coordinated training seminars for public officials and bankers on anti-money laundering measures and oversees the anti-money laundering efforts of its member countries in the
Western Hemisphere. See www.cicad.oas.org/EN/.

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Glossary of Anti-Money Laundering Terms

Originator
The account holder or, where there is no account, the person
(natural or legal) which places the order with the financial institution to perform the wire transfer.
Over The Counter (OTC)
Two distinct meanings in the money laundering context:
1. As used in U.S. Bank Secrecy Act reporting forms, it refers to deposits of cash made physically at a branch.
2. In the securities industry, it describes the market for trading equities that are not listed on an organized stock exchange, or for trading securities such as corporate bonds, mortgagebacked or asset-backed securities, currency swaps, etc. In the OTC market, trading is conducted remotely by brokerdealers rather than on a physical exchange floor, and prices are set by negotiation between the buyer and seller rather than by “auction bidding” on the floor of an exchange.

P
Passive Trust
See Bare Trust.
Payable Through Account
Transaction account opened at a depository institution by a foreign financial institution through which the foreign institution’s customers engage, either directly or through sub-accounts, in banking activities and transactions in the country where the account was opened. Such accounts pose risks to the depository institutions that hold them because it can be difficult to conduct due diligence on foreign institution customers who are ultimately using the PTA accounts.

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PC-R-EV
See MONEYVAL.
Physical Cross-Border Transportation of Currency
Any in-bound or out-bound transportation of currency or bearer negotiable instruments from one country to another. The term includes: (1) physical transportation by a natural person, or in that person’s accompanying luggage or vehicle; (2) shipment of currency through cargo containers; and (3) the mailing of currency or bearer negotiable instruments.
Physical Presence
Existence of an actual brick and mortar location with meaningful management of the institution physically located within a country, where it maintains business records and is subject to supervision. The mere existence of a local agent or low level staff does not constitute physical presence.
Placement
The first phase of the money laundering process: The physical disposal of cash proceeds derived from illegal activity.
Poey Kuan
See Alternative Remittance System.
Policies
A financial institution’s operating regulations and its internal rules that define how employees are expected to conduct themselves. Politically Exposed Person (PEP)
According to FATF’s revised 40 Recommendations of 2012, a
PEP is an individual who has been entrusted with prominent public functions in a foreign country, such as a head of state, senior politician, senior government official, judicial or military official, senior executive of a state-owned corporation or important political party official, as well as their families and close associates. The term PEP does not extend to middleranking individuals in the specified categories. Various country

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regulations will define the term PEP, which may include domestic as well as foreign persons.
Ponzi Scheme
A money laundering system named after Charles Ponzi, an
Italian immigrant who spent 10 years in jail in the U.S. for a scheme that defrauded 40,000 people out of $15,000,000.
Ponzi’s name became synonymous with the use of new investors’ money to pay off prior investors. Ponzi schemes involve fake, non-existent investment schemes in which the investors are tricked into investing on the promise of unusually attractive returns. The operator of the scheme can keep the operation going by paying off early investors with the money from new investors until the scheme collapses under its own weight and/or the promoter vanishes with the remaining money. The scheme recently engaged in by Bernie Madoff is an example of a Ponzi scheme. The prime bank guaranty, roll program, bank debenture program and high yield promises are frequently used to entice investors into participating in Ponzi schemes. Predicate Crimes
“Specified unlawful activities” whose proceeds, if involved in the subject transaction, can give rise to prosecution for money laundering. Most anti-money laundering laws contain a wide definition or listing of such underlying crimes. Predicate crimes are sometimes defined as felonies or “all offenses in the criminal code.”
Private Banking
A department in a financial institution that provides high-end services to wealthy individuals. Private banking transactions tend to be marked with confidentiality, complex beneficial ownership arrangements, offshore investment vehicles, tax shelters and credit extension services. Private banking is viewed by many governments as highly vulnerable to money laundering. 329

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Private Investment Company (PIC)
Also known as a Personal Investment Company, a PIC is a type of corporation that is often established in an offshore jurisdiction with tight secrecy laws to protect the privacy of its owners. In some jurisdictions, an international business company or exempt company is referred to as a private investment company. PICs are viewed as prime money laundering vehicles.
Pyramid scheme

This is the same as a Ponzi scheme.

R
Red Flag
A warning signal that should bring attention to a potentially suspicious situation, transaction or activity.
Regulatory Agency
A government entity responsible for supervising and overseeing a category of domestic institutions. The agency generally has authority to issue regulations, to conduct examinations, to impose fines and penalties, to curtail activities and, sometimes, to terminate charters of institutions under its jurisdiction. Most financial regulatory agencies play a major role in preventing and detecting money laundering and other financial crimes.
Remittance Services
Also referred to as giro houses or casas de cambio, remittance services are businesses that receive cash or other funds that they transfer through the banking system to another account. The

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account is held by an associated company in a foreign jurisdiction where the money is made available to the ultimate recipient.
Report on the Observance of Standards and Codes (ROSC)
A report used by the IMF and the World Bank that summarizes the extent to which countries observe internationally recognized standards and codes for fiscal and monetary stability. The standards examine monetary and financial policy transparency, fiscal transparency, banking supervision, securities, insurance, payments systems, corporate governance, accounting, auditing and insolvency and creditor rights. Since 2002, they have also included examination of anti-money laundering and terrorist financing standards. ROSCs summarizing countries’ observance of these standards are prepared and published at the request of the member country. The results are used in consideration of
IMF and World Bank loans and for the private sector (including rating agencies) for risk assessment. ROSCs are also useful in determining a country’s prospective risks associated with money laundering. See http://www.imf.org/external/np/rosc/rosc. asp?sort=date. Reputational Risk
The potential that adverse publicity regarding a financial institution’s business practices and associations, whether accurate or not, will cause a loss of confidence in the integrity of the institution. Banks and other financial institutions are especially vulnerable to reputational risk because they can become a vehicle for, or a victim of, illegal activities perpetrated by customers. Such institutions may protect themselves through
Know Your Customer and Know Your Employee programs.
Respondent Bank
A bank for which another financial institution establishes, maintains, administers or manages a correspondent account.
Retrospective Due Diligence
Examining the identity and activity of existing customers and their accounts to confirm their legitimacy. The Cayman Islands and the Bahamas, when adopting their anti-money laundering

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frameworks, required financial institutions to perform due diligence on existing customers. The U.K. considered the requirement, but did not implement it, citing the heavy burden on businesses in its financial sector. The U.S. does not require retrospective due diligence. Risk-Based Approach
The assessment of the varying risks associated with different types of businesses, clients, accounts and transactions in order to maximize the effectiveness of an anti-money laundering program.
Risk Matrix
Document or chart that allows financial institutions to assess the money laundering risk of a business or customer relationship. A risk matrix sets out critical elements or parameters of risk—such as the country of origin or the type of anticipated transactions— so that institutions can calculate whether a potential client presents a low, medium or high level of money laundering risk. Later, the matrix allows the institution to make informed decisions on the frequency of transaction monitoring of particular accounts or customers.

S
Safe Harbor
Legal protection for financial institutions, their directors, officers and employees from criminal and civil liability for breach of any restriction on disclosing information imposed by contract or by any legislative, regulatory or administrative prohibition, if they report their suspicions in good faith to the Financial
Investigation Unit (FIU), even if they did not know precisely what the underlying criminal activity was, and regardless of whether illegal activity actually occurred.

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Glossary of Anti-Money Laundering Terms

Safe Deposit Box
A secure box inside the vault of a bank that can be used to store anything of importance a customer wishes to protect, such as legal documents, jewelry, coins, wills, etc. Safe deposit boxes can also provide a useful storage place for the proceeds of crime.
Seize
To prohibit the transfer, conversion, disposition or movement of funds or other assets on the basis of an action initiated by a competent authority or a court under a freezing mechanism.
However, unlike a freeze, a seizure allows the competent authority to take control of specified funds or other assets. The seized assets remain the property of the person(s) or entity(ies) that held an interest in them at the time of the seizure, although the competent authority will often take over possession, administration or management of the seized assets.
Self-Regulatory Organization (SRO)
A body that represents a profession (e.g., lawyers, notaries, other independent legal professionals or accountants), and which is made up of member professionals, has a role in regulating the persons who are qualified to enter and practice in the profession, and also performs supervisory or monitoring functions. For example, such a body would enforce rules to ensure that high ethical standards are maintained by those in the profession.
Senior Foreign Political Figure
U.S. term for foreign politically exposed persons. See Politically
Exposed Persons.
Settlors
Persons or companies who transfer ownership of their assets to trustees by means of a trust deed. Where the trustees have some discretion as to the investment and distribution of the trust’s assets, the deed may be accompanied by a non-legally binding letter setting out what the settlor wishes done with the assets. 333

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Shell Bank
Bank that exists on paper only and that has no physical presence in the country where it is incorporated or licensed, and which is unaffiliated with a regulated financial services group that is subject to effective consolidated supervision.
These banks are able to evade day-to-day regulation.
Recommendation 13 of the FATF 40 Recommendations says that countries should not approve the establishment, and should not accept the continued operation, of shell banks.
Financial institutions should refuse to enter into, or continue, correspondent banking relationships with shell banks, and should guard against establishing relations with respondent foreign financial institutions that permit their accounts to be used by shell banks.
Simple Trust
See Bare Trust.
Smart Card
Plastic card resembling traditional credit or debit cards that contains a computer chip capable of storing more information than a magnetic stripe, such as health insurance, e-cash, government identification and credit card data.
Smurfing
A commonly used money laundering method, smurfing involves the use of multiple individuals and/or multiple transactions for making cash deposits, buying monetary instruments or bank drafts in amounts under the reporting threshold. See
Structuring.
Smurfs
Individuals hired by money launderers to go from financial institution to financial institution purchasing monetary instruments or depositing currency or monetary instruments in amounts under the reporting threshold.

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Split Deposits
A series of deposits in which a customer splits a sum of money and makes smaller deposits into two or more accounts that add up to the original amount.
Sting Operation
Investigative tactic in which undercover officers pose as criminals, sometimes through a “front” business, to win the confidence of suspected or known criminals to gather information and to obtain evidence of criminal conduct. It is an effective means of identifying criminals, penetrating criminal organizations and identifying tainted property in money laundering and other cases.
Stored Value Card
Pre-paid payment card that stores a monetary value from which purchase amounts are deducted each time the card is used.
STR
See Suspicious Transaction Report.
Structuring
Illegal act of splitting cash deposits or withdrawals into smaller amounts, or purchasing monetary instruments, to stay under a currency reporting threshold. The practice might involve dividing a sum of money into lesser quantities and making two or more deposits or withdrawals that add up to the original amount. Money launderers use structuring to avoid triggering a filing by a financial institution. The technique is common in jurisdictions that have compulsory currency reporting requirements. See Smurfing.
Subpoena
Compulsory legal process issued by a court to compel the appearance of a witness at a judicial proceeding, sometimes requiring the witness to bring specified documents.

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Suspicious Activity
Irregular or questionable customer behavior or activity that may be related to a money laundering or other criminal offense, or to the financing of a terrorist activity. May also refer to a transaction that is inconsistent with a customer’s known legitimate business, personal activities, or the normal level of activity for that kind of business or account.
Suspicious Activity Report (SAR)
See Suspicious Transaction Report.
Suspicious Transaction Report (STR)
A government form that includes a financial institution’s account of a questionable transaction. Many jurisdictions require financial institutions to report suspicious transactions to relevant government authorities on a suspicious transaction report, also known as a suspicious activity report or SAR.

T
Tax Haven
Countries that offer special tax incentives or tax avoidance to foreign investors and depositors.
Tax Information Exchange Agreements
Bilateral agreements among national governments that can yield evidence for money laundering and tax evasion prosecutions. Terrorist Financing
The process by which terrorists fund their operations in order to perform terrorist acts. Terrorists need financial support to carry out their activities and to achieve their goals. There is little difference

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between terrorists and other criminals in their use of the financial system. A successful terrorist or terrorist group, much like a criminal organization, is one that is able to build and maintain an effective financial infrastructure. In order to do so, the group or the individual must develop sources of funding and means of obscuring the links between those sources and the activities they support. They need to find a way to make sure the funds are available and can be used to purchase goods or services for terrorist acts. The sums needed to mount terrorist attacks are not always large, and the associated transactions are not necessarily complex. There are two primary sources of financing for terrorist activities. The first involves financial support from countries, organizations or individuals. The other involves a wide variety of revenue-generating activities, some illicit, including smuggling and credit card fraud.
Testimony
Witness’ oral presentation, usually under oath, that describes facts known to the witness.
Tipping Off
Improper or illegal act of notifying a suspect that he or she is the subject of a Suspicious Transaction Report or is otherwise being investigated or pursued by the authorities.
Trade Finance
See Letter of Credit.
Transparency International (TI)
Berlin-based, non-governmental organization dedicated to increasing government accountability and curbing both international and national corruption. Established in 1993, TI is active in approximately 100 countries. It publishes “corruption news” on its website daily and offers an archive of corruptionrelated news articles and reports. Its Corruption Online
Research and Information System, or CORIS, is perhaps the most comprehensive worldwide database on corruption. TI is best known for its annual Corruption Perceptions Index (CPI), which ranks countries by perceived levels of corruption among

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public officials; its Bribe Payers Index (BPI) ranks the leading exporting countries according to their propensity to bribe. TI’s annual Global Corruption Report combines the CPI and the BPI and ranks each country by its overall level of corruption. The lists help financial institutions determine the risk associated with a particular jurisdiction. See www.transparency.org.
Trust
Arrangement among the property owner (the grantor), a beneficiary and a manager of the property (the trustee), whereby the trustee manages the property for the benefit of the beneficiary in accordance with terms set by the grantor.
Trustee
May be a paid professional or company or unpaid person that holds the assets in a trust fund separate from the trustee’s own assets. The trustee invests and disposes of the assets in accordance with the settlor’s trust deed, taking into consideration any letter of wishes.
Typology
Refers to a money laundering method and is a term used by
FATF.

U
Underground Banking
See Alternative Remittance System.
United Nations (UN)
An international organization that was established in 1945 by 51 countries committed to preserving peace through cooperation and collective security. Today, nearly every nation

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in the world belongs to the UN. See also Vienna Convention.
The United Nations contributes to the fight against organized crime with initiatives such as the Global Program against
Money Laundering (GPML), the key instrument of the UN Office of Drug Control and Crime Prevention in this task. Through the
GPML, the UN helps member states to introduce legislation against money laundering and to develop mechanisms to combat this crime. The program encourages anti-money laundering policy development, monitors and analyzes the problems and responses, raises public awareness about money laundering and acts as a coordinator of joint anti-money laundering initiatives with other international organizations. See www.un.org. UN Security Council Resolution 1267
Adopted in 1999, the resolution imposed sanctions on Talibancontrolled Afghanistan for its support of Osama Bin Laden and the Al-Qaeda organization. The sanctions have subsequently been modified and strengthened—they no longer exclusively target Afghanistan and now extend to any individual, group, undertaking or entity participating in planning or financing activities for Al-Qaeda or the Taliban. Member countries are obliged to adopt sanction implementation programs so that financial institutions can block the transactions, and freeze the assets of any person or entity on the list of designated terrorist entities maintained by the UN 1267 Committee. See www. un.org/Docs/sc/committees/1267/1267ListEng.htm. UN Security Council Resolution 1373 (2001)
Adopted in 2001, the resolution requires member nations to take a series of actions to combat terrorism through the adoption of laws and regulations and the establishment of administrative structures. The resolution also requires member nations to “afford one another the greatest measure of assistance for criminal investigations or criminal proceedings relating to the financing or support of terrorist acts.” See http:// daccess-dds-ny.un.org/doc/UNDOC/GEN/N01/557/43/PDF/ N0155743.pdf?OpenElement.

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Unusual Transaction
Transaction that appears designed to circumvent reporting requirements, is inconsistent with the account’s transaction patterns or deviates from the activity expected for that type of account. USA Patriot Act
The Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism
Act of 2001 (Public Law 107-56). Enacted on October 26,
2001, the historic U.S. law brought about momentous changes in the anti-money laundering field, including more than 50 amendments to the Bank Secrecy Act. Title III of the Act, the
International Money Laundering Abatement and Anti-Terrorist
Financing Act of 2001, contains most, but not all, of its antimoney laundering-related provisions.

V
Value Transfer Service
See Money Transfer Service.
Vienna Convention
Convention in 1988 against the Illicit Trade in Narcotic Drugs and Psychotropic Substances. Countries that become parties to the Vienna Convention commit to criminalizing drug trafficking and associated money laundering, and enacting measures for the confiscation of the proceeds of drug trafficking. Article III of the Convention provides a comprehensive definition of money laundering, which has been the basis of much subsequent national legislation.

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Glossary of Anti-Money Laundering Terms

Vital Service Providers (VSPs)
People who help move the billions of dollars drug traffickers earn around the world. VSPs include accountants, attorneys, broker-dealers, other financial institutions, communications and transportation providers, and people who build concealment traps—sophisticated hiding places for drugs and money in vehicles, boats, or houses.
Vostro Account
See Nostro Account.

W
White-collar crime
A type of crime generally seen as non-violent or involving more sophisticated “business-related” schemes rather than violence or the threat of violence. Such crimes include tax fraud
(evasion, false tax returns, failure to file tax returns), money laundering (any attempt to hide money derived from illegal sources), bribery, bankruptcy fraud, environmental fraud, health care fraud and many others.
Willful Blindness
Legal principle that operates in money laundering cases in the
U.S. and is defined by courts as the “deliberate avoidance of knowledge of the facts” or “purposeful indifference.” Courts have held that willful blindness is the equivalent of actual knowledge of the illegal source of funds or of the intentions of a customer in a money laundering transaction.
Wire Transfer
Electronic transmission of funds among financial institutions on behalf of themselves or their customers. Wire transfers are

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financial vehicles covered by the regulatory requirements of many countries in the anti-money laundering effort.
Wolfsberg Group
Named after the castle in Switzerland where its first working session was held, the Wolfsberg Group is an association of global financial institutions, including Banco Santander, Bank of Tokyo-Mitsubishi, Barclays, Citigroup, Credit Suisse Group,
Deutsche Bank, Goldman Sachs, HSBC, J.P. Morgan Chase,
Société Générale and UBS. In 2000, along with Transparency
International and experts worldwide, the institutions developed global anti-money laundering guidelines for international private banks. Since then, it has issued several other guidelines on correspondent banking and terrorist financing, among others. See www.wolfsberg-principles.com. World Bank
The World Bank is a vital source of financial and technical assistance to developing countries. It is not a bank in the usual sense, but is made up of two unique development institutions owned by 184 member countries—the International Bank for
Reconstruction and Development (IBRD) and the International
Development Association (IDA). Both organizations provide low-interest loans, interest-free credit, and grants to developing countries. In 2002, the IMF and the World Bank launched a 12-month pilot program to assess countries’ anti-money laundering and counter-terrorist financing measures. The
World Bank and the IMF, in conjunction with FATF, developed a common methodology to conduct such assessments based on the FATF’s 40 Recommendations. See www.worldbank.org.

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Z
Zakat
One of the Five Pillars of Islam and among the primary obligations that each Muslim must fulfill, zakat means tithing, or alms-giving. Once every lunar year—approximately 355 days— zakat requires a donation to charity representing a fixed portion of a Muslim’s possessions, generally 2.5% of an individual’s total net worth, excluding obligations and family expenses.

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Chapter

Practice Questions For Certification Examination

D

7

isclaimer: This set of practice questions is meant to indicate neither the length nor composition of the actual CAMS
Examination. Unlike the questions on our Examination, these were not subjected to psychometric screening or approved by the Examination Task Force and doctorate level psychometrician. They are merely questions that were considered for inclusion in the CAMS Examination, and, though not approved, offer an indication of the types of questions we pose.

1. Which of the following is the most common method of laundering money through a legal money services business? A. Purchasing structured money instruments.
B. Smuggling bulk-cash.
C. Transferring funds through Payable Through
Accounts (PTAs).
D. Exchanging Colombian pesos on the black market.

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2. In general, the three phases of money laundering are said to be: Placement:
A. Structuring and manipulation.
B. Layering and integration.
C. Layering and smurfing.
D. Integration and infiltration.
3. Which statement is true?
A. Bust-out schemes are popular in creating large bankruptcy frauds where businesses secure increasing loans in excess of the actual value of the company or property and then run with the money, leaving the lender to foreclose and take a substantial loss. B. Cuckoo smurfing is a significant money laundering technique identified by the Financial Action Task
Force, where a form of structuring uses nested accounts with shell banks in secrecy havens.
C. In its 40 Recommendations, the FATF issued a list of
“designated categories of offense” that asserts crimes for a money laundering prosecution.
D. E-cash is not attractive to the money launderer because it cannot be completely anonymous and does not allow for large amounts to be “transported” quickly and easily.

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4. Which three of the following is an indication of possible money laundering in an insurance industry scenario?
A. Insurance products sold through intermediaries, agents or brokers.
B. Single-premium insurance bonds, redeemed at a discount. C. Policyholders who are unconcerned about penalties for early cancellation.
D. Policyholders who make full use of the “free look” period. 5. Which two activities are typically associated with the black market peso exchange (BMPE) money laundering system?
A. Converting illicit drug proceeds from dollars or Euros to Colombian pesos.
B. Converting illicit drug proceeds from Colombian pesos to dollars or Euros.
C. Facilitating purchases by Colombian importers of goods manufactured in the United States or Europe through peso brokers.
D. Facilitating purchases by European or U.S. importers of goods manufactured in Colombia through peso brokers. 347

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6. What is the Right of Reciprocity in the field of international cooperation against money laundering?
A. The legal principle that financial institutions that have referred customers to other financial institutions can share information about these customers with the other institutions.
B. A rule of the Basel Committee allowing properly regulated financial institutes of another member state of the Basel Committee to do business without additional supervision to the degree that the other state grants the same right.
C. The right of each FATF member country to delegate prosecution of a case of money laundering to another member that is already investigating the same case.
D. A rule in the law of a country allowing its authorities to cooperate with authorities of other countries to the degree that their law allows them to do the same.
7. The greatest risk for money laundering is for casinos that
A. Provide their customers with a wide array of gambling services. B. Operate in a non-Egmont member country.
C. Allow customers with credit balances to withdraw funds by check in another jurisdiction.
D. Only send suspicious transaction reports to the financial intelligence unit of the country it operates in.

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8. Which statement is true regarding the risk of Politically
Exposed Persons (PEPs)?
A. PEPs provide access to third parties on whom the financial institution has not conducted sufficient due diligence. B. PEPs have significantly greater exposure to the politically corrupt funds, including accepting bribes or misappropriating government funds.
C. PEPs are foreign customers who inherently present additional risk as they are engaged in cross-border transactions. D. PEPs generally do not pose enhanced risks to an institution due to their political standing; rather, PEPs increase the prestige of an institution.
9. Dirty money, derived from criminal activities of
Belgian Criminal A, is sent to a foreign bank account of Corporation B. Then in Belgium, a new investment
Company C is incorporated. Criminal A is appointed as a director of Company C. Company C borrows money from the foreign Company B and buys real estate in Belgium.
The real estate is rented to third parties. Director
(Criminal) A also rents an apartment in the building. With the funds generated by the rent, Company C pays off the loan to Corporation B, and the salary of Director A.
Criminal A now converted his dirty money in legal funds.
This laundering method is commonly referred to as what?
A. Offsetting real estate transactions.
B. Loan back.
C. Cuckoo smurfing.
D. Loan manipulation.

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10. A new customer approaches a bank to open a commercial account. The customer provides an address for the account located across the city from the branch. When asked by the account representative if the customer requires any additional banking services, the customer responds she is also interested in opening a personal investment account. The account representative refers the customer to their broker-dealer. The customer tells the firm representative she has never had a brokerage account before and has a few questions about how an investment account works. The customer asks how deposits can be made into her account, if there are any reporting requirements, and how to go about moving balances out of the account using wire transfers. No questions are asked about fees associated with these transactions. Which three items would be considered suspicious? A. The customer asks many questions about the brokerage account, but none of them are related to investing. B. The customer is opening a commercial account and at the same time a personal investment account.
C. The address of the account holder and the branch where the customer came to open the account are not close to each other.
D. That the customer appears unconcerned about the fees. 350

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11. International trade in goods and services can be used as either a cover for money laundering or as the laundering mechanism itself. What is MOST important for the launderer when engaging in this method? The ability:
A. To over- or under-invoice the goods.
B. To sell the exported goods for as much as possible.
C. To use goods that do not need to be declared.
D. To use high-value assets such as luxury cars or boats.
12. Which of the following statements is true? Correspondent banking is MOST vulnerable to money laundering when the correspondent account is:
A. Maintained for foreign financial institutions that are banks. B. Not used to provide services directly to third parties.
C. Maintained for a foreign bank that does not have a physical presence in any country.
D. Maintained for a foreign private bank that is publicly traded and is a qualified intermediary.
13. Which statement is true? Lawyers:
A. In FATF member countries can generally not be used to serve as formation agents to set up trusts, front companies or shell companies.
B. And similar professional “gatekeepers” are called money services businesses.
C. Can generally not be used to act as a nominee shareholder for a beneficial owner.
D. Can be abused by launderers by using the accounts they set up for them for the placement and layering of funds. 351

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14. The Third EU Money Laundering Directive of 2005 applies to which of the following firms?
A. Auditors, estate agents based in the EU.
B. U.S. Financial institutions covered by the USA
Patriot Act.
C. Shell firms inside and outside the EU.
D. EU based high value good dealers who deal in cash of
10,000 Euro or more.
15. According to the EU Directives of 2001, an independent legal professional is obligated to report suspicion of money laundering in a client relationship when:
A. Representing a client in a legal matter.
B. Ascertaining the legal position for a client.
C. Participating in financial or corporate transactions.
D. Obtaining information associated with a judicial proceeding. 16. Which of the following is the most difficult regulatory challenge facing a foreign financial institution with a correspondent banking relationship in the U.S.?
A. USA Patriot Act.
B. Basel Due Diligence Principles for Banks.
C. FATF Guidance on Terrorist Financing.
D. UN Security Council Resolution on Correspondent
Banking.

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17. Which were the Basel Committee’s two main motivations to encourage strong Know Your Customer programs in its paper “Customer Due Diligence for Banks?”
A. A. irror FATF’s KYC Recommendations.
M
B. Meet European Union guidelines.
C. Protect the safety and soundness of banks.
D. Protect the integrity of banking systems.
18. What is the definition of a predicate offense?
A. Lawful or unlawful activity that involves willful blindness, and if there is an international element to the crime, can lead to a suspicious activity report.
B. Unlawful activity whose proceeds, if involved in the transaction, can give rise to prosecution for the crime of money laundering.
C. An interface which is the underlying segment of a suspicious transaction monitoring system.
D. A specified unlawful activity that is committed through concentration accounts deceiving customers that are not directly related to the account.
19. What is considered a beneficial owner of an account? A person or entity:
A. That has direct signatory authority over an account, and whose name appears on the account.
B. That is ultimately entitled to the funds in the account, even though his name may not appear on the account.
C. That is the originator and the destination of most (but not all) transactions conducted within the account, but who does not ultimately control such funds.
D. That is a gatekeeper, has the legal title to the account, and typically transfers the funds to a trust.

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20. A bank in Italy holds a business account for an Italian company that sells gold throughout Europe and the
Western Hemisphere. The bank knows the purpose of this account is to receive payment for sales. A review of the account shows a pattern of wire transfers coming from payable-through accounts. There is also a pattern of purchases of gold bullion held in Swiss banks. The MOST important factor in assessing whether money laundering is a threat is that the:
A. Customer sells gold in regions where it carries an important or religious significance that adds to the high intrinsic value.
B. Payments come from third-party accounts.
C. Payments received are in the form of wire transfers instead of cash.
D. Account holder maintains gold bullion rather than finished pieces of jewelry.
21. Which of the following should a national legislature consider when criminalizing money laundering in line with the CFATF 19 Recommendations (choose three)?
A. Do not limit the number of specific predicate offenses for money laundering.
B. Criminalize conspiracy or association to engage in money laundering.
C. Indicate whether it is relevant that a predicate offense may have been committed outside the local jurisdiction. D. Require money laundering offenses to prove that the offender has actual knowledge of a criminal connection to the funds.

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22. Which three statements are true about the 3rd EU Directive on Money Laundering of 2005? It:
A. A. as proposed in order to update European
W
Community legislation in line with the Financial Action
Task Force (FATF) 40 Recommendations.
B. Largely replicates the definitions included in the
Second Directive, including the definition of a politically exposed person.
C. Repeats the main customer due diligence requirements of the first and second Directives, but adds more detail to the requirements by, for example, including a specific requirement to identify the beneficial owner if one exists and includes ongoing monitoring requirements.
D. Requires firms to apply the customer due diligence requirements to existing customers at appropriate times on a risk sensitive basis.
23. The FATF 40 Recommendations say that countries should:
A. Not allow bearer shares and legal persons that are able to issue bearer shares.
B. Gather statistics on STRs; prosecutions and convictions; on property frozen, seized and confiscated; and on mutual legal assistance, but not necessarily on other international requests for cooperation.
C. Consider the feasibility of a system where banks and other financial institutions and intermediaries would report currency transactions without indicating a minimum fixed amount.
D. Not approve the establishment or accept the continued operation of shell banks.

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24. Among the Principles for Information Exchange Between
Financial Intelligence Units for Money Laundering Cases, issued by the Egmont Group on June 13, 2001, we find which of the following?
A. Information-sharing agreements must be drafted according to a model issued by the Egmont Group.
B. Information-sharing agreements should not allow room for case-by-case solutions to specific problems in case of NCCT countries.
C. Information exchanged between FIUs may be used only for the specific purpose for which the information was sought or provided.
D. The requesting FIU may make use of the information shared by a disclosing FIU for administrative purposes without the prior consent of the disclosing FIU.
25. In which stage of money laundering would you classify depositing small amounts of cash into several related accounts? A. Integration.
B. Structuring.
C. Placement.
D. Construction.
26. In which stage of money laundering would you classify the use of laundered funds to purchase high value assets and luxury items?
A. Integration.
B. Structuring.
C. Placement.
D. Construction.

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27. In most laws criminalizing money laundering, it is stated that: A. Financial institutions are not responsible for money laundering or suspicious transactions taking place within their accounts until the government places the customer on a watch list.
B. Tipping off (telling customers that their accounts/ transactions are under investigation because of suspicion) is not punishable.
C. The dirty money undergoing money laundering will not be confiscated because of privacy laws.
D. Employees of financial institution who intentionally ignore clear signs of money laundering may be punished with imprisonment and/or fines.
28. The tactic in which individuals make multiple deposits in small quantities to avoid detection is called:
A. Paralleling.
B. Integration.
C. Investing.
D. Structuring.

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29. In which case might a Suspicious Transaction Report NOT be necessary?
A. A customer who deposits money of suspicious origins and refuses to answer questions from the financial institution’s staff.
B. A customer who tries to move money that is suspected of being derived from criminal activity.
C. A customer who owns a large supermarket and deposits large amounts of cash several times a day.
D. A customer whose account is showing transaction activities which are beyond his known financial capability. 30. As part of their role in fighting money laundering, financial institutions should:
A. Designate a compliance officer.
B. Depend solely on The State’s staff for combating money laundering.
C. Refuse small cash deposits under the reporting threshold. D. Not open accounts for people from high risk jurisdictions. 358

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31. What could happen to compliance officers if they do not comply with the anti-money laundering laws and regulations? A. Their employers could face reputation damage, but the employee is immune from penalty.
B. Loss of job, prison penalties and fines, negative reputation to their employer.
C. Nothing. Only the financial institution’s legal counsel will be responsible for complying with laws.
D. Nothing. Only the staff directly handling transactions have to worry.
32. What is willful blindness defined as?
A. Failing to file a Suspicious Transaction Report for dealing with companies or financial institutions from offshore tax havens.
B. Not following customer identification procedures as set out in the institution’s procedures.
C. Deliberate avoidance of knowledge of the facts or ignoring obvious money laundering red flags.
D. Deliberate avoidance of a customer based on the assumption that his or her behavior suggested a potential threat as money launderer and/or terrorist.

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33. In anti-money laundering terminology a “red flag” is:
A. A warning sign used to bring attention to potentially suspicious, risky transactions or activities.
B. A general banking term used once the balance is negative / overdue.
C. The standard flag of countries not cooperative in fighting money laundering and terrorist financing.
D. An indicator that a customer is listed on an economic sanctions list.
34. The Reporting Officer of a financial institution should:
A. Report everything that comes his way from anyone in the organization.
B. Report everything that comes his way from senior management or Board of Directors.
C. Review available information related to the customer, transactions, profile, history and file a Suspicious
Transaction Report for only those customers where a suspicion of money laundering exists.
D. Report only what the Reporting Officer’s superior agrees should be reported.

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35. Which of the following statements is true?
A. Credit cards are not likely to be used in the layering phase of money laundering because of restrictions in cash payments.
B. Credit cards are effective instruments for laundering money because the transactions do not create an audit trail.
C. A launderer can launder money by prepaying his credit card using funds that are already in the banking system, creating a credit balance on his account, and requesting a credit refund.
D. A launderer can use illicit funds that are already in the banking system to pay his credit card bill for goods purchased, which is an example of placement.
36. Why is a Payable Through Account vulnerable to money laundering? A. These are master correspondent accounts that allow the customers of the foreign bank to do a wide range of transactions.
B. These are correspondent accounts located in a noncooperative country or territory.
C. These are nested correspondent accounts at a foreign shell bank with customers with whom the domestic bank did not exercise due diligence.
D. These are master escrow accounts on which a domestic bank generally does not conduct periodic verification. 361

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37. What is the reasoning behind implementing a “risk-based anti-money laundering approach”?
A. It will keep the regulators focused on money laundering controls in sectors beyond banks.
B. Institutions can best use their limited resources to focus on matters where the money laundering risks are highest.
C. A quantitative approach will generate better results than a qualitative approach.
D. It allows the institution to focus on selling products that have a better return on investment.
38. According to the FATF 40 Recommendations, “designated non-financial businesses and professions” include:
A. Casinos, real estate agents and dealers in precious stones. B. Money service businesses, gatekeepers, and issuers of electronic money.
C. Dealers in precious metals, lawyers, commodity futures traders.
D. Life insurance companies, real estate agents and notaries. 39. According to the FATF 40 Recommendations, the threshold for identifying occasional customers at financial institutions is:
A. EURO/US$ 5,000.
B. EURO/US$ 10,000.
C. EURO/US$ 15,000.
D. EURO/US$ 20,000.

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40. Tom works as a compliance officer at ABC Bank. He is looking at the transactions of one of the bank’s customers,
Mr. Brown, the owner of a check cashing company. Over the last six months, Mr. Brown has not made withdrawals of cash against check deposits. He also deposited two checks for US$2,000 each that were issued by a casino.
When checking the KYC file, Tom sees that, when opening the account, Mr. Brown had requested detailed information about fees and commission that are charged by the bank. What should arouse Tom’s suspicion the most? Mr.
Brown:
A. Deposited checks from casinos.
B. Did not make withdrawals of cash against check deposits. C. Showed uncommon curiosity about commissions and fees charged.
D. Does not have an escrow account.

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41. A small broker-dealer has an AML compliance program that addresses procedures for filing Suspicious
Transaction Reports and includes policies, procedures and internal controls for customer identification, monitoring accounts and identifying money laundering red flags. Every employee of the broker dealer is trained via the Internet in January and in July on AML issues.
The board does not take the Internet training. Instead, the compliance officer organizes a luncheon for them where an outsider comes in and trains them. The program provides for the appointment of a compliance officer, and once a year the compliance officer conducts an audit to test the program. In what respect does the program need improvement? A. The AML program should be tested by an independent person, not the compliance officer.
B. The AML program should be tested more than once per year.
C. The board should receive the same training provided to the employees.
D. Employees should not be trained via the Internet, because classroom training is better.

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42. Susan works as a senior Money Laundering Reporting
Officer at XYZ Bank. She is taking a closer look at the activity of several customers. What would arouse her suspicion the MOST?
A. A customer who owns several check cashing companies in town and rents safe deposit boxes at different branches.
B. A customer who avoids taking vacations.
C. A small business that provides financial statements which are not prepared by an accountant.
D. A customer involved in investment management who guarantees a very high rate of return, well above what other competitors can offer.
43. Which of the following best describes the “alternative remittance system”?
A. The transfer of values between countries, outside of the legitimate banking system.
B. A non-electronic data remittance system used in several NCCT countries to report suspicious activities.
C. Old-fashioned reporting requirements commonly used in non-cooperative countries and territories.
D. The transfer of funds between two or more financial institutions using concentration accounts.

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44. An AML compliance officer was reviewing customers at
XYZ Bank and one of the customers (Mr. Sam Tropicana) attracted her attention. Through a period of several months, cash deposits and withdrawals were transacted through his account with amounts ranging between
US $7,500 and US $17,000. In addition, Sam deposited two checks, issued by a casino into his account for US
$32,000 each. When opening the account, Sam stated that he operated an import/export company. Which of the following additional items should arouse the suspicion of an anti-money laundering compliance officer the most?
A. Sam maintained a personal account as well as the business account.
B. Sam’s home telephone number was disconnected last month. C. Sam asked for a letter of credit to finance some imports from a new supplier.
D. Sam conducted large cash transactions for his import/ export business.
45. Which three of the following statements are true?
A. Online gambling provides an excellent method of laundering because transactions are conducted primarily through credit or debit cards and the sites are typically unregulated offshore firms.
B. An institution can know when a credit card is used for online gambling transactions because the cards rely on codes that illustrate the type of transactions.
C. Online gambling provides an excellent method of laundering because it lends itself to any type of cash movement and there is no face-to-face contact with the customer.
D. Some banks no longer allow the use of credit cards for online gambling transactions.

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46. What are the three key goals of an anti-money laundering program? A. Prevent and detect money laundering and terrorist financing; report suspicious activity to proper authorities if the laws or regulations require it; train all pertinent employees.
B. Satisfy regulatory requirements; report suspicious activity to proper authorities if the laws or regulations require it; train all pertinent employees.
C. Train all pertinent employees if the laws require it; prevent money laundering; prevent terrorist financing.
D. Reduce regulatory burdens; help the court systems in convicting money launderers; protect the institution.

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47. An anti-money laundering specialist is employed by a large bank. An account owner is well-known to the specialist and the account has been open at the bank for several years. The specialist noticed that financial instruments have been deposited in a suspicious manner over the last four months, leading him to file two
Suspicious Transaction Reports (STRs) on the account.
Recently, suspicious activity involving high-risk countries has been detected over the last few days.

Various law enforcement agencies have called to discuss the STRs with the specialist. The specialist has asked the agents whether they think the relationship with the customer should be terminated. These agents advised that this a business decision for the bank to make.
The specialist has kept the legal advisors and upper management apprised of the activity and has provided them copies of the STRs.

Which of the following should the specialist recommend?
A. Terminate the relationship with this account owner if possible. B. Monitor the account for continued suspicious activity.
C. Contact the account owner again about the nature of suspicious transactions.
D. Seek guidance from regulators regarding a decision to terminate the account.

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48. The FATF has consistently noted the use of casinos in money laundering schemes in its annual typologies reports. One laundering technique involving casinos is:
A. Asking for winners’ checks to be made out in the name of third persons or without a payee.
B. Abusing casinos by circumventing its gatekeepers.
C. Prepaying a casino token or chip by using funds that are already in the casino system, creating a debit balance. D. Extensive gambling via multiple games throughout the casino. 49. Which of the following should an anti-money laundering specialist include on an internal investigation log?
A. A government order on a customer that garnishes his wages for failure to pay child support.
B. Supporting documentation and materials for denying service to a client with a bad credit rating.
C. Notes pertaining to activity that is unusual, but for which a Suspicious Transaction Report has not been filed. D. Reference to a memorandum to the company’s corporate management relating to budgetary and similar concerns.

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50. What are the three key criteria in AML risk rating?
A. Customer type, geographic location, products and services used.
B. Geographic location, customer type, employment status. C. Products and services used, customer type and prior banking relations.
D. Employment status, customer type, products and services used.
51. A financial institution is looking to establish an online account opening service. The institution plans to offer this product to new and existing customers within the country. Which of the following would be the best plan of action for an AML specialist to recommend enabling the institution to verify the customer’s identity?
A. Do not offer the product, as it is too high risk as the customer cannot be seen to verify their identity.
B. Require all customers to send a copy of valid photo identification to the institution.
C. Ensure that the institution has a reliable third party source that will enable verification of the customer.
D. Allow customers to enter required information, but require all customers to come to the institution in person for verification.

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52. Which of the following controls would most effectively minimize the need to correct failures to collect required customer information in the account opening process?
A. A quality review staff that checks paper applications to ensure all fields are complete.
B. An automated account opening platform that requires data entry prior to allowing the account to be opened.
C. Requiring that a manager review and approve all new account applications.
D. Documenting a procedure that sets forth the steps required to open an account.
53. When conducting training for AML purposes for account opening staff, which of the following addresses the most important aspects to consider in the training?
A. What the employees need to do, the importance of
AML efforts and the penalties for non-compliance.
B. The governmental AML bodies, what the employees need to do and the importance of AML efforts.
C. The penalties for non-compliance, the governmental
AML bodies, and what employees need to do.
D. The importance of AML efforts, the governmental AML bodies and the penalties for non-compliance.

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54. When drafting an AML policy, which of the following internal parties is most important to have approve the policy? A. Senior management.
B. The audit department.
C. The sales team management.
D. The operational staff management.
55. Suzy is an AML compliance officer at an institution that is looking to open treasury management services
(e.g., wires, check clearing, foreign draft issuance) for correspondent banking customers. Which of the following should Suzy be most concerned about regarding the institution’s capabilities regarding these customers?
A. Whether the new account systems will be able to handle customers with foreign names.
B. Whether the correspondent accounts will be approved by government regulators.
C. Whether the correspondent accounts will be able to provide evidence of their customers’ identities at account opening
D. Whether the correspondent accounts will be able to be monitored by the institution’s monitoring systems.

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56. John is an AML compliance officer at a financial institution that is looking at an electronic KYC tool to facilitate the account opening process. Which of the following aspects would be most useful for John to consider when assessing vendors providing the tools?
A. How well can the vendor work with the institution’s existing account systems and account opening processes? B. Can the vendor provide training on how to use the new tool? C. Can the tool prevent fraudulent accounts from being opened? D. Can the tool provide alerts to the AML compliance staff when it finds a match with a customer in a jurisdiction with inadequate AML controls?
57. A customer wants to establish a sizable relationship with a financial institution. The AML officer is not comfortable with the client’s explanation for the source of the funds, but the client manager is vouching for the client and is eager to open the relationship quickly. What should the
AML officer do to validate the client’s sources of funds?
A. Accept the client manager’s approval of the client.
B. Allow the account to be opened but be sure to monitor the account activity.
C. Perform a background investigation to determine whether the client’s source of funds is credible.
D. Decline the account.

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58. An AML compliance officer is investigating unusual activity that she has noticed in a customer’s accounts.
The customer has a retirement account, a savings account in trust for his son, a joint checking account with his wife, a company checking account and an individual brokerage account. The compliance officer believes the customer may be embezzling funds from his business. Which is the best path for her to follow up on her suspicions?
A. Focus on the checking accounts, as the checking accounts allow the fastest movement of funds.
B. Ignore the savings and brokerage accounts, as these are not used in the placement stage of money laundering. C. Look at the movement of funds in all the accounts, as the customer may be using all of them to launder money. D. Focus on the business account, as the customer is embezzling money from the company.

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59. About an hour before closing time, a construction worker comes to a financial institution and wants to provide cash in exchange for sending money abroad. It is the middle of summer and the customer indicates that he’s been outside for the bulk of the day and needs to send money to a family member who is in another country. Which of the following would be considered the biggest concern with the customer and his request?
A. The customer is sweating; probably because he is nervous due to the fact he’s trying to launder narcotics proceeds. B. The customer is sending money to a relative in a highrisk foreign location.
C. The customer seems slightly distracted when asked questions by the financial institution’s staff.
D. The customer is not able to provide a reasonable response as to the source of the funds.
60. A customer at a brokerage firm indicated that he was primarily a conservative, long-range investor. The customer has recently been engaging in day trading in penny stocks. What should an AML compliance officer do in such a situation?
A. Check with the account officer to see if the customer has indicated a change in his investment strategy.
B. Report the customer as suspicious due to investing in penny stocks.
C. Contact the customer and ask why he is engaged in high-risk day-trading activity.
D. Refer the customer for senior management for approval. 375

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61. A financial institution branch manager who has been in place for over ten years has not taken a vacation for almost four years. The company does not allow employees to roll vacation over from year to year. An AML compliance officer has noticed unusual activity in several accounts at the branch location. What should the AML officer do?
A. Insist that the manager take a vacation, as not taking one is a red flag.
B. Report the manager to authorities for engaging in suspicious activity.
C. Determine whether the manager has engaged in transactions in the accounts where the unusual activity has occurred.
D. Conduct a background check to see if the manager has been convicted of criminal activity.
62. An AML compliance officer is looking to establish a suspicious activity reporting process at her small institution. Which of the following would be the best course of action?
A. Allow employees to refer suspicious activity directly to the government authorities to file as quickly as possible. B. Have employees refer all unusual activity to the internal independent audit department to assess whether the activity should be reported.
C. Have employees refer all unusual activity to senior management to ensure they are aware of all unusual activity within the organization.
D. Have employees refer all unusual activity to her so that she may conduct an investigation into what needs to be reported to authorities.

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63. After reporting suspicious activity to the appropriate authorities and they request additional follow up on the reports, which of the following actions should an AML compliance officer do?
A. Inform the customer that his/her activity has been reported as suspicious and the authorities are asking about him/her.
B. Indicate to the authorities that you have fulfilled your regulatory duty by referring the matter to them.
C. Give the authorities everything they request.
D. Cooperate fully with the authorities, as permitted by law. 64. A compliance officer is looking to improve a compliance program for a financial institution that operates in several countries. The institution has developed a consistent customer due diligence (CDD) requirement for all customers of the institution that exceed each of the individual countries’ requirements. When looking to provide management reporting on the CDD compliance efforts of the institution, which of the following would make most sense?
A. Report by each country’s compliance with the legal requirements within their country.
B. Report on compliance with the company’s stated requirements. C. Report on compliance with each country’s requirements only for those customers that are serviced by branches in multiple countries; all others should be reported on the company’s stated requirements. D. Report on the level of monitoring performed on the activity in the accounts.

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65. Establishing compliance as a key responsibility for every employee of a financial institution is best performed how?
A. By having senior management require compliance as a condition of employment.
B. By having auditors conduct testing on employee compliance. C. By pointing out the regulatory consequences of noncompliance in training.
D. By having the AML officer personally tell associates of their responsibilities.
66. An institution that offers mortgages notices the national financial intelligence unit has issued several advisories about reporting mortgage fraud. A compliance officer has noticed that the level of mortgage fraud reporting has increased as a result of conducting post-account opening source of funds verification. The FIU has noted that loans with unverified income have been noted as a significant concern. What should the AML compliance officer do?
A. Pass along the FIU advisories to the mortgage unit and let them address the issue as they see fit.
B. Refer the increased reporting of unusual activity to the regulators for them to address.
C. Speak to the mortgage unit about revising the income verification process to do this earlier in the process, as suggested by the FIU.
D. Refer the matter promptly to the board of directors to let them address the issue promptly.

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PRACTICE QUESTIONS FOR CERTIFICATION EXAMINATION

67. Robert is a compliance officer for a financial institution.
Robert is looking to assess the effectiveness of the current AML program. Which of the following should
Robert consider in his assessment of the program’s effectiveness? A. Sales staff surveys on AML efforts, customer due diligence error rates, quality assurance testing on STR filings. B. Customer due diligence error rates, sales staff surveys on AML efforts, percent of products and services monitored for suspicious activity.
C. Quality assurance testing on STR filings, sales staff surveys on AML efforts, percentage of products and services monitored for suspicious activity.
D. Customer due diligence error rates, quality assurance testing on STR filings, percentage of products and services monitored for suspicious activity.

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68. Joe, the compliance officer for a small bank, has noticed that new regulations now require reporting on crossborder transactions that exceed a certain threshold. What is appropriate set of next steps for Joe to take to prepare his bank for the new requirements?
A. Consult with the regulators, provide training to impacted associates and work with the technology partners to capture all cross-border transactions for reporting. B. Provide training to impacted associates, work with technology partners to capture all cross-borders transaction for reporting and implement a testing plan to be sure appropriate transactions are captured and reported. C. Work with technology partners to capture all crossborder transactions for reporting, implement a testing plan to be sure appropriate transactions are captured and consult with the regulators.
D. Implement a testing plan to be sure appropriate transactions are captured and reported, provide training to impacted associates and consult with the regulators. 69. When documenting ongoing training efforts, which of the following should be documented to demonstrate the distribution of the training to appropriate employees?
A. Whether the training was provided to the board of directors. B. The topics the training addressed.
C. The names and areas of the employees who took the training. D. Whether the employees who took the training passed the post-training assessment.

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PRACTICE QUESTIONS FOR CERTIFICATION EXAMINATION

70. When assessing a new product, which of the following should be considered as part of the assessment from an
AML perspective?
A. The inherent risk of the product, the control environment to mitigate the risks presented by the product, the residual risk of the product in light of the controls. B. The control environment to mitigate the risks presented by the product, the residual risk of the product in light of the controls and the projected profitability of the product.
C. The projected profitability of the product, the control environment to mitigate the risks presented by the product and the Inherent risk of the product.
D. The residual risk of the product in light of the controls, the inherent risk of the product and the projected profitability of the product.

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71. Marie, a compliance officer at a financial institution, attends an annual AML-industry conference and learns of a new regulation that will impact her current AML processes. The regulatory environment has been relatively stable within the industry for several years, but
Marie is glad she attended this conference to get news of the new requirements. What should Marie do to stay abreast of future changes in requirements?
A. Request permission to attend future annual AMLindustry conferences.
B. Ask internal auditors to provide her with notice of changes needed to the program.
C. Implement a process to determine when new regulations are published and assess them for impacts to the AML program.
D. Conduct a risk assessment to determine if the regulations change frequently enough to implement a process to check for changes.
72. A compliance officer is looking to provide some way to report on the effectiveness of the AML program to senior management. Which of the following would be the most appropriate means to keep senior management informed of these efforts?
A. Develop a report containing metrics that reflect the effectiveness of various key program elements.
B. Rely on the internal audit reporting and regulatory examinations. C. Provide a summary of all reported suspicious activity.
D. Provide detailed training to senior management on their AML obligations.

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PRACTICE QUESTIONS FOR CERTIFICATION EXAMINATION

73. A financial institution’s internal audit department has found an issue with an AML process involving the AML compliance officer’s efforts to conduct sufficient account monitoring on certain products offered by the institution.
The AML compliance officer should do which of the following? A. Let the independent audit function remediate the issue, as they have identified it and the resolution of the issue needs to be handled independently of the compliance function.
B. Dispute the finding with audit, as the compliance officer should be sufficiently empowered to make all
AML-related decisions for the institution.
C. Develop and follow an action plan to remediate the issue and report to audit on the progress made on the issue. D. Escalate the matter to the account opening team and have them make the appropriate business decision.
74. A financial institution has determined that opening accounts for certain types of customers is not worthwhile, as the cost of implementing controls is too great for the revenue earned from the customers. Which of the following options is the most effective way to enforce such a decision?
A. Implement automated account opening controls to prevent the account opening for the prohibited customer types and provide employee training.
B. Develop a policy and procedure and implement a postaccount opening random testing for compliance.
C. Inform senior management of the prohibition and provide employee training.
D. Include a notice of the prohibition in customer disclosures. 383

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75. A longtime customer of the bank comes into the bank a number of times over a series of weeks and deposits a large amount of money and, the next day, asks for the money to be wired to a third world country. This behavior is not in keeping with his normal business practices.
What should the compliance officer recommend?
A. Contact the Board of Directors as soon as possible and inform them of this activity.
B. Immediately contact law enforcement by phone and tell them of the potential money laundering activity.
C. Collect the appropriate documentation and review it with the purpose of filing an STR.
D. Make a note of the activity, but do not file a STR in order to not risk losing a longtime customer.
76. After collecting and reviewing all of the appropriate documentation in preparation for the filing of an STR, what should the compliance officer do with the documentation?
A. The officer should organize the documentation and attach it to the filed STR.
B. The officer should maintain the documentation in a separate file in case law enforcement asks for the supporting documentation for the STR.
C. The officer should hand the documentation over to the outside counsel of the bank in order to bring a civil suit against the customer.
D. The officer should use the documentation as a basis for closing the account.

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PRACTICE QUESTIONS FOR CERTIFICATION EXAMINATION

77. After receiving an STR, the relevant law enforcement agency requests permission to interview the bank personnel who are familiar with the underlying transaction. What should the compliance officer recommend? A. The officer should confer with bank counsel as to whether to request subpoenas from law enforcement.
B. The officer should deny permission for any such interviews without the creation of a grand jury or a formal court ordered investigation.
C. The officer should only allow those employees who are comfortable be interviewed by law enforcement.
D. The officer should allow the employees to be interviewed only if they are given immunity by law enforcement. 78. What are three factors a prosecutor should take into consideration in deciding whether to bring criminal charges against a financial institution?
A. Whether the institution has a criminal history.
B. Whether the institution cooperated with the law enforcement investigation.
C. Whether the institution discovered and self-reported the potential criminal violation.
D. Whether the institution is a very large institution and its prosecution will make good headlines for the law enforcement agency.

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79. The compliance officer is trying to put together a set of procedures for handling the documentation that supports the filing of an STR. What should the compliance officer recommend to be part of these procedures?
A. Make a list of all relevant documents available to all bank officers and employees.
B. Segregate the documents that support each STR and ensure that they are available for inspection at the request of law enforcement.
C. Attach the documents to the filed STR to ensure that law enforcement has ready access to the documents.
D. Rely on the five year record retention policy that the bank has to be able to retrieve all relevant documents when requested.
80. The compliance officer is trying to put together a set of procedures for handling the review of potentially suspicious transactions. What should the compliance officer recommend be part of these procedures?
A. That the institution rely primarily on the back office to identify suspicious trends in account activity.
B. That the institution make it the responsibility of all employees to identify suspicious activity.
C. That the institution rely primarily on the account relationship managers of accounts to identify suspicious activity.
D. That the institution rely on the dissemination of red flags in each area of the bank to cover all possible suspicious activity.

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PRACTICE QUESTIONS FOR CERTIFICATION EXAMINATION

81. The compliance officer is trying to put together a set of procedures for handling the decision of whether or not to file an STR. What should the compliance officer recommend to be part of these procedures?
A. The officer should recommend that the decision as to whether or not to file an STR be centralized to ensure uniformity. B. The officer should recommend de-centralizing the decision in order to speed up the process and to ensure that the decision is made closest to where the activity occurred.
C. The officer should recommend that STRs only be filed once they have been authorized by the Board of
Directors of the bank.
D. The officer should recommend that STRs only be filed once they have received a thorough legal review.
82. Of the following scenarios, which two are potential red flags indicating possible suspicious activity that should be investigated further?
A. A large family with multiple accounts held in the name of different family members.
B. Accounts held for a business in a branch that is located on the other side of town from where the business is located.
C. An individual who holds multiple accounts under the same name.
D. A company that has multiple accounts, one for each of their various subsidiary businesses.

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83. In conducting a criminal investigation, what are three things that the law enforcement investigator should do?
A. The criminal investigator should make every effort to “follow the money” in the transaction to determine where it came from and where it went.
B. The criminal investigator should identify the potential unlawful activity involved, referred in some countries as the “specified unlawful activity.”
C. The criminal investigator should document the underlying activity and transactions potentially involved in the transaction.
D. The criminal investigator should research all similar cases that have occurred in recent history in the immediate area.
84. Typically, when should a financial institution file an STR?
A. Whenever they are preparing to close an account.
B. Whenever they detect unusual or suspicious transactions. C. Only when they are able to establish the existence of a criminal violation.
D. Only when the Board of Directors approves the filing of the STR.

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PRACTICE QUESTIONS FOR CERTIFICATION EXAMINATION

85. When a bank receives a subpoena for information about a specific account, what two steps should the compliance officer take?
A. The compliance officer should ensure that the staff research and collect all documents responsive to the subpoena. B. The compliance officer should insist on law enforcement explaining why the subpoena was issued and what law enforcement is looking for.
C. The compliance officer should ensure that an independent review is conducted of the account and the transactions in the account.
D. The compliance officer should only comply with the subpoena after first getting approval from the bank’s legal counsel.
86. A law enforcement representative calls up the compliance officer and urgently requests information pertaining to a particular account in connection with an on-going terrorist financing investigation. What should the compliance officer do?
A. Get permission from the Board of Directors to hand the material over to law enforcement.
B. Hand the material over to law enforcement immediately because of the urgent nature of the request. C. Request the law enforcement representative provide a court order or grand jury subpoena unless the bank has already filed an STR on the matter.
D. Get permission from the bank’s legal counsel before handing the material over to law enforcement.

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87. In conducting a criminal investigation, what are three things that the law enforcement investigators should do?
A. Conduct computer-based searches on the individuals and entities involved.
B. Review any previously filed STRs on the individuals and entities involved.
C. Analyze the financial transactions and activity of the subject and try to determine if there is anything that is high-risk or is out of the ordinary.
D. Perform a review of the individual’s or entity’s credit history and borrowing record.
88. The compliance officer reads about a large potential fraud case in the morning newspaper. When the officer gets to the bank, the officer uncovers the fact that the potential fraud case involves an important customer of the bank. After doing an internal investigation, the officer determines that there is no suspicious activity in the customer’s accounts. What should the officer do next?
A. The officer should notify the Board of Directors of the nature and results of the internal investigation.
B. The officer should document the nature and results of the internal investigation and keep the documentation in an appropriate file.
C. The officer should file an STR in case that the customer’s accounts could assist law enforcement in its formal criminal investigation.
D. The officer should file an STR in order to justify the time spent on the internal investigation and to not be second guessed by the bank examiners.

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PRACTICE QUESTIONS FOR CERTIFICATION EXAMINATION

89. What are three developments that should cause a financial institution to conduct an internal investigation?
A. When the institution receives a grand jury subpoena with regard to transactions that have occurred within several accounts at the institution.
B. When several employees of the institution alert senior management or the compliance officer that there are some suspicious transactions within an account.
C. When the institution’s auditor identifies various shortcomings in the institution’s AML policies and procedures. D. When a small local business starts engaging in overseas activity involving numerous, unexplained wire transfers.
90. What are three possible red flags indicating suspicious or unusual activity that might warrant an investigation and the filing of an STR?
A. The opening of a new account without a local telephone number or utility bill available.
B. Unusually high monthly balances in comparison to known sources of income.
C. High level of monetary transactions through an account during the course of a month, but low beginning and ending balances.
D. Multiple cash deposits made just under the reporting threshold. 391

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91. What is an advantage of having an outside counsel perform an internal investigation on behalf of the financial institution? A. The outside counsel can bring an impartial and legal perspective to the review.
B. The outside counsel can intimidate the employees into confessing complicity with the wrongdoers.
C. The outside counsel can create an attorney-client privilege not just vis à vis the bank, but also in connection with each employee.
D. The outside counsel will be able to convince the prosecutors not to take any action against the institution. 92. What are the three classic gateways for international cooperation and sharing?
A. Mutual Legal Assistance Treaties (MLATs).
B. Law enforcement use grand jury subpoenas.
C. Exchange of information between Financial
Intelligence Units (FIUs).
D. Exchange of information between supervisory agencies. 392

PRACTICE QUESTIONS FOR CERTIFICATION EXAMINATION

93. What are three of the recommended ways to respond to a law enforcement inquiry?
A. Cooperate with the law enforcement inquiry as much as possible.
B. Respond to all formal requests for information as promptly and thoroughly as possible, unless there is a valid objection that can and should be made.
C. Ensure that all communication, written and oral, is funneled through a centralized place.
D. Guard against unwarranted publicity by resisting all inquiries and requests whenever possible.
94. What three steps should be taken when there is a criminal investigation that is targeting the bank itself?
A. The senior management and the Board of Directors should be notified and kept apprised of the progress of the investigation.
B. The bank should consider retaining experienced outside counsel to assist the bank in responding to the investigation. C. The bank should immediately go to the media and explain why it has done nothing wrong.
D. The relevant employees of the bank should be notified of the existence of the investigation and should be given instructions as to what to do and how to act.

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95. When a financial institution is responding to a formal criminal investigation by a law enforcement agency, what is the primary purpose of requiring information going through a central point within the institution?
A. To be able to ensure that nothing damaging to the financial institution gets released.
B. To ensure that responses are timely and thorough and that privileged material is not inadvertently handed over. C. To ensure that the employees of the institution do not divulge information that would breach the privacy rights of customers.
D. To ensure that there is one person who can adequately and thoroughly apprise the Board of
Directors of the progress of the investigation.
96. When a financial institution is served with a search warrant by a law enforcement agency, what are three things that the employees of the institution should do?
A. They should not release any documents until the institution’s outside counsel arrives on the scene.
B. They should cooperate fully with the law enforcement agents and remain calm and polite.
C. They should try to obtain an inventory of the materials that the law enforcement agents take from the institution. D. They should review the warrant to determine its scope.

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PRACTICE QUESTIONS FOR CERTIFICATION EXAMINATION

97. When should a financial institution consider retaining an experienced outside counsel to assist it?
A. Whenever the institution receives a subpoena from any law enforcement agency.
B. When the institution itself appears to be the target of a criminal investigation.
C. When law enforcement appears to be focused on the accounts of a very good and long-standing customer of the institution.
D. When the banking agencies criticize the adequacy of the institution’s AML monitoring procedures.
98. When should a compliance officer recommend that a financial institution conduct an internal investigation?
Choose three out of four.
A. When there is a suspicion that an employee is conspiring with a long-term customer to launder money through the bank.
B. When a series of customers open separate accounts at different branches, but with the same contact information. C. When the bank’s regulatory agency gives the bank low marks with regard to its AML compliance efforts.
D. When a long term employee decides to take only intermittent vacation days, but not two weeks in a row, per bank policy.

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99. What are three practical tips in interviewing employees with regard to an unusual or suspicious transaction that they have witnessed?
A. One should interview the employees as soon after the occurrence as possible in order to ensure that their memories are fresh.
B. One should try to put the employees at ease during the interview and start with relatively easy, noncontroversial, questions before getting into more sensitive matters.
C. One should use open-ended questions for the employees in order to ensure that the questions do not dictate what the expected answer is.
D. One should control the interview as much as possible in order to attempt to resolve the matter quickly and uncover the wrongdoer.
100. With regard to exchanges of information between FIUs of different countries, what are three controlling principles?
A. That sharing between FIUs be permitted only if the central banks are also a party to the sharing.
B. That the sharing of information should be done as freely as possible on the basis of reciprocity.
C. That the sharing should be on the basis of requests and also spontaneously.
D. That differences in the definition of offenses should not impede the free exchange of information.

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Answers
1. A

21. A, B, C

41. A

61. C

81. A

2. B

22. A, C, D

42. D

62. D

82. B, C

3. A

23. D

43. A

63. D

83. A, B, C

4. B,C,D

24. C

44. D

64. B

84. B

5. A, C

25. C

45. A, B, D

65. A

85. A, C

6. D

26. A

46. A

66. C

86. C

7. C

27. D

47. A

67. D

87. A, B, C

8. B

28. D

48. A

68. B

88. B

9. B

29. C

49. C

69. C

89. A, B, D

10. A, C, D

30. A

50. A

70. A

90. B, C, D

11. A

31. B

51. C

71. C

91. A

12. C

32. C

52. B

72. A

92. A, C, D

13. D

33. A

53. A.

73. C

93. A, B, C

14. A

34. C

54. A

74. A

94. A, B, D

15. C

35. C

55. D.

75. C

95. B

16. A

36. A

56. A.

76. B

96. B, C, D

17. C, D

37. B

57. C

77. A

97. B

18. B

38. A

58. C

78. A, B, C

98. A, B, D

19. B

39. C

59. D

79. B

99. A, B, C

20. B

40. B

60. A

80. B

100. B, C, D

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398

Chapter

Guidance Documents and Reference Materials

T

8

his section cites several CAMS Examination supporting documents and reference materials. It also suggests websites and periodicals that offer additional supporting material.
Several international bodies that are focused on AML/
CFT have published valuable guidance documents and reference materials that are helpful in preparing for the CAMS
Examination.
For study purposes, generally the reference documents have an introduction, putting the material in context and, in some cases, describing the methodology behind their production. For example, in each of FATF’s Risk Based Approach Guidance documents, the purpose of the risk-based approach is explained in the opening chapter. The core material then describes the specific AML risks that are the focus of the guidance and describes the best practices for mitigating those risks. It is this core material that is examined in the CAMS Examination.
Two documents above all others (FATF’s “Forty
Recommendations and Interpretive Notes”) should receive particular study from CAMS candidates. It is highly advised to download the free PDF versions available from the FATF website to keep with your other CAMS study materials.

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Guidance Documents and Reference Materials
By virtue of their importance, some of the documents listed below will inevitably receive more attention in the CAMS Examination, so an understanding of them is crucial to a candidate’s successful completion of the CAMS certification examination. These more important documents are underlined and in bold font for study convenience. (PDF Version: Copy and paste links into web browser to locate referenced material.)

I.

Financial Action Task Force (FATF): http://www.fatf-gafi.org 

The Forty Recommendations and Interpretative
Notes (February 2012) http://www.fatf-gafi.org/topics/fatfrecommendations/ documents/fatfrecommendations2012.html



FATF Public Statement (18 February 2010) http://www.fatf-gafi.org/topics/high-riskandnoncooperativejurisdictions/documents/fatfpublicstatementfebruary2010.html 

Improving Global AML/CFT Compliance: update ongoing process (18 February 2010) http://www.fatf-gafi.org/topics/high-riskandnoncooperativejurisdictions/documents/improvingglobalaml cftcomplianceon-goingprocess-16february2012.html



Guidance for Financial Institutions in Detecting Terrorist
Financing (April 2002) http://www.fatf-gafi.org/media/fatf/documents/ Guidance%20for%20financial%20institutions%20in%20 detecting%20terrorist%20financing.pdf 

Money Laundering and Terrorist Financing in the
Securities Sector (October 2009) http://www.fatf-gafi.org/media/fatf/documents/reports/ ML%20and%20TF%20in%20the%20Securities%20
Sector.pdf

400

Guidance Documents and Reference Materials



Risk-Based Approach Guidance for Casinos http://www.fatf-gafi.org/documents/riskbasedapproach/ name,2131,en.html



Risk-Based Approach Guidance for Legal Professionals http://www.fatf-gafi.org/documents/riskbasedapproach/ 

Risk-Based Approach Guidance for Trust and Company
Service Providers http://www.fatf-gafi.org/documents/riskbasedapproach/ 

Risk-Based Approach Guidance for Real Estate Agents http://www.fatf-gafi.org/documents/riskbasedapproach/ 

Money Laundering & Terrorist Financing Vulnerabilities of Commercial Websites and Internet Payment Systems http://www.fatf-gafi.org/topics/methodsandtrends/ documents/moneylaunderingterroristfinancing vulnerabilitiesofcommercialwebsitesandinternet paymentsystems.html



Money Laundering & Terrorist Financing Risk
Assessment Strategies http://www.fatf-gafi.org/topics/methodsandtrends/ documents/ moneylaunderingterroristfinancing riskassessmentstrategies.html 

Best Practices Paper on Trade Based Money
Laundering
http://www.fatf-gafi.org/topics/fatfrecommendations/ documents/bestpracticesontradebasedmoney laundering.html



Freezing of Terrorist Assets – International Best
Practices (June 2013) http://www.fatf-gafi.org/topics/fatfrecommendations/ documents/bpp-finsanctions-tf-r6.html



Typologies Reports http://search.fatf-gafi.org/search/C.view=default/results? q=Typologies&s=&sa=0&hf=10

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II.

Basel Committee on Banking Supervision: www.bis.org 



Consolidated KYC Risk Management (October 2004) http://www.bis.org/press/p041006.htm 

Due diligence and transparency regarding cover payment messages related to cross-border wire transfers http://www.bis.org/publ/bcbs154.htm



Sharing of financial records between jurisdictions in connection with the fight against terrorist financing
(April 2002) http://www.bis.org/publ/bcbs89.htm 

General Guide to Account Opening and Customer
Identification (February 2003) (Attachment to Basel
Committee publication “Customer due diligence for banks”) http://www.bis.org/publ/bcbs85annex.htm



III.

Customer due diligence for banks (October 2001) www.bis.org/publ/bcbs85.htm Compliance and the Compliance Function in Banks http://www.bis.org/press/p050429.htm FATF-Style Regional Bodies:


Asia Pacific Group on Money Laundering www.apgml.org 

Vulnerabilities of Casinos and Gaming Sector
(March 2009) http://www.fatf-gafi.org/media/fatf/documents/reports/ Vulnerabilities%20of%20Casinos%20and%20
Gaming%20Sector.pdf

402

Guidance Documents and Reference Materials





Terms of Reference (July 2006) http://www.apgml.org/documents/docs/12/APG%20 TERMS%20OF%20REFERENCE%20format%20 updated%20May%202009.pdf 

Caribbean Financial Action Task Force www.cfatf.org 

CFATF 19 Recommendations (Revised October 1999) http://www.antiguagaming.gov.ag/Money%20 Laundering/CFATF%2019.pdf



Typologies Exercises http://www.apgml.org/frameworks/default. aspx?FrameworkID=5



Eastern and Southern African Money Laundering Group www.esaamlg.org/ 

Eurasian Group on Combating Money Laundering and
Financing of Terrorism http://www.eurasiangroup.org/ 

Grupo de Acción Financiera Internacional sobre lavado de dinero (GAFISUD) http://www.gafisud.info/eng-quienes.php 

IV.

APG Yearly Typologies Report (2010) http://www.apgml.org/documents/default. aspx?documentcategoryid=6

Middle East and North Africa Financial Action Task
Force (MENAFATF) www.menafatf.org/ United Nations (UN): http://www.un.org http://www.un.org/en/ 

Model legislation on money laundering and financing of terrorism http://www.unodc.org/unodc/en/money-laundering/ Model-Legislation.html

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V.

UN Security Council Resolutions on Terrorism http://www.un.org/en/sc/ctc/resources/res-sc.html International Money Laundering Information Network: www.imolin.org VI. European Union: http://europa.eu/index_en.htm 

3rd EU Directive 2005/60/EC of the European Parliament and of the Council (October 2005) http://eur-lex.europa.eu/LexUriServ/LexUriServ. do?uri=CELEX:32005L0060:EN:NOT
(N.B. This directive expands on the 2nd EU Directive
2001/97/EC of the European Parliament and of the Council on Prevention of the Use of the Financial System for the
Purpose of Money Laundering (December 2001).)

VII. Council of Europe: www.coe.int
 MONEYVAL Committee http://www.coe.int/t/dghl/monitoring/moneyval/ VIII. Egmont Group of Financial Intelligence Units: www.egmontgroup.org 

Statement of Purpose of the Egmont Group of Financial
Intelligence Units (Revised June 2004) http://www.egmontgroup.org/library/egmont-documents 

Principles for Information Exchange Between Financial
Intelligence Units for Money Laundering and Terrorism
Financing Cases (June 2001) http://www.egmontgroup.org/library/egmont-documents 404

Guidance Documents and Reference Materials



Interpretive Note Concerning the Egmont Definition of a
Financial Intelligence Unit (November 2004) http://www.egmontgroup.org/about/what-is-an-fiu 

100 Cases from the Egmont Group http://www.egmontgroup.org/library/cases IX. Wolfsberg Group: www.wolfsberg-principles.com


Wolfsberg AML Principles for Correspondent
Banking (November 2002) www.wolfsberg-principles.com/corresp-banking.html 

Wolfsberg Statement on the Suppression of the
Financing of Terrorism (January 2002) www.wolfsberg-principles.com/financing-terrorism.html 

Wolfsberg AML Principles on Private Banking
(Revised Version May 2002) www.wolfsberg-principles.com/privat-banking.html 

Wolfsberg Statement on AML Screening, Monitoring and Searching 2009 http://www.wolfsberg-principles.com/pdf/Wolfsberg_ Monitoring_Screening_Searching_Paper-Nov_9_2009. pdf 

Wolfsberg AML Guidance on Credit/Charge Card
Issuing and Merchant Acquiring Activities http://www.wolfsberg-principles.com/credit-merchant. html

Other Websites with Helpful AML Material
CAMS qualified professionals will routinely consult the websites of their “home” regulators. However, there are other websites that contain helpful AML materials.
Association of Certified Anti-Money Laundering Specialists www.ACAMS.org 405

Study Guide for the CAMS Certification Examination

Australian Transaction Reports and Analysis Centre (AUSTRAC) www.austrac.gov.au Financial Transactions and Reports Analysis Centre of Canada
(FINTRAC)
www.fintrac.gc.ca
International Monetary Fund www.imf.org/external/np/exr/facts/aml.htm UK Financial Services Authority http://webarchive.nationalarchives.gov.uk/*/http:/www.fsa.gov.uk (N.B. The FSA has now become two separate regulatory authorities. The Financial Conduct Authority and the Prudential
Regulation Authority. Archived versions of the FSA site are available at the National Archives.)
UK Financial Conduct Authority http://www.fca.org.uk/ Bank of England Prudential Regulatory Authority http://www.bankofengland.co.uk/pra/Pages/default.aspx U.S. Financial Crimes Enforcement Network http://www.fincen.gov/ U.S. Office of Foreign Assets Control (OFAC) http://www.treasury.gov/about/organizational-structure/offices/ Pages/Office-of-Foreign-Assets-Control.aspx
World Bank www.worldbank.org 406

Guidance Documents and Reference Materials

AML-Related Periodicals
ACAMS Today:
A quarterly magazine for ACAMS members providing stories from the AML workplace and current global issues and developments on money laundering. http://acamstoday.org/wordpress/ ACAMS MoneyLaundering.com
A monthly newsletter focusing on current global, legal, regulatory and enforcement issues and other money laundering related news, analysis and guidance. www.moneylaundering.com Money Laundering Bulletin
A U.K-based newsletter published 10 times per year addressing issues on money laundering practices, policing efforts and the antilaundering systems of various industries. http://www.moneylaunderingbulletin.com/ ABA Bank Compliance
The American Bankers Association’s monthly magazine dealing with legal, regulatory and compliance issues and information. http://www.aba.com/Products/bankcompliance/Pages/default.aspx 407

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80 Southwest 8th Street, Suite 2350
Miami, Florida 33130 USA
Telephones: +1.305.373.0020 or
+1.866.459.CAMS in the united states
Fax: +1.305.373.7788
Email: info@ACAMS.org
ACAMS.org
ACAMS.org/español

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