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BSA, AML, SARs, andRed Flags Training

Harlow T. Spaan, N. Jeffrey Sorg

Approval of this course by state agencies does not constitute an endorsement of the views or opinions which are expressedby the course sponsor, instructor, authors or lecturers. While this publication is designed to be accurate information aboutthe subject matter it covers, it is sold with the understanding that the distributor, author, and publisher are not engaged inrendering legal, accounting or other professional advice. If such advice or other expert assistance is required, the services of acompetent professional should be sought. The recipient is cautioned to check with their managing supervisor before acting onany suggestion or recommendation, or before using any sample form contained herein.

C©2007-2015 by Sorg and Spaan, LLC, ALL RIGHTS RESERVED. Duplication or transmission is not permitted. United Statesof America and foreign copyright laws protect this publication. The text of this publication, or any part thereof, may not bereproduced in any manner whatsoever without written permission from the copyright holders. Permission is granted to printthe material on this page for personal use only.

VERSION 2015-12-23

I

CONTENTS

Anti-Money Laundering Training for Today: Where Are We Now? . . . . . . . . . . . . . . . . . . . 1Course Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Anti-Money Laundering Review: Money Laundering Defined . . . . . . . . . . . . . . . . . . . . . . . . 3So How Does Money Laundering Happen? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

1. Placement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42. Layering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43. Integration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

How to Prevent Money Laundering . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Customer Identification Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Verifying Customer Documents and Identities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Suspicious Activity Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Filling Out the Preliminary SAR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Frequently Asked Questions About SARs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

What to Expect From a BSA/AML Examination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Red Flags . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11FinCEN Red Flags List: Red Flags for Suspicious Activity Related to Mortgage Loan Fraud . . 11FFIEC Red Flags List: Potentially Suspicious Activity That May Indicate Money Laundering 13Fannie Mae Red Flags List: Resources to Help You Combat Mortgage Fraud . . . . . . . . . . . . . . . 14Responding to Red Flags . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

What’s New in AML Procedures? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Electronic Filing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Advisory on Company Compliance Culture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

1. Leadership Should Be Engaged . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232. Compliance Should Not Be Compromised By Revenue Interests . . . . . . . . . . . . . . . . . . . 233. Information Should Be Shared Throughout the Organization . . . . . . . . . . . . . . . . . . . . . 244. Leadership Should Provide Adequate Human and Technological Resources . . . . . . . . . . 245. The Program Should be Effective and Tested By an Independent and Competent Party 256. Leadership and Staff Should Understand How Their BSA Reports are Used . . . . . . . . . 25

AML Deficient Jurisdictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26OFAC and Specially Designated Nationals List . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27High-Intensity Crime Areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28LexisNexis Annual Mortgage Fraud Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

Case Study: What Would You Do? (Scenario 1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32



Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Anti-Money Laundering Trainingfor Today: Where Are We Now?

This course is intended to inform you of the compliance requirements of the Bank Secrecy Act in regardsto Anti-Money Laundering and the reporting of Suspicious Activity. It is designed to fulfill the trainingrequirements of the Bank Secrecy Act (BSA) 31 CFR 1010 and 1029.

This course is delivered online and covers written text, case studies, and testing. Students must complete alltraining content and pass a final test of randomized questions on the course content before being creditedfor completion of the course and being issued a certificate. This course is not timed, but should takeapproximately 120 minutes to complete.

Course Objectives

• Identify the compliance requirements of the Bank Secrecy Act in regards to Anti-Money Laundering andthe reporting of Suspicious Activity.

• Identify red flags that may indicate potential money laundering or fraud.

• Properly describe the requirements to submit a Preliminary Suspicious Activity Report, SAR, and otherreporting requirements.

• Learn about recent developments and guidance from government agencies and third-party reports.

• Analyze case studies based on real-life fraud and money laundering scenarios to mitigate fraud and moneylaundering risk.

Background

On April 16, 2012, the Financial Crimes Enforcement Network (FinCEN) officially made effective a setof guidelines pertaining to a final rule that defined non-bank residential mortgage lenders and originatorsas loan or finance companies. As a result, FinCEN required nonbank mortgage lenders and originatorsto establish an Anti-Money Laundering (AML) program and file Suspicious Activity Reports (SARs) forcertain loan transactions under the Bank Secrecy Act. The compliance date took effect August 13, 2012.The compliance requirements had been in place for financial institutions for some time, and FinCEN hasissued studies and analyses demonstrating the efficacy of SARs to help discover fraud and underscored thebenefits of the regulations to financial institutions by mitigating risk.

Why is this training needed? FinCEN has stated that they do not agree that the registration and trainingrequirements under the SAFE Act are sufficient to address all of the concerns and accomplish all of the goalsrelated to AML and SAR programs. They have also deemed not to make an exception for RMLOs with lessthan an arbitrary number or employees or net worth, as it would perpetuate the substantial gap in SARreporting for mortgage finance companies.

Because this requirement has been effect for several years, the chancesare very good that your company already has an AML program, witha set of policies and procedures in place and a training program de-signed to reinforce them. The intent of this course is not to start froma zero-knowledge perspective, but is rather to review the compliancerequirements that have already been established in prior training, andreinforce your knowledge of your requirements through case studiesbased on recent enforcement action, testing, and critical thinking exer-cises. This training will also review the most common mortgage fraudred flags, and will address new developments in fraud, and money laun-dering such as new guidance from FinCEN, updated risk areas, newdevelopments in the LexisNexis report, and recent enforcement actions.

This program should be approved by company management, as a com-mitment to compliance is a major responsibility to prevent money laundering, terrorist financing, and fraud-ulent activities. All employees should adhere to the requirements described in this training. Because ofthe seriousness of the subject, breaches of the AML program may result in monetary fines to the companyand other enforcement actions, and may result in disciplinary action up to and including termination ofemployees involved in a violation. Employees are required to report violations or suspected violations, aswell as suspicious activities outlined in this program. Just like you see at the airport: "If you see something,say something."

Anti-Money Laundering Review:Money Laundering Defined

Acronyms to know:

• FinCEN: Financial Crimes Enforcement Network

• OFAC: Office of Foreign Assets Control

• SDN: Specially Designated Nationals

• BSA: Bank Secrecy Act

• AML: Anti-Money Laundering

• SAR: Suspicious Activity Report

Money laundering is the concealment of the origins of illegally obtained money by:

• Making them appear to be from a legal source

• Hiding them

• Placing them beyond the reach of the government

• Conducting a series of transactions, transferring the proceeds to a BSA country, and returning the fundsto the original source.

The intent behind these actions is to disguise the source of the money, change its form, or move the fundsto a more inconspicuous location.

Anti-Money Laundering Review: Money Laundering Defined

4 So How Does Money Laundering Happen?

So How Does Money Laundering Happen?Money laundering is an act that seeks to disguise the source of the money, change its form, or move thefunds to a more inconspicuous location. How do criminals seek to do this? There are three basic stages ofmoney laundering:

1. PlacementFirst, illegally obtained money is introduced into financial or non-financial institutions. This relieves the criminal of holding large amountsof cash and places that money into a legitimate financial system. Thisis the most likely phase where launderers can be caught. However, dueto safeguards against large deposits, criminals are likely to disguisethese placements in a few ways, including down payments on one ormore properties.

2. LayeringThe second stage, also known as structuring, is where criminals try todisguise the source of the money through complex financial transac-tions, which frequently entails international movement of the funds. For the mortgage loan employee, beaware of individuals obtaining a home equity loan shortly after making a large down payment on a propertyand wiring out proceeds of the loan. Also, take a closer look at any foreign accounts used for large pay-ments or to qualify for a mortgage loan. Launderers will seek to exploit loopholes or delays in internationaljurisdiction.

3. IntegrationAfter introducing funds into a financial institution and then thoroughly disguising those funds via layer-ing/structuring, the criminal(s) will seek to cash out their investment. It is in this stage where mortgageprofessionals must be especially vigilant, especially where property flips are concerned. Flipping a propertyis where the purchaser buys a property, makes a few improvements, and then seeks to capitalize on thoseimprovements or more favorable market conditions to turn a profit on the property. Criminals seeking tocash out on their laundering investment may not be looking to turn a profit and may instead just be lookingto make a down payment on a property, and then quickly selling the property. Just like gold, art, or anynumber of other high-value possessions, property must be considered as an asset that launderers may thenlater turn around and liquidate very quickly, or after suspicion has waned.


How to Prevent Money Laundering 5

How to Prevent Money LaunderingTo prevent money laundering, loan or finance companies must implement a program designed to preventexploitation of the company for the purposes of laundering money. This program should consist of four maincomponents:

1. Policies and procedures based on the company’s products and services. A risk assessment should beconducted by qualified personnel to identify the company’s weaknesses and strengths and tailor companypolicy around the company’s unique profile.

2. Designation of a compliance officer. This individual is responsible for disseminating the company’swritten policy, administering training, and ensuring that independent testing is conducted periodically.

3. Ongoing training of any and all personnel in a position to detect fraud. The compliance officer shouldconduct a review of employee and department activities to determine where along the line fraud couldbe detected, and ensure that personnel are appropriately trained to catch suspicious activities.

4. Independent testing to monitor and maintain an effective program that fulfills existing requirementsand is proactive to catch potential violations.

In addition to the four main components (a compliance officer, policies, training, and periodic independentassessments), there are two more very important tools used to combat money laundering and mortgage fraud.These are the Customer Identification Program (CIP), and the Suspicious Activity Report (SAR).

Customer Identification Program

The Customer Identification Program (CIP) is an important tool to combat mortgage fraud and terroristfinancing, and institutions must maintain an effective CIP to prevent these actions. The Bank Secrecy Actrequires financial institutions to verify the identity of new customers. Confirming the identity of the customeris the most important aspect of establishing an account or relationship with the customer.

Remember: The regulations (31 CFR § 1020.100) defines an account as a formal arrangement es-tablished to provide or engage in services, dealings, or other financial transactions.

Forming reasonable belief that the customer is who they say they are can be confirmed by providing thefollowing information:

• Name

• Date and place of birth

• Residence address and mailing address if different

The following items may also be used to verify identity:

• If a U.S. person, a Social Security Number is sufficient


6 Verifying Customer Documents and Identities

• If not a U.S. person, provide at least one of the following:

• U.S. taxpayer identification number

• Passport number and country of issuance, and alien identification card number

• Number and country of issuance of any other government-issued document evidencing residence andbearing a photograph or similar safeguard

Additionally, the following is necessary to confirm individual identity:

• Official issued identification number (Social Security Number, Employee Identification Number, or Indi-vidual Taxpayer Identification Number)

• Current Armed Forces identification (photograph required)

• Valid passport (photograph required)

• Current Alien Identification (current photograph required)

• Valid Employee Identification number

Note: The identity of existing customers does not need to be verified if the company previouslyverified the customer’s identity consistent with the regulation and continues to have a reasonablebelief that it knows the identity of the customer.

Verifying Customer Documents and IdentitiesThe regulation enacting the CIP requirement does not require financial institutions to verify the authenticityof a document provided for identity verification, so there’s no need to take classes on how to spot a fakeID! However, if the document shows some obvious form of fraud, this should impact whether the financialinstitution has a reasonable belief that it knows the customer’s identity.

If the customer is unable to provide an identification document that iscurrent or has a photo, or if personnel is unfamiliar with documentationprovided, or if there are other circumstances that risk preventing iden-tity verification, certain non-documentary methods of verifying identitymay be used. These include contacting the customer; verifying identitythrough comparing information provided by the customer to informa-tion from a Consumer Reporting Agency, public database, or employer;and checking references with financial institutions.

If suspicious information is found during the course of the CIP process, it should be reported in a preliminarySuspicious Activity Report (SAR) to the BSA/AML compliance officer, and may be filed to FinCEN in theform of a SAR.

Customers must be notified that the financial institution is requesting information to verify their identities.This notice must be clearly and conspicuously posted in customer access areas of the place of business, and


Suspicious Activity Reports 7

on the financial institution’s website, if applicable. This notice must also be included with disclosures priorto a loan application being processed:

Important Information about Procedures for Opening a New Account

To help the government fight the funding of terrorism and money laundering activities, federallaw requires all financial institutions to obtain, verify, and record information that identifies eachperson and/or entity who opens an account. (e.g., establishes a formal relationship by means ofa loan application)

What this means to you: When you open an account, we will ask for your name, address, dateof birth (for individuals), and other information that will allow us to identify you. We may alsoask to see your driver’s license or other identifying documents.

Suspicious Activity ReportsThe regulation that implements suspicious activity reporting requires financial institutions to report fraud-ulent attempts to obtain a mortgage loan, or to launder money from other crimes by purchasing residentialreal estate. Suspicious activity reports filed to FinCEN are handled by the BSA/AML compliance officer,so the suspicious activity report that the vast majority of mortgage company employees will encounter isactually the preliminary SAR. For more information on how to file the actual SAR with FinCEN, we’ll coverthat later in this course in the new E-Filing section.

Filling Out the Preliminary SARSo you’ve encountered suspicious activity, and now it is time to inform the BSA compliance officer. Thepreliminary suspicious activity report is the first step to getting a SAR filed, and the next section will reviewhow to complete it.

• First, review all of the red flags that tipped you off to suspicious or fraudulent activity. Be as inclusive aspossible; no detail is too small. Review paperwork provided to you in the application, credit, and closingpackages, with special attention paid to the application. The majority of fraud occurs on the application.

• Second, fill out your company’s preliminary SAR form. Your company likely already has one, but if youdon’t know how to access it, ask your BSA compliance officer. If you are the BSA compliance officerand you don’t know if you have a preliminary SAR form, you can use this sample template 1 , butbe sure to check that it adheres to your company’s pre-existing policies and procedures and customize itusing your company’s information. After filling out the preliminary SAR, submit it to your BSA/AMLcompliance officer in a fashion that is consistent with company policies and procedures, whether that ishand-delivery, mail, email, or via an electronic document system.

• Finally, you’ll need to proceed with the loan itself, which means you’ll need to make a credit decisionbased on the information provided to you. Complete the loan to close. If you have any concerns, elevatethe loan to quality control for a recommendation to deny the loan or proceed to closing.

http://r.onlineed.com/2374.pdf1

http://r.onlineed.com/2374.pdf




8 Suspicious Activity Reports

Frequently Asked Questions About SARsQuestion: So, how does one know to file a suspicious activity report?

Answer: Ask yourself the following questions:

1. Does this transaction involve or do you suspect it involves funds from illegal activity or is intended todisguise funds from illegal activity?

2. Is this transaction designed to evade the requirements of the Bank Secrecy Act?

3. Does this transaction lack any apparent lawful purpose? Is there a reasonable explanation for thistransaction?

4. Does this loan facilitate criminal activity?

If you answered yes to any of those questions, or can’t say "no" with absolute certainty, it is time to file apreliminary SAR.

Question: How long do I have to file a SAR?

Answer: A loan or finance company has 30 days to file a report after becoming aware of a suspicioustransaction. If you’re filling out a preliminary SAR, do this as soon as possible so that the BSA complianceofficer has time to process it and submit the official SAR to FinCEN.

Question: I’m not the BSA/AML compliance officer. Do I still have to file a SAR?

Answer: Yes, and no. The BSA compliance officer should be responsible for filing a SAR with FinCEN andcontacting law enforcement in situations that require urgent attention (such as ongoing money laundering).As an employee of a financial institution (not the AML compliance officer), you are responsible for filing aninitial report and giving the BSA compliance officer as much information as possible.

Question: I gave my initial report to the AML compliance officer. Am I part of an investigation now?

Answer: No, and as a matter of fact, you should not have any expectation to even be "kept in the loop" bythe BSA compliance officer. Information about a SAR or any investigation is confidential. If you have newinformation, however, be sure to inform the BSA compliance officer.

Question: This will make great water cooler talk. Can I tell my coworkers about the SAR I just filed?

Answer: Absolutely not. SARs are confidential, and should only be shared with company personnel thathave a need to know. Sharing information from the SAR, or even that one has been filed at all, could notifyor tip-off potential defrauders that the activity has been reported and impede a potential investigation.


What to Expect From a BSA/AML Examination 9

What to Expect From a BSA/AML Examination

First and foremost, examiners will look to see if you have the four main components or pillars of a BSA/AMLcompliance program. They will also look to see if there is consistent monitoring for suspicious activity,that SAR functions reflect geographical risk and customer base, that money laundering and fraud is beingconsidered when planning new products and services, and that effective independent testing is taking place.

Examiners may seek to "map out" the process the company fol-lows to monitor for, identify, research, and report suspicious ac-tivities. They will then likely follow an alert through the entireprocess. To get inside the mind of an investigator, go throughthe checklist below and ask yourself the following questions:

How Does the Company Identify Unusual Activity?

• What are the lines of communication for referral of unusualactivity to the appropriate personnel?

• Which personnel are responsible for identifying, researching, and reporting suspicious activities?

• What systems are in place to monitor and identify suspicious activity?

How Does Transaction Monitoring Function?

• Do transaction monitoring reports capture all areas (appropriate to the products and services the companyoffers) that pose money laundering and terrorist financing risks?

• Are monitoring systems generating accurate reports at a reasonable frequency?

How Are Accounts Monitored For Unusual Activity?

• What types of customers, products, and services are included within monitoring systems?

• Are system’s filtering criteria reasonable?

• Has system programming been independently validated or is it in-house?

• Is access system monitoring appropriately limited with sufficient oversight?

How Are Alerts Managed?

• Does the company’s policies, procedures, and processes ensure timely generation of, review of, andresponse to reports of unusual activities?

• Do policies and procedures incorporate appropriate research of unusual activity?

• What are the company’s lines of communication from all personnel to the appropriate individual ordepartment responsible for evaluating unusual or suspicious activity?

• Does the company have enough staff dedicated to review suspicious activity, and are they appropriatelytrained? What is their experience level, and do they have the tools and resources to do their jobseffectively?


10 What to Expect From a BSA/AML Examination

• Does the SAR decision making process incorporate customer due diligence and enhanced due diligenceinformation?

How are SAR-related Decisions Made?

• Does the company AML policy include procedures for documenting decisions not to file a SAR? Whatabout escalating issues with SAR filings involving repeat offenders or the same accounts? Does thecompany consider closing accounts due to continuous suspicious activity?

How Are SARs Completed and Filed?

• Do company policies and procedures provide for completing, filing, and retaining SARs?

• Are SARs reported to board of directors, senior management, or other need-to-know personnel?

• Are SARs shared with corporate offices or controlling companies, as necessary?

Are Transactions Tested, and How?

• Do account monitoring systems have any glaring weaknesses?

• Based on the company’s products, services, customers, and geographies, what is the company’s overallAML risk profile?

• What was the quality and extent of the last independent assessment of the AML program?

• What were the findings of any previous examinations?

• Has the company recently undergone any significant organizational changes?

Asking yourself these questions can help prepare you for what you’re likely to encounter in an investigation ofyour company’s BSA/AML program. Additionally, be prepared for examiners to review loan files and cross-reference information gathered in the Customer Identification Program (CIP) and Customer Due Diligence(CDD) documentation. Accounts will be reviewed for unusual activity, and if found, will be checked againstactivity typical for the customer based on occupation, source of funds, etc. If the examiner finds unusualactivity, they will check your suspicious activity monitoring systems to see if they detected the unusualactivity, and will seek to identify any deficiencies such as inappropriate filters, insufficient risk assessment, orinadequate decision making. Examiners will review management decisions to determine whether decisionsto file a SAR are reasonable, whether documentation is adequate, and whether the decision process wascompleted and SARs filed in a timely manner.

Remember: SARs must be filed within 30 days of the initial detection of suspicious activity.

SARs will be sampled from the BSA reporting database or the company’s internal SAR records and willbe reviewed for accurate information and thorough narratives. This examination will be used to form aconclusion about the efficacy of the company’s policies and procedures to meet regulatory requirements, sohaving a good grasp of what to expect is helpful if you’re concerned about an upcoming examination, or ifyou just want to preempt the possibility of being audited.

Red Flags

Red flags are a guide to a possible problem, but they do not unquestionably constitute, without review, asuspicious activity or a legal violation. While a single red flag in and of itself may not indicate fraud ormoney laundering, the presence of multiple red flags should alert the employee of potential illegal activity,and may necessitate the filing of a preliminary suspicious activity report.

Examples of red flags have been given by various governmentagencies, including FinCEN, Fannie Mae, and the Federal Fi-nancial Institutions Examination Council (FFIEC). The follow-ing lists are not all-inclusive in that there may be other red flagsthat signal potentially suspicious activity, but these lists shouldprovide some aid to financial institutions. You can view theentire lists given by each agency online by clicking the linksbelow at the start of each list, but we’ve gone ahead and in-cluded the red flags that specifically concern non-depositoryinstitutions such as mortgage loan origination businesses, andremoved the red flags that pertain to depository institutionslike banks. Some red flags may appear in more than one list.

It is not important to know which list each red flag is mentioned,but it is important to at least be familiar with each potentialred flag.

FinCEN Red Flags List: Red Flags for SuspiciousActivity Related to Mortgage Loan Fraud

From August 16, 2012 Advisory #FIN-2012-A009 2

This list consolidates information from previously issued FinCEN reports and contains common red flags formortgage loan fraud. FinCEN notes that no single red flag is definitive proof of illegal activity, and red flagsshould be viewed in context of other indicators that may demonstrate a need for enhanced due diligence ora preliminary SAR.

https://www.fincen.gov/statutes_regs/guidance/html/FIN-2012-A009.html2

https://www.fincen.gov/statutes_regs/guidance/html/FIN-2012-A009.html






Red Flags

12 FinCEN Red Flags List: Red Flags for Suspicious Activity Related to MortgageLoan Fraud

• Borrower/buyer submits invalid documents in order to cancel his or her mortgage obligations or to payoff his or her loan balance(s).

• Same notary public and/or other "authorized representative" preparing, signing, and sending packages ofnearly identical debt elimination documents for multiple borrowers with outstanding mortgage balances.

• Same notary public and/or other "authorized representative" working with and/or receiving paymentsfrom unusually large numbers of borrowers.

• Falsification of certified checks, cashier’s checks, or "non-cash item checks" drawn against a borrower/buyer’saccount, rather than from the account of a financial institution.

• Borrower/buyer applies for a loan for a "primary residence " but does not reside in the new primaryresidence as indicated on the loan application; other individuals occupy the borrower/buyer’s new primaryresidence indicating the property is being used as a secondary residence or income-generating property.

• Borrower/buyer of a younger age purchases his or her "primary residence" in a senior citizen residentialdevelopment.

• Borrower/buyer requests refinancing for "primary residence" when public and personal documents indicatethat the borrower/buyer resides somewhere other than the address on the loan application.

• Language included in a short sale contract indicates the property could be resold promptly. This possiblyillegal "flipping" may occur regardless of whether the Federal Housing Administration (FHA) has re-enacted or waived its arms-length resale regulations to FHA buyers.

• Low appraisal values, non-arms length relationships between short sale buyers and sellers, or previousfraudulent sale attempts in short-sale transactions,.

• Agent of the buyer and/or seller in mortgage transaction is unlicensed.

• Past misrepresentations made by borrower/buyer in attempts to secure funding, property, refinance,and/or shorts sales.

• Improper/incomplete file documentation, including borrower/buyer reluctance to provide more informa-tion and/or unfulfilled promises to provide more information.

• Apparent resubmission of rejected loan application with key borrower/buyer details changed or modifiedfrom individual borrower to company/corporation. This activity may identify the same person attemptingto secure a loan fraudulently through a straw-borrower or non-existent person.

• Borrower/buyer attempts to structure currency deposits/withdrawals, or otherwise to hide or disguisethe true value of assets, in order to qualify for loan modification programs intended for those homeownersin financial distress.

• Request from third party affiliates on behalf of distressed homeowners to pay fees in advance of thehomeowner receiving mortgage counseling, foreclosure avoidance, a loan modification, or other relatedservices.

• Third party solicitation of distressed homeowners for purported mortgage counseling, foreclosure avoid-ance, loan modification, or other related services. These third parties may also claim to be associatedwith legitimate mortgage lenders, the U.S. government, or a U.S. government program.

Red Flags

FFIEC Red Flags List: Potentially Suspicious Activity That May Indicate MoneyLaundering 13

FFIEC Red Flags List: Potentially Suspicious ActivityThat May Indicate Money Laundering

From FFIEC BSA AML Examination Manual, Appendix F 3

The following examples are red flags that may warrant additional scrutiny. The FFIEC notes that the merepresence of a red flag is not by itself evidence of criminal activity, just that closer scrutiny may be warrantedto help determine whether the activity is suspicious or has no legal purpose.

Customers Provide Insufficient or Suspicious Information

• A customer uses unusual or suspicious identification documents that cannot be readily verified.

• A customer provides an individual tax identification number after having previously used a Social Securitynumber

• A customer uses different tax identification numbers with variations of his or her name.

• A customer’s home or business telephone is disconnected.

• A customer makes frequent or large loan payments and has no record of past or present employmentexperience. (This is more applicable to servicers, but the information may appear in the credit report oron the loan application)

Customers Efforts to Avoid Reporting or Record Keeping Requirement

• A customer tries to persuade a company employee not to file required reports or maintain requiredrecords.

• A customer is reluctant to provide information needed to complete a loan application or to have thereport filed, or to proceed with a transaction after being informed that the report must be filed.

• A customer asks to be exempted from reporting or record keeping requirements.

Lending Activity

• Loans secured by pledged assets held by third parties unrelated to the borrower.

• Loans are made for or are paid on behalf of, a third party with no reasonable explanation.

• Large cash down payments with no reasonable explanation or explainable source of funds.

Employees (These would be red flags to look for regarding the company’s employees)

• An employee exhibits a lavish lifestyle that cannot be supported by his or her salary.

• Employees fail to conform to recognized policies, procedures, and processes.

Items from Other Sources

http://www.ffiec.gov/bsa_aml_infobase/pages_manual/OLM_106.htm3

http://www.ffiec.gov/bsa_aml_infobase/pages_manual/OLM_106.htm








Red Flags

14 Fannie Mae Red Flags List: Resources to Help You Combat Mortgage Fraud

• Borrower makes timely payments and seeks to make their transactions as unremarkable as possible tointegrate his illicit funds (This is more applicable to servicers)

• Using nominees or straw buyers to secure numerous mortgages on various residential properties, therebycreating a means for the conversion of illicit cash into real property; projecting an appearance of manyunrelated mortgages paid on a regular or expedited basis.

• Fraudulent documentation at the initiation of the loan, including among other things, false statements,omissions straw buyers, false appraisals, identity theft.

• Invest the proceeds of illegal activity, including real estate, through the direct purchase or in paying downloans shortly after they have been obtained.

• Quit-claim deeds in the chain of title

• Use of Powers of Attorney

• Frequent ownership changes in a short period of time (possible flipping)

• Sales between family members and business partners

• Employer is a large company but W-2 and 1099 are not computer generated

Fannie Mae Red Flags List: Resources to Help YouCombat Mortgage Fraud

From January 2013 Mortgage Fraud Program Advisory 4

Fannie Mae notes that inconsistencies in the loan file are often a tip-off that the file contains misrepresen-tations. The presence of one or more red flags in a file does not necessarily mean that there was fraudulentintent. However, several red flags in a file may signal a fraudulent transaction.

High-level Red Flags

• Social Security number discrepancies within the loan file

• Address discrepancies within the loan file

• Verifications addressed to a specific party’s attention

• Verifications completed on the same day they were ordered

• Verifications completed on weekend or holiday

• Documentation includes deletions, correction fluid, or other alteration

• Numbers on the documentation appear to be squeezed due to alteration

https://www.fanniemae.com/content/tool/common-red-flags.pdf4

https://www.fanniemae.com/content/tool/common-red-flags.pdf







Red Flags

Fannie Mae Red Flags List: Resources to Help You Combat Mortgage Fraud 15

• Different handwriting or type styles within a document

• Excessive number of Automatic Underwriting System (AUS) submissions

Mortgage Application

• Significant or contradictory changes from handwritten to typed application

• Unsigned or undated application

• Employer’s address shown only as a post office box

• Loan purpose is cash-out refinance on a recently acquired property

• Buyer currently resides in subject property

• Same telephone number for applicant and employer

• Extreme payment shock may signal straw buyer and/or inflated income

• Purchaser of investment property doesn’t own a residence

Sales Contract

• Non arms-length transaction: seller is real estate broker, relative, employer, etc.

• Seller is not currently reflected on title

• Purchaser is not the applicant

• Purchaser(s) deleted from or added to the sales contract

• No real estate agent is involved

• Power of Attorney is used

• Second mortgage is indicated, but not disclosed on the application

• Earnest money deposit equals the entire down payment or is an odd amount

• Multiple deposit checks have inconsistent dates, i.e., #303 dated 10/1, #299 dated 11/1

• Name and/or address on earnest money deposit check differs from the buyer’s

• Real estate commission is excessive

• Contract dated after credit documents

• Contract is "boiler plate" with limited fill-in-the-blank terms, not reflective of a true negotiation

Credit Report

• No credit history or "thin" credit files

• Invalid Social Security number or variance from that on other documents

• Duplicate Social Security number or additional user of Social Security number

Red Flags


• Recently issued Social Security number

• Liabilities shown on credit report that are not on mortgage application

• Length of established credit is not consistent with applicant’s age

• Credit patterns are inconsistent with income & lifestyle

• All trade lines opened at the same time

• Authorized user accounts have superior payment histories

• Significant differences between original and new or supplemental credit reports

• Also Known As (AKA) or Doing Business As (DBA) indicated

• Numerous recent inquiries

• Missing pages and/or supplements

• Employment discrepancies

• Social security alerts

Employment and Income Documentation

• Applicant’s job title is generic, e.g., "manager", "Vice President"

• Employer’s address is a P O Box, the property address, or applicant’s current residence

• Applicant’s residence is (will be) in location remote from employer

• Employer name is similar to a party to the transaction, i.e., utilizes applicant’s initials

• Employer unable to be contacted

• Year-to-date or past-year earnings are even dollar amounts

• Withholding not calculated correctly (check FICA tables)

• Withholding totals don’t foot from pay advice to pay advice

• Pay period dates overlap and/or don’t correspond with other documentation

• Abnormalities in pay check numbering

• Handwritten VOE, pay stubs, or W-2 forms

• W-2 form presented is not the employee’s copy

• Employer’s identification number has a format other than 12-3456789

• Income appears to be out of line with type of employment

• Self-employed applicant does not make estimated tax payments

• Real estate taxes or mortgage interest claimed, but no ownership of real property disclosed

Red Flags


• Tax returns not signed or dated

• High income applicant without paid preparer

• Paid preparer signs taxpayer’s copy of tax returns

• Interest and dividend income don’t substantiate assets

• Applicant reports substantial income but has no cash in bank

• Large increase in housing expense

• Reasonableness test: income appears to be out of line with type of employment, applicant age, educationand / or lifestyle

Asset Documentation

• Down payment source is other than deposits (gift, sale of personal property)

• Applicant’s salary doesn’t support savings on deposit

• Applicant doesn’t utilize traditional banking institutions

• Pattern of loyalty to financial institutions other than the subject lender

• Balances are greater than the FDIC, SIPC insured limits

• High asset applicant’s investments are not diversified

• Excessive balance maintained in checking account

• Dates of bank statements are unusual or out of sequence

• Recently deposited funds without a plausible paper-trail or explanation

• Bank account ownership includes unknown parties

• Balances verified as even dollar amounts

• Two-month average balance is equal to present balance

• Source of earnest money is not apparent

• Earnest money isn’t reflected in account withdrawals

• Earnest money is from a bank or account with no relationship to the applicant

• Bank statements do not reflect deposits consistent with income

• Reasonableness Test: Assets appear to be out of line with type of employment, applicant age, educationand / or lifestyle

Appraisal

• Appraisal ordered by a party to the transaction

• Occupant shown to be tenant or unknown

Red Flags


• Owner is someone other than seller shown on sales contract

• Appraisal indicates transaction is a refinance, but other documentation reflects a purchase

• Purchase price is substantially higher than predominant market value

• Purchase price is substantially lower than predominant market value

• Subject property obsolescence is minimized

• Large positive adjustments made to comparable properties

• Comparable sales prices don’t bracket the subject’s value

• Comparable sales are not similar in style, size, and amenity

• Dated sales used as comparable sales

• New construction / Condo conversion: All comparable sales located in subject development

• Comparable properties are a significant distance from the subject, or located across neighborhood bound-aries (main arteries, waterways, etc.)

• Map scale distorts distance of comparable properties

• "For Rent" sign appears in photographs

• Photos appear to be taken from an awkward or unusual standpoint

• Address reflected in photos does not match property address

• Weather conditions in photos inconsistent with average marketing time, date of appraisal

• Appraisal dated before sales contract

• Significant appreciation in short period of time

• Prior sales are listed for subject and/or comparables without adequate explanation

Title

• Prepared for and/or mailed to a party other than the lender

• Evidence of financial strain may indicate a compromised sale transaction (flip, foreclosure rescue, strawbuyer refinance, etc.), or might suggest undisclosed credit problems in the case of a refinance

• Income tax, judgments or similar liens recorded

• Delinquent property taxes

• Notice of default or Modification agreement recorded

• Seller not on title

• Seller owned property for short time

• Buyer has pre-existing financial interest in the property

Red Flags


• Date and amount of existing encumbrances don’t make sense

• Chain of title includes an interested party such as real estate licensee or appraiser

• Buyer and Seller have similar names (property flips often utilize family members as straw buyers)

Owner Occupancy

• Purchase Transactions:

• Real estate listed on application, yet applicant is a renter

• Applicant intends to lease current residence

• Significant or unrealistic commute distance

• Applicant is downgrading from a larger or more expensive house

• Sales Contract is subject to an existing lease

• Occupancy affidavits reflect applicant does NOT intend to occupy

• New homeowner’s insurance is a rental policy (declarations page)

Refinance Transactions

• Rental property listed on application is more expensive than subject property

• Different mailing address on applicant’s bank statements, pay advices, etc.

• Different address reported on Credit Report

• Significant or unrealistic commute distance

• Appraisal reflects vacant or tenant occupancy

• Occupancy affidavits reflect applicant does NOT intend to occupy

• Homeowner’s insurance is a rental policy (declarations page)

• Reverse directory does not disclose subject property address

HUD-1 Settlement Statement or Closing Disclosure

• Borrower or Seller names are different from sales contract and title

• Sales price is inconsistent with contract, loan approval and/or appraisal

• Excessive earnest money or builder deposit

• Earnest money deposit is inconsistent with sales contract and/or application

• Payouts to unknown parties

• Refinance pays off previously undisclosed liens

• Excessive sales commissions

Red Flags

20 Responding to Red Flags

• Excessive fees and/or points

• Seller-paid closing costs, especially for purchaser with sufficient assets for down payment

• Cash proceeds to borrower are inconsistent with final application and loan approval

Responding to Red Flags

If a red flag is detected, the BSA/AML compliance officer should be informed immediately according tocompany policy and procedures. The filing of a preliminary SAR may be necessary. The AML complianceofficer may ask you to investigate further or gather additional information.

What’s New in AML Procedures?

Since the effective date in August of 2012, there have been a few notable changes in anti-money launderingprocedures. We’ll take a few minutes going over those changes, which include recent (April 2013) filingrequirement changes, recent (August 2014) advisory on company compliance, AML-deficient jurisdictions,the specifically designated nationals list from the Office of Foreign Assets Control, and insight and analysisfrom the most recent LexisNexis Annual Mortgage Fraud Report.

Electronic Filing

The BSA established E-Filing, which allows organizations or in-dividuals to securely file BSA forms online. FinCEN also usesthis system to issue notices and updates to the E-Filing com-munity. Among several other forms, the E-Filing system allowsnon-bank companies to file SARs quickly online. Employeesof large companies may find this interesting, but chances are,this will not be a part of your day-to-day responsibilities. Loanoriginators in one-person operations will find this informationcrucial, as they are likely operating as the AML complianceofficer, and these requirements apply to every mortgage loancompany, regardless of size.

• Filing Reports: File SARs through the FinCEN BSA E-Filing system. FinCEN will no longer acceptphysical, printed versions of the forms, as they do not meet the reporting requirements under Title 31,Part 103 of the BSA. Navigate to http : / /bsaefiling .fincen .treas .gov / and register, if youhaven’t already. Companies will either file discretely (individual reports) or via batch filing or system-to-system filing (multiple reports). The responsibility to submit electronic filing reports should fall tothe compliance officer. Take a moment to look up your company’s compliance officer, which may be youif you are operating a small loan originating company.

• Recording Information: Provide as much information as possible. There will be several blank fieldsthat you will have the option to fill in, but many will be marked with an asterisk (*) to indicate thatthey must be completed even if the answer is unknown.

• Corrected/Amended Reports: A corrected report must be filed whenever errors are discovered ina previously filed SAR. An amended report must be filed whenever new data is discovered and thecircumstances do not justify filing a continuing report. Corrected and amended reports must be completedin their entirety.

http://bsaefiling.fincen.treas.gov/









22 Advisory on Company Compliance Culture

• Continuing Reports: A continuing reports is one that is filed when suspicious activity continues afteran initial SAR is filed. These reports may be filed after a 90 day review of the initial filing, with thefiling deadline being 120 days after the date of the previously related SAR filing (or 30 days after the 90day review period). Do not review narrative already established by the initial report, only events thatoccurred during the 90-day review period.

• Joint Report: SARs may be jointly filed when two or more financial institutions collaborate in filing asingle SAR involving all of the collaborating institutions. Filing a joint SAR does not relieve individualjoint filers of the responsibility to report suspicious activity that may not have been included in the jointfiling. DO NOT designate another institution as a joint filer if that institution has not agreed to the jointfiling, as this action may lead to a willful violation of the Bank Secrecy Act.

• Supporting Documentation: Filers can include a single comma separated values (CSV) file containingno more than one megabyte of data. The file is recommended for documenting transaction records thatare too numerous to record in Part V. No other supporting documentation is permitted other than thisCSV file. If other supporting documentation exists, please describe it in Part V. This documentationmust be maintained for five years, and must be available to authorities upon request.

• Keeping Records: Records are still required to be kept by the filing company for 5 years. These recordsneed to be kept in a local file, or digitally on a hard drive or network drive, as filings will not be able tobe retrieved from the BSA.

• Unknown subject: Whether you are filing discrete reports (individual reports) or electronic batch files,SARs must be prepared and submitted no later than 30 calendar days after the date of initial detectionof facts that may constitute filing a SAR. If no subject was identified, an additional 30 calendar daysmay be granted to identify a subject, but in no case can a report be delayed more than 60 days afterinitial detection.

• Confirmations: Each batch file transmission will be acknowledged to the sender within one businessday of receipt. If the transmitter hasn’t received notice of receipt within 5 business days, contact theBSA E-Filing help desk.

For additional electronic filing instructions, involving a line-by-line breakdown of the SAR form itself, pleasesee this supporting document, available at:

• https : / /www .fincen .gov /forms /files /FinCEN%20SAR%20ElectronicFilingInstructions- %20Stand %20Alone %20doc .pdf

Advisory on Company Compliance CultureOn August 11, 2014 FinCEN issued an advisory to U.S. Financial Institutions recommending promoting a"Culture of Compliance." This advisory came in the wake of BSA/AML shortcomings, and shortly after theirsecond bi-annual guidance on AML-deficient jurisdictions. The advisory highlighted the fact that financialinstitutions with a poor culture of compliance also tended to have shortcomings in their BSA/AML programs.

Food for Thought: What could a poor culture of compliance look like in your company?

When you have to take your annual training do you roll your eyes, or do you view it as anopportunity to improve your skills as a responsible loan originator?

https://www.fincen.gov/forms/files/FinCEN%20SAR%20ElectronicFilingInstructions-%20Stand%20Alone%20doc.pdf

















Advisory on Company Compliance Culture 23

When you are faced with the costs of developing policies, or training, or hiring a third-partyexaminer, do you put it off, or do you make room in the budget to make sure you’re managingyour risk and keeping your community safe?

Does your organization’s management encourage doing things "by the book," or do managersshrug their shoulders when asked questions about regulations and proper procedures and givestaff leeway to "wing it" in their daily operations?

To provide companies with a blueprint and help establish a culture of compliance, FinCEN provided 6 quicktips to strengthen its BSA/AML compliance:

1. Leadership Should Be Engaged

2. Compliance Should Not Be Compromised By Revenue Interests

3. Information Should Be Shared Throughout the Organization

4. Leadership Should Provide Adequate Human and Technological Resources

5. The Program Should be Effective and Tested By an Independent and Competent Party

6. Leadership and Staff Should Understand How Their BSA Reports are Used

1. Leadership Should Be EngagedLeadership is responsible for performance in all areas, including BSA compliance. As applicable, and con-sistent with the size and structure of the company, leadership should include a board of directors, executivemanagement, owners, etc.

While this leadership may never be responsible for filing a preliminary SAR, they should certainly under-stand the institution’s responsibilities of compliance with the BSA, and fully support the company’s efforts.Leadership should also remain informed of the institution’s BSA compliance efforts and receive periodictraining appropriate to their role within the institution.

2. Compliance Should Not Be Compromised By RevenueInterests


24 Advisory on Company Compliance Culture

One of the hardest pills to swallow is the fact that ongoingcompliance efforts must be balanced with maintaining businessand keeping the company profitable. However, an investmentup-front to do things the right way is always better than puttingit off and risking incurring penalties for violations.

Compliance staff should be empowered with enough autonomyto implement the company’s AML program. For example, amortgage loan company derives significant revenue from eachmortgage loan originator. However, if a branch manager noticesinappropriate activity by an MLO, he or she should feel safeto report this activity to the AML compliance officer withoutfear of potential loss of production impacting their branch’snumbers. If money laundering or other fraud is taking place,mitigating that risk to the company and to the community is far more important than the bottom line.

3. Information Should Be Shared Throughout theOrganizationEnforcement actions reveal that some institutions had relevant infor-mation that was not made available to BSA compliance staff. In simpleterms, the right hand didn’t know what the left was doing. This canbe due to several factors: no mechanisms have been created to shareinformation, the significance or relevance of the information was notappreciated or deemed appropriate to share, or the deliberate decisionto prevent BSA/AML staff from having access to the information forvarious reasons.

Each financial institution is constructed differently, but most have sim-ilar structures with different departments that have access to different sorts of information. For example, aproduction or loan origination department will be looking at information through a slightly different lensethan an underwriting department, but both should be aware of red flags that normally may be obvious toone department, but not the other. Similarly, legal departments should work closely with the compliancedepartment and BSA/AML compliance officer; the legal department may come across enforcement actionsand settlements in their risk management research that the compliance department might not be aware of.

4. Leadership Should Provide Adequate Human andTechnological ResourcesThe first element of a BSA/AML compliance program is the designation of a compliance officer. This individ-ual is responsible for the ongoing task of monitoring consistent compliance with the BSA. Knowledge of theBank Secrecy Act is important, but this individual must also be empowered by ownership and managementto do their job with both autonomy and transparency.

FinCEN cites inadequate technological resources as a fault that can lead to a backlog of alerts, which canlead to failures to report suspicious activity in a timely fashion.


Advisory on Company Compliance Culture 25

5. The Program Should be Effective and Tested By anIndependent and Competent PartySince the establishment of the Dodd-Frank Act in 2011, the em-phasis by government agencies, such as FinCEN and the Con-sumer Financial Protection Bureau (CFPB), has been on beingable to prove that your company, and you individually, are do-ing business in a compliant manner, with the consumer’s bestinterest first and foremost. This means having policy docu-ments written and available, training documents maintained,loan files organized, SAR records available for the appropriatetime, and a stamp of approval from a party other than some-one inside the company. This means that company leadershipshould choose a party to examine the compliance program thatis competent, unbiased, and who does not have conflicting interests that may skew their judgment and affectthe outcome of the examination.

Third-party examinations can be time-consuming and irritating, but they should not be regarded as anunfortunate formality; rather, as a key to locate deficiencies of the program and take proper correctiveaction.

6. Leadership and Staff Should Understand How TheirBSA Reports are UsedAs an employee of a financial institution, you are no doubt aware - and probably sick of - the stacks of paper-work and digital forms that you process on a daily basis. However, everyone - be they ownership, leadership,management, and other staff - should understand and recognize that BSA reports are not generated just tocheck the box marked "Compliant," but are used by law enforcement and others responsible for safeguardingthe nation.

With the advent of recent terrorist activities, it has becomeeven more important to be vigilant in efforts to cut down onmortgage fraud, money laundering, and terrorist financing. Lawenforcement and other government agencies integrate this infor-mation into a bigger picture to thwart terrorist organizations,rogue nations, proliferators of WMDs, drug trafficking, andfraud schemes that hurt businesses and prey upon citizens. Fin-CEN data assists investigators in connecting the dots in theirinvestigations by allowing for a more complete identification ofthe respective subjects with information such as personal infor-mation, previously unknown addresses, businesses and personalassociations, banking patterns, travel patterns, and communi-cation methods. Perhaps most noticeably, the mere existence of suspicious activity reporting functions as adeterrent to would-be defrauders.

Additionally, reporting by financial institutions is used to:


26 AML Deficient Jurisdictions

• Serve as tips to initiate investigations

• Expand existing investigations

• Promote international information exchange

• Identify significant relationships, trends and patterns

Please note that the guidance in FinCEN’s August 2014 advisory does not change any existingexpectations or obligations under BSA/AML requirements and is not intended to change obliga-tions that institutions may have outside the BSA, or contradict previous guidance from FinCEN.Rather, the guidance provided by FinCEN should help reinforce the importance of an overarchingculture of compliance throughout the organization.

AML Deficient JurisdictionsIn addition to their guidance on anti-money laundering and establishing a culture of compliance, FinCENhas tracked jurisdictions that have proven deficient in anti-money laundering strategies. This list may affectfinancial institutions obligations and approaches to risk management. For day-to-day operations in a non-depository financial institution, such as a mortgage loan business, these lists have little use, but could beused in conjunction with other red flags that may be considered suspicious activity. The most currentAML-deficient jurisdictions list from July of 2015 includes:

Jurisdictions Requiring Countermeasures or Enhanced Due Diligence:

• Iran

• Democratic People’s Republic of Korea

• Algeria

• Myanmar

Jurisdictions Having AML Deficiencies

• Afghanistan

• Angola

• Bosnia and Herzegovina

• Ecuador

• Guyana

• Iraq

• Lao PDR


OFAC and Specially Designated Nationals List 27

• Panama

• Papua New Guinea

• Sudan

• Syria

• Uganda

• Yemen

While verifying a customer’s identify through the company’s customer identification program, if a connectionwith one of these countries is revealed, this may indicate another potential red flag. For specific guidanceon what countermeasures, due diligence, or enhanced due diligence looks like, refer to FinCEN’s most recentpress announcement on their website:

• https : / /www .fincen .gov /statutes _regs /guidance /html /FIN -2015 -A002 .html

OFAC and Specially Designated Nationals List

While not a new tool per se, the Specially Designated Nationals(SDN) List from the Office of Foreign Assets Control (OFAC)is an important tool in fighting money laundering and terroristfinancing. It is updated very often, and up-to-date changes foreach calendar year are listed in documentation available online.There are a number of programs available that can check cus-tomers against the SDN list, but even if you don’t have accessto one of these programs, the list is easily searchable using theSDN Search tool on OFAC’S website (available here online 5

), and the database is available in its entirety in various down-load formats. Consult this list regularly, especially when facedwith other red flags.

If it is determined that a customer, or someone with or for whom the customer is transacting, is on the SDNlist or is from or engaging in transactions with a person or entity in an embargoed country or region, thefollowing steps should be taken:

1. Notify the AML Compliance Officer

2. Reject the application

3. File a blocked assets and/or rejected transaction form with OFAC (more information here 6 )

https://sdnsearch.ofac.treas.gov/5

https://www.treasury.gov/resource-center/sanctions/Documents/e_blockreport1.pdf6















https://sdnsearch.ofac.treas.gov/



https://www.treasury.gov/resource-center/sanctions/Documents/e_blockreport1.pdf




28 High-Intensity Crime Areas

High-Intensity Crime AreasWhile mortgage fraud can happen anywhere, it is helpful to know which areas suffer from a higher volumeof financial crime. FinCEN provides a regional map that highlights states and counties that are consideredhigh intensity financial crime areas (HIFCA). The highlighted areas are considered high intensity moneylaundering zones, and mortgage professionals working in those zones should be extra vigilant.

Within these zones, FinCEN gives specific counties that are higher risk. Consult the table below to see ifyou operate within or near a HIFCA.

Region Area Jurisdiction by Counties

California Northern District Monterey, Humboldt, Mendocino, Lake, Sonoma, Napa, Marin, ContraCosta, San Francisco, San Mateo, Alameda, Santa Cruz, San Benito,Monterey, Del Norte

California Southern District Los Angeles, Orange, Riverside, San Bernardino, San Luis Obispo, SantaBarbara, Ventura

Southwest Border Arizona - All Counties. Texas - Counties bordering, and adjacent tothose bordering the US and Mexico Boundary (Click here for detailedinformation)

Chicago Cook, McHenry, Dupage, Lake, Will, Kane

New York New York - All Counties. New Jersey - All Counties.

South Florida Broward, Miami-Dade, Indian River, Martin, Monroe, Okeechobee, PalmBeach and St Lucie


LexisNexis Annual Mortgage Fraud Report 29

LexisNexis Annual Mortgage Fraud ReportIn addition to FinCEN’s HIFCA map, there are additional resources that reflect current mortgage fraudtrends. The LexisNexis Annual Mortgage Fraud Report is another one of these tools. The report takesinformation provided by major mortgage lenders, agencies, and insurers, as well as HMDA data from theMortgage Bankers Association, to paint a picture of mortgage fraud trends. Some of the highlights from themost recent report show some interesting information.

Here are 9 things you need to know from the 16th Annual LexisNexis Mortgage Fraud Report:

1. The top 10 states in Mortgage Fraud Index (MFI) are consistent with the HIFCA map from FinCEN,but also include Nevada, Utah, Georgia, and Maryland.

1. Florida’s MFI of 529 is easily the highest, and is over five times the expected fraud rate based on itsloan origination volume. However, this does represent an improvement, as Florida’s MFI has decreasedevery year since its high of 717 in 2009. Originators working in Florida are advised to take extra care inregards to potential fraud and money laundering.

2. Florida’s improvements in mortgage fraud means that those numbers are made up elsewhere. New York,New Jersey, Utah, and Illinois all saw marked increases in MFI from 2012 to 2013.

3. Closer analysis of locations frequently appearing on the report show 5 metropolitan statistical areas(MSAs) that combined to make up nearly 40% of all mortgage fraud investigations.


30 LexisNexis Annual Mortgage Fraud Report

1. By far the most common type of fraud occurs on the application, with nearly 75% of reported loansinvolving some kind of fraud or misrepresentation on the loan application. This number has steadilyclimbed over the past 3 years. Other areas where fraud or misrepresentation occurred were: CreditDocumentation (17%), Property Valuation (15%), Tax Return/Financial Statement (12%), Verificationof Deposit (15%), and Verification of Employment (15%). Note that percentages exceed 100% due toinvestigated loans frequently featuring multiple instances of fraud.

2. Potential collusion is slightly up from the previous report, with 2.2 percent of all loans investigatedincluding at least one instance of undisclosed non-arms length transaction.

3. The report analyzes deed transfer between relatives and known associates that result in a loss. Thesemay be indicative of non-arms length transactions. Some may be disclosed and legitimate, thus, thereport does not rank actual collusion activity, rather the potential for risk. The report takes a wide-anglelook using deed transfers with a 20-95 percent decrease in price, and then a more focused look at deedtransfers with a 50-95 percent decrease, then ranks the states with the highest potential for collusionactivity. An Index rank of 0 would indicate a very low risk for potential collusion, where a rank of 100would be the reasonable expected risk for potential collusion and a rank above 100 means the potentialrisk is at a level above expectations. Use the two tables below to determine whether you operate in ornear a state with high potential for collusion.


LexisNexis Annual Mortgage Fraud Report 31

1. Alabama, Louisiana, Pennsylvania, New York, New Jersey, Kentucky, and California appear on bothtop 10 lists. California is the most notable state on the list, as until the most recent report, it had notappeared in the top 10, and it now appears on both the wide-angle and the focused look lists.

2. The potential collusion report is important to take note of because it identifies the type of fraud thatis most likely to involve planning, intention, and collusion between parties that are likely to be repeatoffenders of fraudulent behavior.

Case Study: What WouldYou Do? (Scenario 1)

Conclusion

Congratulations on completed this module on the Bank Secrecy Act, Anti-Money Laundering, and SuspiciousActivity reports. We hope that, in addition to reviewing important material regarding anti-money launderingrequirements, red flags, and suspicious activity reports, that you also learned something about recent trendsand reports and lessons to be learned from recent enforcement actions.

What follows is a 20-question test. The passing score is 70%, and if you fail, you will have the opportunityto re-take the final exam. To review, be sure to study the whole course, but pay special attention to themechanics of money laundering, red flags, and the review questions that you already answered over the spanof the course.