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Anti-Money LaunderingA.D.Banker&Company

TABLE OF CONTENTS

iA.D.Banker&Company®

Chapter 1 Introduction to Anti-Money Laundering .............................................................................1Course Objectives; Definition of Money Laundering; Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT); Origination of Money Laundering; Money Laundering: The Crime; Methods of Money Laundering; Three Phases of Money Laundering; Review Questions

Chapter 2 Organizations, Agencies, and Laws .....................................................................................9International Organizations and Associations; United States Agencies; United States Laws; The FATF 40 Recommendations; Review Questions

Chapter 3 Money Laundering Preventive Measures .........................................................................23Preventive Measures Required by Financial Institutions and Other Professions; Preventive Mea-sures Required by Insurance Companies and Producers; Insurance Products Covered by FinCEN Regulations; Insurance Product Excluded by FinCEN Regulations; Risk Assessment; Requirements for Insurer AML Training; Review Questions

Chapter 4 Warning Signs and Safeguards ...........................................................................................29Safeguards and Tools to Combat Money Laundering; Red Flags; Willful Blindness; Suspicious Activity Report (SAR); SAR Confidentiality; Identifying Potential Money Laundering Situations in the Insurance Industry; Review Questions

Chapter 5 Trends, Techniques and Effects of Money Laundering ...................................................41Trends; Techniques; The Effects of Money Laundering; Conclusion; Review Questions

Review Questions Answer Key ..............................................................................................................61

Anti-Money Laundering

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Copyright 2015© A.D. Banker & Company®, L.L.C.

This course, seminar, or publication provides general information regarding the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. The publisher hereby expressly excludes all warranties.

Disclaimer: This course, seminar, or publication provides general information regarding the subject matter. It is sold with the understanding that the publisher is not engaged in rendering legal or accounting advice. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The publisher hereby expressly excludes all war-ranties.

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1Introduction to Anti-Money Laundering

Course ObjectivesAnti-money laundering (AML) describes the efforts of government agencies and the financial services and insurance industries to prevent, detect, and report money laundering activities. In general, money laundering is a term that describes the concealment of the original source of funds acquired through illegal means.

The motivation to engage in money laundering is generally the desire to camouflage criminal activity as the source of income—either to make the funds appear legitimate or to funnel them into other illegal activities such as drug trafficking or terrorism. According to the United Nations, money laundering is

“Any act or attempted act to disguise the source of money or assets derived from criminal activity. It is the process whereby dirty money produced through criminal activity is transformed into clean money.”

In this course, we will examine various money laundering techniques. We will also discuss the history of money laundering and its evolution from the basic offshore account to the present-day practices of money placement, layering, and integration. National and international government agencies, laws, and other safeguards will be reviewed, as will the effects of money laundering. Finally, we will increase awareness of the insurance industry’s role in recognizing and combating money-laundering techniques.

Every day throughout the world, money launderers seek new ways to funnel illegally gained profits back into legitimate commerce, using whatever financial means are available. Even the insurance industry, once thought to be immune to the trappings of cash-heavy crime money, is no longer beyond the reach of money launderers.

Definition of Money LaunderingThe Internal Revenue Service (IRS) is one of the government agencies responsible for investigating violations of federal money laundering statutes; specifically, the IRS investigates violations of 18 U.S.C.§ 1956 – Laundering of Monetary Instruments and 18 U.S.C.§ - Engaging in Monetary Transactions in Property Derived from Specified Unlawful Activity.1 On its website, the IRS defines money laundering as:2

“the activities and financial transactions that are undertaken specifically to hide the true source of the money. In most cases, the money involved is earned from an illegal enterprise and the goal is to give that money the appearance of coming from a legitimate source.”

1 http://www.irs.gov/uac/Money-Laundering-&-Bank-Secrecy-Act-(BSA)-Criminal-Investigation-(CI)2 http://www.irs.gov/uac/Overview--Money-Laundering

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CHAPTER ONE

Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT)According to the International Monetary Fund, “money laundering and the financing of terrorism are financial crimes with economic effects.”3 Anti-money laundering efforts and combating the financing of terrorism protect the financial framework of all jurisdictions worldwide.

Throughout this course, the term “jurisdiction” is used. It should be noted that “jurisdiction” does not necessarily translate into the terms “state” or “country.” The legal definition of jurisdiction is: 4

Jurisdiction1. Power of a court to adjudicate cases and issue orders. 2. Territory within which a court or government agency may properly exercise its power.

Cornell University Law School considers the term “jurisdiction” to mean the same thing as “power.” This means one court or legal system may actually have power, or jurisdiction, over another with respect to making judicial and legal decisions. In other words, one court, territory, state, or country has legal authority over another. This legal authority may apply to all laws, or only to specific laws—such as AML/CFT laws.

A number of international and federal organizations exist to work together to prevent and detect the crimes of money laundering and financing terrorism—and to investigate and prosecute those who commit them. In addition, AML/CFT measures adopt universal standards to regulate specific types of financial transactions and activities. We will discuss these organizations, measures, and standards throughout this course.

Origination of Money LaunderingAccording to the IRS and the Financial Crimes Enforcement Network (FinCEN)5, criminal activity utilizing financial fraud was the origination of money laundering in the U.S., despite the public’s perception it originated during Prohibition and became popular because of gangsters such as Al Capone. Although organized crime did not create the concept of money laundering, it employed it at a high level.

Notorious underworld figure Meyer Lansky is credited with transforming money laundering to an art form. He is regarded as the first individual to establish a labyrinth of foreign banks, dummy companies, and offshore accounts to move and hide money. Lansky even managed to dodge the Swiss Banking Act of 1934 by purchasing his own Swiss bank. Lansky was the only high-profile mobster of his time who was never arrested or convicted of money laundering (or any other crime). Despite being indicted for income tax evasion, Lansky was later acquitted.

The Watergate scandal introduced the term money laundering to the public in the United States, incorporating it into common vocabulary when a presidential fundraising committee moved illegal campaign contributions to Mexico, then transferred the funds back into the U.S. through transactions using a shell company in Miami. From there, the money was re-donated to the committee by entities that appeared legitimate.

These types of illegal activities prompted the enactment of banking laws to require the creation of a paper trail for certain types of financial transactions and activities. The purpose of the paper trail is to allow government agencies and the judicial system to enforce laws pertaining to financial crimes. The IRS and Financial Crimes Enforcement Network (FinCEN) began investigating and prosecuting money laundering in the 1970s.

3 https://www.imf.org/external/np/leg/amlcft/eng/4 http://www.law.cornell.edu/wex/jurisdiction5 http://www.fincen.gov/news_room/aml_history.html

2 A.D.Banker&Company®

INTRODUCTION TO ANTI-MONEY LAUNDERING

Money Laundering: The CrimeThe initial federal legislation that addressed money laundering was enacted in 1970.6 Referred to as the Bank Secrecy Act (BSA), the Currency and Foreign Transactions Reporting Act requires American financial institutions to help government officials detect and prevent money laundering. The FinCEN definition of financial institution is:7

Financial InstitutionA “financial institution” includes any person doing business in one or more of the following capacities:

1. bank (except bank card systems)2. broker or dealer in securities3. money services business4. telegraph company5. casino6. card club7. a person subject to supervision by any state or federal bank supervisory authority

In particular, the BSA requires financial institutions to:

■ Document the cash purchase of a negotiable instrument (i.e., a document that guarantees the payment of a specific dollar amount of money and meets other requirements of 3 U.C.C. §3-104);

■ File a report for all daily cash transactions that exceed an aggregate of $10,000; and■ Report suspicious activity that might indicate money laundering, tax evasion, and/or other

criminal activity might be occurring.

The BSA is referred to as an “anti-money laundering” law and has been amended several times, most notably by the USA PATRIOT Act of 2001.

Although individual instances of deceptive transactions such as income tax evasion and bribery were prosecuted before 1986, the actual laundering of money was not declared a crime until the enactment of the Money Laundering Control Act of 1986. The Act described, defined, and prohibited the practice of money laundering.

In the United States, money-laundering laws include:

■ Bank Secrecy Act (1970)■ Money Laundering Control Act (1986)■ Anti-Drug Abuse Act (1988)■ Annunzio-Wylie Anti-Money Laundering Act (1992)■ Money Laundering Suppression Act (1994)■ Money Laundering and Financial Crimes Strategy Act (1998)■ USA PATRIOT Act (2001)—specifically, Title III, also known as the International Money

Laundering Abatement and Financial Anti-Terrorism Act■ Intelligence Reform & Terrorism Prevention Act (2004)

The definition of money laundering stated here deals primarily with the origin of money; however, terrorists are equally concerned with concealing the destinations and purposes of the proceeds from their illegal activities. In fact, terrorists and terrorist organizations rely almost exclusively on laundered money because no financial institution or government wants to be identified with them.

6 http://www.fincen.gov/statutes_regs/bsa/7 http://www.fincen.gov/financial_institutions/msb/definitions/fin_ins.html

3A.D.Banker&Company®

CHAPTER ONE

Money laundering is a global problem and is outlawed in most countries. The International Monetary Fund (IMF) is an organization of 188 countries that work together to foster global monetary cooperation.8 According to the IMF’s director,9

“Effective anti-money laundering and combating the financing of terrorism regimes are essential to protect the integrity of markets and of the global financial framework as they help mitigate the factors that facilitate financial abuse.”

It should be kept in mind that money laundering makes money derived from criminal activity appear to have been obtained legally, such as through a bank loan, the sale of property, or from the operation of a legitimate business. A person earning illicit income (i.e., a drug trafficker or a con man) has as much to fear from the Internal Revenue Service (IRS) as it does from law enforcement and other regulatory agencies.

Methods of Money LaunderingIf the income earned from illegal activity is small, and money launderers have a legitimate job for which they report their income, it may not be necessary to launder money by booking bets on March Madness, for instance. Small-time bookmakers can simply funnel illegally earned money into their cash flows or tuck it away into otherwise legitimate savings plans.

However, when illicit income is earned in an amount that cannot be blended easily into an elevated standard of living, the criminal encounters a serious challenge. A relatively lavish life style based on a $60,000 income might catch the attention of the IRS. Establishing a cash business that does not depend upon rotating inventory (i.e., the purchase and sales of material goods) is the classic method of laundering money. A clothing store, for example, would be a poor choice in which to hide ill-gotten gains because it would not generate enough business to justify inflated sales figures.

Ironically, two of the businesses best suited to laundering money are, in fact, laundries: coin operated laundromats and car washes. Even if the IRS suspected shady dealings, it would have a difficult time proving precisely how many quarters were inserted into washers and dryers and precisely how many cars were washed and waxed. Other cash generating businesses such as bars, restaurants, and nightclubs are equally suitable for laundering larger amounts of money.

Under certain circumstances, it is essential for those receiving proceeds from illegal activities to hide or launder the funds. For example, a politician accepting a bribe would not want the IRS, an accountant, or a [former] spouse to know about the extra $25,000 he or she has suddenly acquired. Although the purpose of laundering an income stream is to place the money into the legal financial system, the opposite is true of the illegally obtained lump sum. The object in this case is to make the money disappear, at least temporarily, until it can reappear in a seemingly legitimate manner and be put to use.

Common methods of making dirty money disappear and reappear later as clean money include stashing it in a safety deposit box and spending it a little at a time. The book and movie, “The Bank Job” was based on an actual break-in of a safe deposit vault in a London bank. The goal was to retrieve incriminating photos from one particular box; however, during the process, many of the boxes were looted, presumably of cash.10

Money laundering typically involves one of several methods, which include:

■ Structuring (also known as “smurfing”) breaks cash down into smaller amounts. Sometimes money orders are purchased with the cash and then deposited into a bank or other account.

■ Bulk cash smuggling involves physically smuggling cash across the border to another jurisdiction where banking laws are less stringent ... or nonexistent.

8 http://www.imf.org/external/about.htm9 http://www.imf.org/external/np/leg/amlcft/eng/10 http://www.crimemagazine.com/baker-street-bank-heist



■ Cash businesses that receive the majority of their income in cash may use their bank accounts to deposit both legally and illegally obtained funds in an attempt to claim all funds as legitimate earnings. The downside to this process is that taxes must be paid on all the monies deposited. In an effort to avoid paying taxes on the illegally earned money, launderers often may make payments to themselves in the form of salaries or consulting fees. Another option for cash businesses is to park illegal money in the company bank account, which is referred to as balance sheet laundering. This method of laundering money is easily detected.

■ Trade-based laundering involves the creation of invoices for items that are overvalued or undervalued.

■ Shell corporations are those with no active business operations, no physical locations, and no employees. Although shell companies do exist to serve as a channel for another legitimate business, they are often established to conceal the identities of their owners and the assets of those owners.

■ Bank capture is the purchase of controlling ownership in a bank, usually in a country that does not utilize strict AML/CFT controls. In a bank capture, launderers are able to move illegally obtained money through the banking system without detection.

■ Casinos can launder large amounts of money because a person may visit a casino, purchase chips, gamble, and then cash in the chips. A check will be issued to the gambler and will later be claimed as winnings, thus disguising the origin of the money.

■ Real estate purchased with illegally obtained money, and then resold later, is a popular method of money laundering because the proceeds received from the sale appear legitimate.

■ Shadow salaries are paid to employees with illegally obtained cash. The employees are not reported to the IRS, other authorities, and/or their insurance companies.

■ Trusts of certain types do not require their owners to reveal their identities; these trusts allow money launderers to hide their identities and the sources of their funds.

It is important to keep in mind that while the majority of money laundering schemes involve cash—of which the primary advantage is anonymity—other schemes involve a variety of financial transactions and forms of money. Some of the more sophisticated methods of money laundering include the use of foreign banks, offshore accounts, shell companies, import-export currency exchange, fake employment, and any number of other ruses. Some countries are alleged to have far more dirty money in Swiss banks than they produce in their own economies’ gross domestic industries. Worldwide interest in such funds has grown with the increase in international terrorism.

One Associated Press article alleged that a former lawyer and a stock trader concocted a fraudulent scheme that involved insider trading and money laundering.11 After being nabbed in a government sting operation, it was revealed the scheme had brought in so much money the two had considered burning $175,000 in cash to avoid detection.

Three Phases of Money LaunderingThe process of money laundering takes place in three phases: placement, layering, and integration.

PlacementDuring the first phase of the money laundering process, dirty money is deposited into a legitimate financial institution or into a product such as life insurance. Large cash deposits draw attention, posing a risk, so launderers find ways to make smaller deposits.

11 http://www.nydailynews.com/new-york/lawyer-longest-ever-prison-sentence-insider-trading-article-1.1090007


CHAPTER ONE

The Bank Secrecy Act required banks to report cash transactions in excess of $10,000 even before the Money Laundering Control Act of 1986 made money laundering a federal crime. In 2001, the USA PATRIOT Act amended the BSA to require more financial institutions to report suspicious activity and expand customer identification in a move specifically targeting terrorist organizations. Owning one’s own bank, as Meyer Lansky did, is one way to circumvent reporting laws. As we have discussed, breaking cash down into smaller amounts (i.e., smurfing) is another way to dodge anti-money laundering laws.

Placement involves making multiple individual deposits of less than $10,000 into a number of different accounts in various financial institutions. Certified bank drafts are then purchased and deposited elsewhere, making the funds appear as withdrawals and re-deposits of legitimate funds. Due diligence rarely detects these transactions, especially if the accounts are held by friends or relatives of the money launderer.

Technology has increased the opportunities for laundering money. Real dollars deposited into ATMs are, in effect, transformed into virtual dollars that exist on paper, which then appear elsewhere as real dollars at prevailing rates of exchange. Five thousand U.S. dollars can be deposited into a bank in Boston and accessed in Toronto days later in the form of Canadian dollars. As the AML/CFT laws tighten, innovative criminals devise new schemes to place their money back into the legitimate economy.

LayeringLayering is the most complex phase of money laundering. Just as one would evade being followed by a stalker by crossing streets, changing trains, or doubling back, sophisticated money launderers do not simply deposit money into Bank A, transfer it to Bank B, and then withdraw it. This simple process might work with a few thousand dollars, but the procedure becomes more intricate when millions of dollars are involved. In such situations, money moves among several depositories in different countries, in varying amounts and forms (i.e., bearer bonds, certified checks), and frequently doubling back.

Layering may also take the form of purchase and sales transactions. For example, goods such as jewelry are purchased with cash and are then resold to legitimate buyers with the proceeds hidden in plain sight and subject to taxation, which the money launderer considers the cost of doing business.

Tracking money throughout the laundering process is a daunting task; it is often impossible to identify the illegal activity that generated it. Anti-money laundering laws are important precisely because of the difficulty in proving the source of illicitly earned money. Because money laundering is often linked to income tax evasion, AML laws are valuable crime-fighting tools.

Representatives of financial institutions in the insurance and banking industries must be vigilant for signs of laundering at the outset of each transaction. We will discuss red flag transactions later in the course.

IntegrationDuring the final phase of money laundering, freshly laundered money is filtered back into the mainstream economy. This process is often accomplished by transferring funds into a bank account of a business owned by the criminal or in which the launderer has invested.

A classic example of integration involves the owner of a chain of electronics retailers in an eastern state. During a period of several years, the business owner was able to skim $8 million from his company and hide it from the IRS by moving it into multiple deposits in a bank account held in a foreign country. Not satisfied with the $8 million, the business owner pumped increments of money back into his company’s legitimate receivables accounts, making the business appear more successful than it really was. This activity boosted the value of the company’s stock. He then sold his personal stock holdings for a profit of more than $30 million and fled to the country where he had first laundered the cash.



Unfortunately, the money launderer failed to realize the foreign country to which he fled observed strict AML laws. His scam was discovered and he was extradited to the U.S., where he was later convicted and sentenced to serve eight years in federal prison. A form of justice was served, but most of the buyers of the stock he dumped at the inflated price never recovered their losses—which is another reason for strict oversight of financial market transactions.

A simple illustration shows the three phases of money laundering in sequence: placement, layering, and integration:

ExampleA dealer in stolen goods deposited a total of $200,000 in separate deposits of less than $10,000 each into several bank accounts (placement). The bank accounts were all held in the name of the criminal’s mother (layering). He then bought a small convenience store in his mother’s name (placement and layering) and installed himself as the business manager. The dealer then funneled an extra $10,000 a week into the store’s receipts.

This money launderer was outed when a neighboring shopkeeper became suspicious and filed a report with the IRS. An IRS audit revealed income far beyond figures justified by inventory purchases, leading to a conviction for money laundering.

Most money laundering is more complex, and the biggest schemes are international in scope. The FBI reported recently that nearly 1,000 federal, state, and local law enforcement officials seized roughly $100 million in cash related to a money laundering scheme that linked dozens of businesses in Los Angeles’ fashion district to a number of Mexican drug cartels.12 Indictments for the cartel’s activities include narcotics trafficking, hostage taking, and money laundering.

In one particular case, a Mexican drug cartel funneled ransom payments through a fashion district business in connection to its kidnapping and torture of a U.S. citizen. The ransom payments were made to one area business and then distributed to seventeen other businesses using a Black Market Peso Exchange scheme, which transformed U.S. dollars into Mexican currency under the guise of the sale of legitimate merchandise.

Integration, bringing the money back into the mainstream, can be a very complex maneuver. It is the point at which launderers most fear being caught; sometimes the money sits for years where it has been placed and layered. In other cases, the veneer of legitimacy is almost foolproof.

Ultimately, the paper trail often convicts the money launderer, which is one reason for insurance agents to maintain orderly, detailed records of all financial transactions, especially those involving cash. Failure to document might raise suspicions of aiding and abetting illicit financial transactions, clearly a situation to be avoided. Another reason to document financial transactions—aside from the fact that doing so is required by federal law—is for the ease in offering post-sale service for legitimate transactions, which constitute 100% of the clientele of most agents.

12 http://www.fbi.gov/news/stories/2014/september/money-laundering-takedown/money-laundering-takedown


1. In general, what is the concealment of the original source of illicit funds?

a. Theftb. Embezzlementc. Money launderingd. Tax evasion

2. What is the primary reason a person chooses to launder money?

a. Tax evasionb. Embezzlementc. A desire to serve time in prisond. To earn a sterling reputation

3. What type of offense is money laundering?

a. It is not an offenseb. A federal crimec. A state crimed. A misdemeanor

4. Which of the following is NOT a method of money laundering?

a. Structuringb. Using a cash businessc. Establishing a shell businessd. Selling auto insurance

5. Which of the following is NOT one of the three phases of money laundering?

a. Placementb. Layeringc. Embezzlingd. Integration

CHAPTER ONE QUESTIONS


2Organizations, Agencies, and Laws

International Organizations and AssociationsMoney laundering is a global problem, one that continues to increase in scope despite the growth of organizations dedicated to combat it. Recently developed countries are especially vulnerable to money laundering schemes.

As previously mentioned, several international organizations exist for the purpose of combating money laundering. They operate with the cooperation of the banking industry and other financial institutions. Employees of entities that cooperate (some do not) are trained to watch for signs and indications that money laundering may be taking place.

Financial Action Task Force (FATF)In 1989, the international Financial Action Task Force (FATF) was established by seven of the world’s largest industrialized nations, known as the G-7: United Kingdom, Canada, France, Germany, Italy, Japan, and the United States.1 Since then, many more nations and organizations have joined this task force, which currently has 36 members.2 Upon its creation, the FATF immediately made an international assessment of money laundering and its effect on the global economy, identifying and defining the basic money laundering techniques used worldwide.

The FATF’s findings comprised what is known as the 40 Recommendations, which were initially developed in 1990 and “are recognized as the international standard for combating money laundering and the financing of terrorism and proliferation of weapons of mass destruction.”3 The original 40 Recommendations were revised in 1996, 2001, 2003, and 2012. These recommendations include a number of definitions and refer to the illegality of disguising the source, location, disposition, or use of any country’s goods or money when such knowledge that those goods derive from a criminal act or relate to a crime. The recommendations also address aiding and abetting persons attempting to evade the consequences of the crime.

Over the years, the FATF has grown to include numerous associate members:4

■ Asia/Pacific Group on Money Laundering (APG)■ Caribbean Financial Action Task Force (CFATF)■ Council of Europe Committee of Experts on the Evaluation of Anti-Money Laundering

Measures and the Financing of Terrorism (MONEYVAL)■ Eurasian Group (EAG)■ Eastern and South Africa Anti Money Laundering Group (ESAAMLG)■ Financial Action Task Force of Latin America (GAFILAT) formerly known as the Financial

Action Task Force of South America Against Money Laundering (GAFISUD)■ Inter Governmental Action Group against Money Laundering in West Africa (GIABA)■ Middle East and North Africa Financial Action Task Force (MENAFATF)

1 http://www.fatf-gafi.org/pages/aboutus/2 http://www.fatf-gafi.org/pages/aboutus/membersandobservers/3 http://www.fatf-gafi.org/pages/aboutus/whoweare/4 http://www.fatf-gafi.org/pages/aboutus/membersandobservers/

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CHAPTER TWO

International Criminal Police Organization (INTERPOL)The International Criminal Police Organization, more commonly referred to as INTERPOL, was established in 1923 after law enforcement officials, attorneys, and judges from 24 countries met in 1914 to develop common methods of dealing with international criminals and criminal enterprises.5 INTERPOL’s mission is “Preventing and fighting crime through enhanced cooperation and innovation on policy and security matters.” Its vision is “Connecting police for a safer world.”

Headquartered in France, INTERPOL serves as the nerve center for its 190 member nations6 to exchange information and intelligence about crime and criminal activity. Through the development of model legislation, INTERPOL helps its members implement anti-money laundering programs and provides training for interested parties. It works globally with the private sector as well as with government agencies to put control measures in place. As with FATF, the United States is heavily involved in INTERPOL.

United Nations Office on Drugs and Crime (UNODC)The United Nations (UN) was formed in 1945 by 51 countries that dedicated themselves to world peace and security, among other objectives. Currently, the UN has 193 member countries.7

In 1997, the UN’s Office on Drugs and Crime (UNODC) was established as the result of a merger between the UN Drug Control Programme and the Centre for International Crime Prevention.8 Among its numerous objectives is the mandate to assist its members fight against illicit drugs, crime, and terrorism. UNODC also encourages AML policy development and, in conjunction with other international organizations, manages AML programs and resources.9

UNODC is also responsible for the administration of the International Money Laundering Information Network (IMoLIN), which is an Internet-based network that assists individuals, organizations, and government agencies in their AML efforts.10 IMoLIN’s website provides information about national laws and regulations concerning money laundering and the financing of terrorism. It also provides contacts for inter-country assistance and an international database of AML laws and regulations.

The CommonwealthFormerly known as the Commonwealth of Nations, the Commonwealth “is an association of sovereign nations which support each other and work together towards international goals.”11 Its 53 member nations have pledged mutual support and assistance in the detection and investigation of money laundering. The Commonwealth’s emphasis is on forfeiture and confiscation of criminal property and its proceeds in order to trace ownership back to illegal sources. Some member nations have been suspected of providing safe havens for money laundering deposits; these suspicions have drawn many other member nations closer together in this fight.

Organization of American States (OAS)The OAS was formed in 1890 and its membership includes 35 independent nations throughout North America, South America, and the Caribbean.12 In 1986, a regional Inter-American Drug Abuse Control Commission was formed specifically to address measures for combating the illegal drug trade. Like other international organizations, the OAS also created a series of recommendations to help member nations draft or amend their relevant legislation.

5 http://www.interpol.int/en/About-INTERPOL/INTERPOL-1914-20146 http://www.interpol.int/en/About-INTERPOL/Overview7 http://www.un.org/en/aboutun/index.shtml8 http://www.unodc.org/unodc/en/about-unodc/index.html?ref=menutop9 http://www.unodc.org/pdf/unodc_brochure_2007.pdf10 https://www.imolin.org/imolin/en/about_us.html11 http://www.commonwealthofnations.org/12 http://www.oas.org/en/about/who_we_are.asp


ORGANIZATIONS, AGENCIES, AND LAWS

The OAS organizations have brought international attention to, and continued pressure on, money laundering. At one time, ill-gotten gains placed in a Mozambique bank, for example, might just as well have been deposited on Mars as far as the law was concerned. Now, however, worldwide mechanisms are linked to help stem the money laundering tide.

The Association of Certified Anti-Money Laundering SpecialistsThe Association of Certified Anti-Money Laundering Specialists® (ACAMS) is an international membership and certification organization dedicated to enhancing the knowledge and skills of anti-money laundering professionals around the globe.13 ACAMS is a worldwide leader in AML/CTF training, education, and networking through its international conferences and other training forums that include financial crime detection and prevention.

United States AgenciesFederal Bureau of Investigation (FBI)The mission of the Federal Bureau of Investigation (FBI) is “to protect and defend the United States against terrorist and foreign intelligence threats, to uphold and enforce the criminal laws of the United States, and to provide leadership and criminal justices services to federal, state, municipal, and international agencies and partners.”14 The FBI investigates and enforces more than 200 categories of federal law, including white-collar crimes such as money laundering. The FBI also traces overseas deposits, a necessary step in the apprehension and conviction of U.S. based criminals who use foreign depositories.

The FBI website states that it “maintains a proactive approach when investigating money laundering. After identifying a specified unlawful activity that generates illicit proceeds, a parallel financial investigation is conducted in order to locate the proceeds and prove their connection to the underlying crime.”15 The website also states its overall accomplishments with respect to asset forfeiture in terms of investigations and their resulting criminal indictments, convictions, and dollar amounts in restitutions, recoveries, and fines.

The Financial Crimes Enforcement Network (FinCEN)The Financial Crimes Enforcement Network is a bureau of the U.S. Department of the Treasury.16 FinCEN’s mission is “to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities.” FinCEN is the financial investigation unit (FIU) of the U.S. government and it exercises its regulatory functions primarily through the BSA and its amendments, including the USA PATRIOT Act.

FinCEN regulations require financial institutions to establish anti-money laundering training programs and report suspected money laundering activities on the Suspicious Activity Report (SAR). Law enforcement agencies working through FinCEN maintain points of contact at U.S. financial institutions and with the FIUs and financial crime investigations in other countries around the world.

FinCEN has the authority to develop the rules under which investigative information is sought and safeguarded. Foreign, state, and local entities must allow reciprocal requests from the federal government when the requests include:

■ The seriousness and magnitude of the suspected criminal conduct■ The dollar amount involved■ Information about whether the analysis was being conducted as part of a multi-agency task

force13 http://www.acams.org/join-acams/#tabbed-nav=what-is-acams14 http://www.fbi.gov/about-us/quick-facts15 http://www.fbi.gov/stats-services/publications/financial-crimes-report-2010-2011/financial-crimes-report-2010-2011#Asset16 http://www.fincen.gov/


CHAPTER TWO

■ Suspected involvement in organized crime, and■ Multi-regional or cross-border implications

Once FinCEN approves a request, it is submitted to the appropriate financial institution through the 314(a) Secure Information Sharing System.

Other Federal AgenciesThe U.S. Drug Enforcement Agency (DEA) investigates money laundering as it relates specifically to illicit drug trafficking. The Criminal Investigation (CI) division of the Internal Revenue Service is responsible for investigating those who are suspected of violating Internal Revenue Code and committing financial crimes. These investigations include those related to cases of suspected money laundering and currency reporting violations in the United States.

U.S. Immigration and Customs Enforcement (ICE) is the primary investigative body of the U.S. Department of Homeland Security. Along with U.S. Customs and Border Protection (CBP), ICE focuses on detecting, intercepting, and investigating money laundering threats that involve people and goods crossing U.S. borders.

United States LawsThe Bank Secrecy Act (BSA)The Currency and Foreign Transactions Reporting Act of 1970, more commonly referred to as the Bank Secrecy Act or the Anti-Money Laundering law, was a mandate from Congress that American financial institutions must support the federal government’s efforts to expose and put a stop to money laundering.17 Essentially, the BSA required all financial institutions to:

■ File reports of aggregate daily cash transactions exceeding $10,000■ Maintain records of the cash purchase of negotiable instruments (i.e., drafts and notes; money

and securities are not negotiable instruments), and■ Report suspicious activities that might indicate the existence of tax evasion, money laundering,

and other criminal conduct

According to the IRS, when financial institutions file documents required by the BSA, they are used by law enforcement officials and government agencies at domestic and international levels to “identify, detect, and deter money laundering whether it is in furtherance of a criminal enterprise, terrorism, tax evasion, or other unlawful activity.”18 The IRS is one of the partners of the U.S. National Money Laundering Strategy.

The BSA requires all persons to file Form 8300 with the IRS within 15 days after cash is received in connection with the conduct of trade or business. IRS filing requirements:19

■ Apply to payments of more than $10,000 received in one transaction or in a series of related transactions; for example:□ One lump sum of more than $10,000□ Two or more related payments that total more than $10,000, or□ Payments received as part of a single transaction (or two or more related transactions) that

cause the total cash received within a 12-month period to total more than $10,000■ Define a transaction as the underlying event resulting in the transfer of cash, which includes:

□ The sale of goods, services, or any type of property□ The rental of goods or any type of property

17 http://www.fincen.gov/statutes_regs/bsa/18 http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Bank-Secrecy-Act19 http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/FAQs-Regarding-Reporting-Cash-Payments-of-Over-10000-Form-8300



□ Cash exchanged for other cash□ The establishment, maintenance of, or contribution to a trust or escrow account□ A loan repayment, and□ The conversion of cash to a negotiable instrument such as a check or bond

■ Define a related transaction as one of two types:□ Transactions between a buyer (or its agent) and a seller that occur within a 24-hour period,

and□ Transactions more than 24 hours apart if the recipient of the cash knows or had reason to

know that each transaction is one of a series of connected transactions■ Define cash as:

□ Money from any country, such as currency and coins’ and□ Monetary instruments such as a cashier’s check, a bank draft, a traveler’s check, or a

money order if it is received per the definition on Treasury Reg. Section 1.6050I-1(c)(iii)—this generally includes retail sales of a consumer durable or collectible or a travel or entertainment activity

Personal checks are NOT considered cash with respect to reporting requirements of Form 8300.

In addition, the BSA requires the reporting of certain foreign bank and financial accounts (i.e., brokerage accounts, mutual funds, unit trusts). Money Service Businesses (MSBs) must also meet certain requirements under the BSA; MSBs include businesses that offer check cashing, money orders, travelers checks, money transfers, currency exchanges, and pre-paid access products (formerly called stored value cards). MSBs must also be registered with the U.S. Department of the Treasury by filing FinCEN Form 107.

Finally, the BSA requires each person who transports, mails, ships, or causes the physical transportation of currency, traveler’s checks, and certain other specified monetary instruments in excess of $10,000 to file FinCEN Form 105. This applies to funds transported into or out of the United States.

Money Laundering Control Act of 1986 (MLCA)The Money Laundering Control Act (MLCA) was enacted in 1986 and declared money laundering a federal crime, banned structuring financial transactions to avoid filing a currency transaction report (CTR) with FinCEN, and declared that property and proceeds obtained through BSA violations are subject to civil and criminal forfeiture.20

ForfeitureThe process of the government seizing property (including money) in response to civil and criminal violations of law.

In most cases, forfeiture is the government’s response to illegal activities, usually with respect to illicit drug trafficking.

According to 18 U.S.C. § 1956, in order to be guilty of money laundering, a person must:

■ Conduct or attempt to conduct a financial transaction that involves the proceeds of a specified unlawful activity

■ Know the proceeds involved in the transaction are the proceeds of a specified unlawful activity

20 http://www.fincen.gov/news_room/aml_history.html


CHAPTER TWO

■ Have acted with one of four specific intentions:1. To promote the carrying out of a specified unlawful activity2. To engage in tax evasion or tax fraud3. Knowledge the transaction was intended to hide or disguise the nature, location, source,

ownership, or control of proceeds from the specified unlawful activity, or4. Knowledge the transaction was intended to avoid the filing of a currency transaction report

or other transaction report required by federal or state law

The definition of specified unlawful activity includes the following criminal offenses:

■ Drug trafficking (i.e., manufacture, importation, sale, or distribution of a controlled substance in violation of law)

■ Murder, kidnapping, robbery, extortion, arson, counterfeiting, espionage, copyright infringement, illegal exportation of firearms, and certain violent crimes

■ Fraud, misappropriation of bank funds, and violations of the International Banking Act of 1978;■ Bribery of a public official and financial misconduct■ Smuggling, trafficking in persons, and sexual exploitation of children■ Environmental crimes (i.e., violations of the Federal Water Pollution Control Act and the Safe

Drinking Water Act)■ Terrorist activities, and■ Certain RICO offenses, such as mail and wire fraud

Depending on the specific violation, penalties range from fines of $500,000 to $1 million, or twice the value of all money and property involved, whichever is greater. In addition, a prison sentence of up to 20 years may be imposed in place of, or in addition to, applicable fines. These penalties would apply to insurance agents who knowingly participate in a money-laundering scheme—even if their only offense was to accept and deposit money they knew or suspected was dirty.

Considering the breadth of its laws, regulations, and statutes, the United States has the most effective anti- money laundering legislation in the world—and they relate to all three phases of the laundering process: placement, layering, and integration.

USA PATRIOT ActThe USA PATRIOT Act (Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act, Public Law 107-56) was enacted in October 2001 in response to the terrorist attacks on the United States on September 11, 2001.21 FinCEN states that the purpose of the USA PATRIOT Act is to “deter and punish terrorist acts in the United States and around the world to enhance law enforcement investigatory tools, and other purposes...” One of the primary goals of the Act is to identify, deter, and prosecute those who commit international money laundering and finance terrorism.

With respect to its money laundering provisions, the USA PATRIOT Act expanded existing laws, such as the BSA, and cited weaknesses in global monetary systems that abetted money laundering. Among these were:

■ Offshore banking and similar facilities that provide anonymity to their customers■ Weak supervision and enforcement of existing money laundering regulations■ Corrupt banking and government officials■ Outdated banking equipment■ Outdated and inadequate laws

21 http://www.fincen.gov/statutes_regs/patriot/



The USA PATRIOT Act gave the Secretary of the Treasury full authority to require financial institutions to evaluate, correct, and upgrade their existing anti-money laundering programs and to create AML programs where none had existed previously. The U.S. Department of the Treasury assigned this task to FinCEN, which then required insurance companies to develop and institute their own anti-money laundering programs. FinCEN also designated how insurance companies must comply with AML regulations and specified exactly which industries or businesses are covered and what products will be included in its jurisdiction.

Intelligence Reform and Terrorism Prevention Act of 2004 (IRTPA)Congress created the National Commission on Terrorist Attacks Upon the United States (the 9/11 Commission) to prepare a bipartisan and complete accounting of the events related to the September 11, 2001 terrorist attacks on the United States. As a result of the 9/11 Commission’s report, which claimed the terrorist attacks were the significant result of failures on the part of U.S. law enforcement and intelligence-gathering communities, the Intelligence Reform and Terrorism Prevention Act of 2004 (IRTPA), Public Law 108-458, was enacted.22

IRTPA recommended a new, government-wide approach to unify U.S. law enforcement and intelligence agencies and established a Director of National Intelligence who has authority to establish procedures to facilitate its recommendations. With respect to anti-money laundering, the Act amended the BSA to enable the Secretary of the Treasury to proscribe regulations requiring certain financial institutions to report cross-border electronic transmittals of funds. Such reporting was deemed reasonably necessary to aid in the fight against money laundering and terrorist financing.

FATF 40 RecommendationsWithin a year of its creation, the FATF issued a report of global money laundering techniques and trends that included a set of 40 Recommendations designed to provide a worldwide plan of action to combat money laundering.23 The 40 Recommendations were revised in 1996 and endorsed by 130 countries. They were revised again in 2001 to address the financing of terrorism; that revision resulted in the creation of the Eight Special Recommendations. The last revisions were in 2003 and in February 2012, when they were last adopted and published.24

The 40 Recommendations were designed to establish a reliable and thorough structure of guidelines countries are urged to put into action to contend with both money laundering and the financing of terrorist activities. Because each country has its own laws and unique concerns, it may not be possible for a country to utilize precisely the same method of adopting the FATF Recommendations. The purpose of the FATF Recommendations are to:25

■ Identify the risks, and develop policies and domestic coordination■ Pursue money laundering, terrorist financing, and the financing of the proliferation of weapons

of mass destruction■ Apply preventive measures for the financial sector and other designated sectors.■ Establish powers and responsibilities for the competent authorities (i.e., investigative, law

enforcement, and supervisory authorities) and other institutional measures■ Enhance the transparency and availability of beneficial ownership information of legal persons

and arrangements■ Facilitate international cooperation

22 https://it.ojp.gov/default.aspx?page=128223 http://www.fatf-gafi.org/pages/aboutus/historyofthefatf/24 http://www.fatf-gafi.org/media/fatf/documents/FATF%20Standards%20-%2040%20Recommendations%20rc.pdf25 http://www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF_Recommendations.pdf


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Beneficial OwnerThe natural person(s) who ultijmately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement.

The following summary outlines the most recent content of the FATF Recommendations.

A - AML/CFT Policies and CoordinationRECOMMENDATIONS 1 AND 2

1. Assessing Risks and Applying a Risk-based Approach – Countries must identify, assess, and evaluate their individual and unique risks for money laundering and terrorist financing. The AML/ CFT recommendations must be implemented stringently, or on a more simplified basis, based on the country’s assessment.

2. National Cooperation and Coordination – Countries must implement and review on a regular basis their AML/CFT policies and designate an authority to bear responsibility for those policies. Within the country, law enforcement agencies, federal intelligence agencies, and other government authorities must have systems in place that allow them to coordinate their efforts and cooperate with each other.

B - Money Laundering and ConfiscationRECOMMENDATIONS 3 AND 4

3. Money Laundering Offense – In each country, the crime of money laundering must conform to the Vienna and Palermo Conventions and be applied to all serious offenses.

4. Confiscation and Provisional Measures – The Vienna and Palermo Conventions and the Terrorist Financing Convention have adopted measures, including legislative measures, that allow authorities to seize or confiscate certain types of property involved in the crime of money laundering. Countries must also adopt these measures and such seizure or confiscation must not bias the rights of legitimate third parties. That property includes:■ Laundered property■ Proceeds or the means used in money laundering crimes■ Property or proceeds of, or used in, the financing of terrorist activities and organization■ Property of equal value to the preceding

C – Terrorist Financing and Financing of ProliferationRECOMMENDATIONS 5 THROUGH 8

5. Terrorist Financing Offense – Terrorist financing must be designated as money laundering and countries must consider terrorist financing a crime to conform to the Terrorist Financing Convention. The financing of terrorist organizations and individual terrorists must be included in this crime.

6. Targeted Financial Sanctions Related to Terrorism and Terrorist Financing – In compliance with the United Nations Security Council resolutions, countries must freeze without delay the funds and assets of any person or entity designated by the Security Council as a terrorist group.

7. Targeted Financial Sanctions Related to Proliferation – In a fashion similar to Recommendation 6, countries must freeze without delay the funds and assets of any person or entity designated by the Security Council as engaging in the proliferation of weapons of mass destruction.



8. Non-profit Organizations – Because non-profit organizations are vulnerable to abuse by terrorists, countries must enact laws that prevent terrorist organizations from posing as legitimate non-profits, exploiting legal entities to avoid asset-freezing measures, and concealing their money laundering activities to divert funds to terrorist organizations.

D – Preventive MeasuresRECOMMENDATIONS 9 THROUGH 23

9. Financial Institution Secrecy Laws – A country’s financial institution secrecy laws must not inhibit implementation of the Recommendations.

CUSTOMER DUE DILIGENCE AND RECORDKEEPING

10. Customer Due Diligence – Keeping anonymous accounts and accounts in obviously fictitious names must be prohibited. Due diligence must be carried out when establishing new accounts, when carrying out occasional transactions above designated thresholds (i.e., $10,000), when it is suspected money laundering or terrorist financing might be taking place and when doubts exist about the truthfulness or completeness of customer identification information. Specific measures to be followed are listed in this Recommendation.

11. Recordkeeping – Financial institutions must maintain records for a minimum of five years in connection with all domestic and international transactions. These records must include information that permits authorities to reconstruct each transaction pertaining to the amount and type of currency and provide evidence for criminal prosecution, if necessary.

Copies of customer identification that must be retained include passports, ID cards, driver’s licenses, background checks, articles of incorporation, and listings of corporate officers (including names, addresses, and telephone numbers).

ADDITIONAL MEASURES FOR SPECIFIC CUSTOMERS AND ACTIVITIES

12. Politically Exposed Persons (PEPs) – With respect to politically exposed persons (who will be defined and discussed later in the course), financial institutions must be required to:■ Implement risk-management systems for determining if a customer is a PEP■ Obtain permission from senior management for establishing or continuing a business

relationship with any PEP■ Exercise due diligence when establishing the source of assets, income, and funds

belonging to any PEP■ Monitor the business relationships with any PEPs on an ongoing basis

These requirements not only apply to the PEP but also to his or her business associates and family members.

13. Correspondent Banking – Recommendations must also be applied to transactions involving securities, fund transfers, and accounts used directly by third parties to transact business on their own behalf (payable-through accounts). A correspondent account is one established by a domestic financial institution to provide services for or on behalf of a financial institution located in another country.

14. Money or Value Transfer Services – Countries must ensure that people and entities providing money or value transfer services are licensed or registered appropriately and their activities are monitored and in compliance with the Recommendations. Sanctions must be applied to people and entities that transact money or value transfer services without being licensed or registered.


CHAPTER TWO

15. New Technologies – Countries must monitor and assess new products, business practices, and technologies—including their development—to determine any money laundering or terrorist financing risks that might surface. Emerging risks must be managed and alleviated.

16. Wire Transfers – Countries must ensure that financial institutions comply with the following requirements with respect to wire transfers:■ Obtain and record accurate originator information and required beneficiary

information■ Monitor transfers that do not contain required originator and beneficiary information

and respond appropriately■ Prohibit transactions and freeze funds in compliance with the UN Security Council

RELIANCE, CONTROLS, AND FINANCIAL GROUPS

17. Reliance on Third Parties – Countries may permit financial institutions to rely on third party performance of specific measures in Recommendation 10, so long as certain requirements are met. When relying on third parties, a financial institution is ultimately responsible for the third party’s conduct.

18. Internal Controls and Foreign Branches and Subsidiaries – Financial institutions must be required to institute AML/CFT programs, including group-wide programs. They must also ensure their foreign branches and subsidiaries apply comparable AML/CFT measures and controls.

19. Higher Risk Countries – Financial institutions must be required to exercise a higher degree of due diligence in countries as called for by the Recommendations. They must also be able to apply countermeasures when called for by FATF and independently, as well.

REPORTING OF SUSPICIOUS TRANSACTIONS

20. Reporting of Suspicious Transactions – Countries must require financial institutions, by law, to report any activity that might involve funds related to criminal activity or terrorist financing to the financial intelligence unit (FIU) of the country.

21. Tipping-off and Confidentiality – Financial institutions—including their directors, officers, and employees—must be protected by law from civil and criminal liability for breaching confidentiality if they report, in good faith, suspicions of money laundering or terrorist financing. In addition, they must be prohibited by law from tipping-off that a suspicious transaction report (STR) is being filed.

DESIGNATED NON-FINANCIAL BUSINESSES AND PROFESSIONS (DNFBPs)

22. DNFBPs: Customer Due Diligence – Customer due diligence and recordkeeping requirements of Recommendations 10, 11, 12, 15, and 17 also apply to the following individuals and businesses in certain circumstances:■ Casinos■ Real estate agents■ Dealers in precious metals and precious stones■ Lawyers, notaries pubic, accountants, and other independent legal professionals■ Trust and company service providers

23. DNFBPs: Other Measures – Requirements in Recommendations 18 through 21 apply to all DNFBPs, subject to certain qualifications listed in this Recommendation.



E – Transparency and Beneficial Ownership of Legal Persons and Arrangements

RECOMMENDATIONS 24 AND 25

24. Transparency and Beneficial Ownership of Legal Persons – Countries must ensure that information relating to the beneficial ownership of all legal entities is accurate and adequate. It is recommended that countries:■ Identify and describe the forms and features of legal ownership for all entities■ Identify and describe the process by which a legal entity may be formed and how

beneficial ownership information is obtained and recorded■ Allow beneficial ownership information to be available to the public■ Evaluate the risks of money laundering and terrorist financing of every legal entity in the

country

25. Transparency and Beneficial Ownership of Legal Arrangements – In a fashion similar to Recommendation 24, countries must ensure that information exists relating to the beneficial ownership of express trusts. In addition, trustees must be required to maintain records concerning agents of the trust, including financial advisors, managers, accountants, tax advisors, etc. Other requirements exist for trustees.

F – Powers and Responsibilities of Competent Authorities and Other Institutional Measures

RECOMMENDATIONS 26 THROUGH 35

REGULATION AND SUPERVISION

26. Regulation and Wupervision of Financial Institutions – Countries must ensure that financial institutions are regulated, supervised, and in compliance with the FATF Recommendations. Regulatory measures must prevent criminals and their associates from being owners in, having any type of management position, or holding any type of financial interest in a financial institution. In addition, countries must not permit the formation or operation of shell banks.

27. Powers of Supervision – The supervisors of financial institutions must have the authority to supervise, monitor, and ensure compliance with AML/CFT measures of the institution, including the authority to conduct inspections. Supervisors must also have the power to compel the production of company documents and information pertaining to compliance, as well as to impose sanctions for failure to comply.

28. Regulation and Supervision of DNFBPs – Specific regulatory and supervisory AML/CFT measures must apply to casinos; less stringent measures apply to other DNFBPs.

OPERATIONAL AND LAW ENFORCEMENT

29. Financial Intelligence Units (FIUs) – Countries must establish FIUs that operate as a center for the collection and review of suspicious transaction reports and other information pertaining to money laundering and terrorist financing. FIUs must also be able to collect information from other agencies and have access to the financial, administrative, and law enforcement information they need to conduct operations effectively.

30. Responsibilities of Law Enforcement and Investigative Authorities – Within the parameters of a country’s national AML/CFT policies, law enforcement authorities must be responsible for money laundering and terrorist financing investigations. Offenses for money laundering and terrorist financing must be handled in similar fashions, including those that take place outside the jurisdiction of a particular law enforcement body. Law enforcement must also have the power and authority to freeze assets and seize or confiscate property.


CHAPTER TWO

31. Powers of Law Enforcement and Investigative Authorities – Law enforcement officials must be provided with access to all documents and information necessary to conduct their investigations and to prosecute violations of law. This access includes the authority to:■ Compel the production of records from financial institutions, DNFBPs, and all legal

persons and entities■ Search people and premises■ Take witness statements■ Seize and obtain evidence■ Use the following methods when conducting investigations:

□ Undercover operations□ Interception of communications□ Assessment of computer systems

□ Identify assets without prior notice to the owner of said assets

32. Cash Couriers – Countries must have the means to identify the physical cross-border transportation of currency and bearer negotiable instruments as well as the legal authority to stop or restrain such currency and instruments if they are suspected of being involved in money laundering or terrorist financing. In addition, countries must have the authority to stop or restrain currency and instruments if they are declared or disclosed falsely.

GENERAL REQUIREMENTS

33. Statistics – Countries must maintain thorough documentation about the efficacy of their AML/CFT programs and systems. This documentation must include facts and data about the STRs they receive and issue, money laundering and terrorist financing investigations, prosecutions, convictions, frozen property and assets, confiscated and seized property, etc.

34. Guidance and Feedback – The competent authorities, supervisors, and self-regulatory bodies of all countries must implement strategies and procedures to assist financial institutions and DNFBPs to utilize national methods of combating money laundering and terrorist financing, including the identification and reporting of suspicious transactions. These strategies and procedures must incorporate guidelines for providing feedback, as well.

SANCTIONS

35. Sanctions – Countries must provide for a variety of sanctions that are appropriate and effective, and that discourage criminal, civil, and administrative violations of AML/CFT requirements, specifically those applying to people and entities covered by Recommendations 6, 8, and 23. Sanctions must apply to financial institutions, DNFBPs, and their directors and members of senior management.

G – International CooperationRECOMMENDATIONS 36 THROUGH 40

36. International Instruments – Countries must, immediately, become a party to and comply with the:■ Vienna Convention, 1988■ Palermo Convention, 2000■ UN Convention against Corruption, 2003■ Terrorist Financing Convention, 1999



In addition, and when applicable, countries must comply with other conventions, including the:

■ Council of Europe Convention on Cybercrime, 2001■ Inter-American Convention against Terrorism, 2002■ Council of Europe Convention on Laundering, Search, Seizure, and Confiscation of the

Proceeds from Crime and on the Financing of Terrorism, 2005

37. Mutual Legal Assistance – Countries must provide the most comprehensive scope of legal assistance relating to money laundering, associated predicate offenses, and terrorist financing investigations. This legal assistance must include prosecution and related proceedings. Treaties, arrangements, and other measures must be in place to encourage and boost cooperation between organizations. This Recommendation contains additional specific suggestions.

38. Mutual Legal Assistance: Freezing and Confiscation – In the event other jurisdictions request legal assistance, countries must make certain they have the authority to identify, freeze, seize, or confiscate:

■ Laundered property■ Proceeds from money laundering, predicate offenses, or terrorist financing■ Instrumentalities used in, or intended for use in, money laundering, predicate offenses,

or terrorist financing; and/or■ Property of comparable value

In addition to freezing, seizing, and confiscating such property or proceeds, countries must have in place guidelines for managing such property.

39. Extradition – Countries must not delay when presented with extradition requests relating to money laundering and terrorist financing, nor may they provide safe havens to those charged with these offenses. Specifically, countries must:■ Make money laundering and terrorist financing extraditable offenses■ Establish clear and effective procedures for the timely processing of extradition

requests, including case management systems■ Not place unreasonable or unduly restrictive conditions on extradition requests■ Make certain an appropriate legal structure supports the compliance with this

Recommendation■ This Recommendation contains additional specific suggestions

40. Other Forms of International Cooperation – Countries must cooperate with each other relating to the offenses of money laundering and terrorist financing, both independently and upon request. This includes implementing and maintaining clear channels of communication and responding to requests at the international level.


1. The Financial Action Task Force’s 40 Recommendations were designed to establish all of the following international standards, EXCEPT:

a. Combat money launderingb. Combat embezzlement at financial institutionsc. Combat the financing of terrorismd. Combat the proliferation of weapons of mass destruction

2. If an insurance agent must report a violation of regulations contained in the Bank Secrecy Act with respect to an insurance transaction, which of the following is the U.S. financial investigation unit to which the agent must file its report?

a. Federal Bureau of Investigation (FBI)b. Financial Action Task Force (FATF)c. Financial Crimes Enforcement Network (FinCEN)d. U.S. Immigration and Customs Enforcement (ICE)

3. The Bank Secrecy Act requires all financial institutions, including insurance companies, to file reports about which of the following?

a. All daily cash transactionsb. Suspicious activities that might indicate tax evasion and criminal conduct is occurringc. Details about employees with poor credit historiesd. The BSA has no requirements pertaining to cash transactions

4. Which of the following is NOT a “specified unlawful activity” under the Money Laundering Control Act?

a. Assault and batteryb. Drug traffickingc. Terrorismd. Mail and wire fraud

5. The Bank Secrecy Act requires financial institutions to report to the IRS on Form 8300 cash transactions in excess of what amount?

a. $100,000b. $10,000c. $1,000d. $100

6. Which of the following is NOT one of the four specific intentions required to be found guilty of money laundering?

a. Intention of promoting a specified unlawful activityb. Intention to commit tax evasionc. Intention to hide the proceeds from a specified unlawful activityd. Not knowing a transaction was intended to avoid the filing of a SAR

CHAPTER TWO QUESTIONS


3Money Laundering Preventive Measures

Preventive Measures Required by Financial Institutions and Other ProfessionsThe financial services industry in the United States is large, diverse, and complex. Most depository institutions are required to meet all anti-money laundering requirements of the BSA, including the implementation of internal controls, accurate record keeping, a Customer Identification Program, and the reporting of any suspicious activity. The securities industry—comprised of investment advisers, life insurers, and money service businesses—is required to establish AML programs and file suspicious activity reports.

Preventive Measures Required by Insurance Companies and Producers

Insurance Companies and Their Representatives Any person or entity engaged within the United States as a business in the issuing or underwriting of any covered product.

Agents and brokers are excluded from the requirement to develop and implement their own individual anti-money laundering programs; however, they must be included in, and abide by, the AML procedures set forth by the insurance companies they represent. This requirement includes the obligation to notify their insurers when they suspect unlawful activity on the part of their clients or prospective clients. Failure to abide by AML regulations and procedures may result in the termination of the contract an agent or broker has with an insurer.

An agent is defined as:

AgentA sales and/or service representative of an insurance company who sells, markets, distributes, or services an insurance company’s covered products. It includes both captive agents—who only work for or on behalf of a single company (or group of companies), and independent agents—who work on behalf of multiple companies.

Agents, also referred to as producers, represent the insurance companies they represent. In general, fiduciary responsibility passes through the agent to the company.

BrokerOne who, by acting as the customer’s representative, arranges or services covered insurance products on behalf of the customer.

Brokers represent their customers. While they must comply with the terms of the contracts they execute with insurers, their primary responsibility is to the customer.

Insurance companies already registered with the Securities and Exchange Commission as broker-dealers are required to utilize AML programs under statute and are exempt from establishing a separate plan of their own. So long as an insurer’s current SEC plan satisfies the requirements of

23

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the FinCEN final rule, it is exempt. In addition, insurance companies are subject to state regulation. FinCEN lists three reasons for excluding agents and brokers from the requirement to develop and implement their own AML programs:

1. Because the insurance company bears the risk of its products and stands to gain the most from sales, it should retain the responsibility for guarding against illegal use of those products.

2. An insurance company can assume the cost of compliance more easily and effectively than individual agents and brokers can.

3. Many insurers can integrate the AML requirements into existing anti-fraud training.

Insurance Products Covered by FinCEN RegulationsThe following products are subject to regulation by FinCEN:1 2

■ Permanent life insurance policies other than group life insurance policies (i.e., whole life, universal life, and variable life).

■ Annuity contracts other than group annuity contracts; and■ Any other insurance product with cash value or investment features.

The purpose of including insurance products that contain cash value or investment features in the definition of covered products is to ensure that any new life insurance or annuity products having characteristics that might make them vulnerable to money laundering are covered in the future. Group life insurance policies and annuities, with or without these characteristics, are administered according to guidelines that make them generally less vulnerable to money laundering and abuse by participants in the plan.

Insurance Product Excluded by FinCEN RegulationsThe following types of insurance are exempt from AML requirements because they are not designed to include cash values or investment features:3

■ Property and casualty insurance■ Term life insurance■ Health insurance■ Reinsurance■ Group insurance

Although various crimes are committed with respect to these exempted types of insurance (i.e., staged auto accidents, phony death and medical claims), the crimes are considered insurance fraud rather than money laundering—unless cash settlements were specifically used in a separate laundering scheme. When using insurance products, money launderers typically prefer individual life and annuity products because they can hide larger sums of money more easily and transfer them to third parties with less risk of detection.

Risk AssessmentInsurance companies must examine their products, policy services, and application procedures and guidelines to determine what areas might be most vulnerable to money laundering. Then, they must implement training to address these areas, including:

■ Policy-related risks, which identify the types of policies most susceptible to laundering■ Service-related risks, which involve making policy changes or amendments without the need

for underwriting assistance1 http://www.fincen.gov/financial_institutions/insurance/guidance.html2 http://www.fincen.gov/statutes_regs/guidance/pdf/fin-2008-g004.pdf3 http://www.fincen.gov/statutes_regs/guidance/pdf/fin-2008-g004.pdf


MONEY LAUNDERING PREVENTIVE MEASURES

■ Client-related risks, which involve issues concerning lifestyle, known associates, family members, accuracy of information contained on applications, etc.

It is important to keep in mind at all times that compliance with AML requirements is risk-based, meaning insurance companies focus most of their training efforts and resources on the products most at risk for laundering, not necessarily those most popular with the public. Although extensive AML training may seem counterproductive to the agent who sells a single lump-sum annuity, that single lump sum premium deposit might be the proceeds of a crime.

Requirements for Insurer AML TrainingWhen money laundering first began to flourish in this country, insurance products were seldom used to launder money and insurers were exempt from AML training and similar requirements. As criminals discovered cash value-rich insurance products such as annuities and variable life products, their interest was sparked. Insurance companies are now required to incorporate the detection of money laundering into their training programs. In effect, insurance company personnel at every level—including employees, agents, brokers, and producers—have joined the ranks of other financial professionals who are expected to combat today’s money launderers.

As noted previously, insurance companies are responsible for the development and implementation of their own AML training programs. Senior management must approve all programs before they are integrated into the insurer’s operating procedures. The actual training may be conducted in-house or by a competent third party, such as a private vendor or another financial institution that is subject to AML rules. Under the USA PATRIOT Act, the training may be conducted through live presentations, videos, online courses, or other media.

Each insurance company must appoint its own compliance officer or compliance committee to bear the responsibility of creating, implementing, and monitoring its AML program. Compliance officers are expected to be familiar with current AML laws and how they apply to its employer’s business operations. Compliance officers have the authority to enforce the policies they set forth and must also monitor those programs to ensure full participation by all employees, agents, and brokers. Finally, compliance officers are charged with updating the program as necessary.

At a minimum, an AML program should include:

■ A description of money laundering and the reason for the training■ Common red flags associated with money laundering so employees are better able to detect it.■ Actions required of agents encountering actual or suspected laundering and how to report

those activities.■ The importance of confidentiality and the consequences for failing to maintain it

A basic AML policy outline for an insurance company’s training might appear as follows:

I. Risk Assessment – Most Susceptible ProductsA. Product and policy risksB. Service-related risksC. Client-related risks

II. Training ProgramA. Development, approval and implementationB. Money laundering red flags and warning signsC. Suspicious activity report (SARs)D. Confidentiality


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III. Testing and MonitoringA. Responsibility and accountabilityB. Captive versus independent agents and brokersC. Periodic updates

Testing and MonitoringThe same rules that mandate insurance company AML programs also require periodic testing of those systems. Responsibility and accountability for testing lies with the insurance companies, primarily through their compliance officers. Monitoring and testing are intended to:

■ Monitor compliance of agents and brokers who are required to take, and who have completed, the training. A certificate of completion will only be satisfactory evidence of compliance if passing an exam is part of the training.

■ Monitor the effectiveness of the training by matching test results against actual reporting. If the number of trained and certified employees increases dramatically but the reporting of suspicious activities does not increase as well, the training might need to be rewritten or reinforced

■ Document test results for recommendations to the AML compliance officer and senior management

No minimum frequency of testing is required; FinCEN leaves this matter to the discretion of insurers. FinCEN trusts insurance companies to tailor their AML testing to their individual risk assessment results. The testing should be stricter and more frequent where the risk of laundering is higher (i.e., in U.S. border areas). Although insurers may use their own training personnel or a third party to conduct testing, it may not be conducted by the company’s compliance officer or anyone who might later be directly involved in evaluating a suspicious activity report.

Money laundering is not static; it is always expanding and evolving. Sometimes standards seem to change without notice. As money laundering takes on new forms and dimensions, those combating it find themselves adjusting their training and tactics right along with the ever-changing innovations utilized by criminals.

In the insurance industry, adapting training to meet the current money laundering climate is the responsibility of the compliance officer, who will draw on information being shared by national and global organizations. That sharing is one of the main purposes of the international groups. At street level, the agent or broker must be on the alert for new information as it becomes available. More importantly, agents can contribute to a healthy financial environment by adhering to a simple rule: report any suspicious activity.

Captive versus Independent AgentsIt is easier for insurance companies with captive agents to ensure their agents complete AML training. Insurers utilizing independent agents have a more difficult time verifying their agents have completed approved AML training. Independent agent contracts with an insurance company often contain AML requirements and provisions that:

■ Enable the insurer to oversee and analyze an agent’s performance regarding AML efforts; and ■ Obligate the agent to document AML training before securing an appointment with the insurer.

As with captive agents, an insurer may train independent agents through the use of one of the other insurers the agent represents—or by a third party. It cannot be emphasized strenuously enough that AML training rules state proof of course attendance is not sufficient to verify compliance. An insurer must be able to document and evaluate the quality of the course completed and verify that actual learning took place.


MONEY LAUNDERING PREVENTIVE MEASURES

Statistics indicate that money launders often target independent agencies and agents, believing them to be less knowledgeable about money laundering than their captive counterparts and, therefore, more vulnerable to whatever schemes they have concocted. It is imperative for ALL agents, whether captive or independent, to stay informed regarding the latest money-laundering news as it applies to the insurance industry.

AML Software ProgramsNumerous online AML programs are available. The purpose of these programs is to:

■ Reduce AML compliance costs■ Monitor more transactions quickly■ Improve the quality and accuracy of alerts■ Enhance speed and effectiveness of investigations

Similar programs have been used by banks and other financial institutions, as well as major insurers, for many years. They ensure agents access to all the tools necessary to identify at-risk products and transactions. The programs also monitor transactions between institutions, and some even filter government watch lists.

Continuing EducationStaying abreast of the current AML environment is crucial. Money launderers are always changing and expanding their tactics and facilities. Consulting companies that conduct AML training seminars address the latest trends and regulations; they may also publish newsletters to help agents obtain the latest AML news and information.

Government and organizational websites such as those of FinCEN and FATF publish free newsletters containing feature articles, speeches, and legal rulings. The Frequently Asked Questions sections of their websites and newsletters are also very helpful.


1. Which of the following statements BEST describes requirements of AML training programs within the insurance industry?

a. Agents must develop and implement their own AML training programsb. Agents must comply with AML training programs, but do not have to develop their ownc. Agents do not have to attend AML training programsd. The insurance industry is exempt from AML training programs

2. What insurance companies are subject to statute with respect to utilize AML programs?

a. Those registered with the SECb. Those authorized in all 50 statesc. Property and casualtyd. Life insurance

3. Which of the following types of insurance ARE exempt from AML training requirements?

a. Variable lifeb. Annuitiesc. Property and casualtyd. Whole life

CHAPTER THREE QUESTIONS


4Warning Signs and Safeguards

Safeguards and Tools to Combat Money LaunderingMoney laundering is a crime that occurs in all types of businesses, not just in the illegal drug trade. People who earn income from illegal gambling and the fencing of stolen-goods, along with those desiring to avoid paying income tax, will always find ways to launder their illicit income. Agents must be alert for potential abuses of the insurance industry and suspicious insurance transactions.

Protective measures and tools are available to help agents safeguard themselves, their agencies, and their insurers from money laundering scams and from being implicated in those fraudulent schemes. The Financial Industry Regulatory Authority (FINRA) has a webpage with links that provide information about AML rules, regulations, and compliance, all of which provide valuable information to agents intent on exhibiting due diligence in their efforts to combat money laundering.1

Customer Identification Program (CIP)A customer identification program (CIP) is based on Section 26 of the USA PATRIOT Act, sometimes referred to as “Know Your Customer.” Every financial institution is required to establish and enforce specific guidelines regarding obtaining and maintaining information about client identity. FINRA guidelines require agents to obtain and maintain documentation of the following information:2

■ For individuals:□ Name, date of birth, and address□ Identification number:

• For U.S. citizens—the Social Security number or employer identification number (EIN)• For non-citizens—the taxpayer ID number, passport number and country of issue,

alien ID card number, or government-issued ID showing nationality, residence, and a photograph

■ For other legal entities (i.e., corporations, LLCs, trusts):□ Principal place of business and other business locations□ Employer identification number (EIN)□ Government-issued business license□ Articles of incorporation, and/or□ Partnership or trust agreement

Know Your MoneyThe U.S. Secret Service is one of the oldest investigative agencies of the American government and was originally established in 1865 as a branch of the U.S. Department of the Treasury to battle the counterfeiting of United States currency. Currently, the Secret Service has two primary missions:3

1. Investigate crimes against the financial infrastructure of the United States, including:a. Counterfeiting U.S. currency and other obligations

1 http://www.finra.org/Industry/Issues/AML/2 http://www.finra.org/web/groups/industry/@ip/@issues/@aml/documents/industry/p011398.pdf3 http://www.secretservice.gov/faq.shtml#faq1

29

b. Forgery or theft of U.S. Treasury checks, bonds, and other securities.c. Fraud of the following types: credit card, telecommunications, computer, and identity; andd. Certain crimes affecting federally insured financial institutions.

2. Protect the president and other individuals (i.e., vice president, immediate families of the president and vice president, former presidents and certain members of their immediate families).

As a result of the Homeland Security Act of 2002 (Public Law 107-296), the Secret Service was transferred from the Department of the Treasury to the Department of Homeland Security to accomplish expanded goals as outlined in the USA PATRIOT Act. Along with the Federal Reserve Board and the Department of the Treasury, the Secret Service administers a website, Know Your Money,4 which provides details about U.S. currency, training and educational resources for industries that rely on cash, images, and features of the U.S. Treasury notes in current circulation, and an extensive FAQ library.

The $100 was redesigned to include new security features to both deter counterfeiting and help individuals and businesses determine whether it is authentic. Currently, the only U.S. bank notes in circulation are of the following denominations: $1, $2 $5, $10, $20, $50, and $100. Notes in denominations larger than $100 are obviously counterfeit.5

Specially Designated Nationals (SDN)The Office of Foreign Assets Control (OFAC), a division of the Department of the Treasury, maintains a list of specially designated nationals (SDNs).6 A specially designated national (SDN) is defined as:7

Specially Designated National (SDN)An individual or company owned or controlled by, and acting on behalf of, targeted countries.

OFAC also keeps a current list of countries under sanction for money laundering—as well as persons and entities known by their criminal activity and that are not related to a specific country (i.e., terrorists and narcotics traffickers). Insurance agents may contact OFAC when faced with a suspicious customer or situation by visiting the Resource Center on the Department of the Treasury’s website, which contains the most recent SDN List. Agents may also subscribe to SDN email updates.

If an agent has been approached by a person or business whom he or she knows or believes to be hostile to the U.S., OFAC must be notified within 10 days. While an agent or broker may notify OFAC directly, it is advisable to utilize insurance company channels for this process.

Regulatory officials recommend agents finding a match on the SDN list for one of their clients to conduct additional research before filing a report. Unless the name is an exact match, it is possible the match is what is termed as a “false hit.” If a match is similar and not exact, agents are urged to contact OFAC Compliance before actually filing a report and blocking assets. The OFAC hotline is 800-540-6322.8

Politically Exposed Persons (PEP)Under its Recommendations 12 and 22, FATF defines a politically exposed person (PEP) as:

Politically Exposed Person (PEP)An individual who is or has been entrusted with a prominent function. Many PEPs hold positions that can be abused for the purpose of laundering illicit funds or other predicate offenses such as corruption, bribery, or terrorist financing.

4 http://www.newmoney.gov/5 http://www.newmoney.gov/uscurrency/default.htm6 http://www.treasury.gov/resource-center/sanctions/SDN-List/Pages/default.aspx7 http://www.treasury.gov/resource-center/faqs/Sanctions/Pages/answer.aspx8 http://www.treasury.gov/resource-center/faqs/Sanctions/Pages/answer.aspx#23

CHAPTER FOUR


WARNING SIGNS AND SAFEGUARDS

Examples of PEPs include:9

■ Foreign and Domestic PEPs – Heads of State; senior politicians; senior government, judicial, or military officials; senior executives of state owned corporations, and important party officials.

■ International PEPs – Members of senior management of international organizations, such as directors, deputy directors, and members of the board; and

■ Family members and close associates of foreign, domestic, and international PEPs.

Because of the potential risks connected with PEPs, FATF and other AML/CFT organizations require the use of additional preventive measures by those with business relationships with PEPs. It cannot be emphasized enough that the required measures are considered preventive and not criminal, as well as within the FATF’s customer due diligence requirements. Financial institutions and insurance agents must know who their customers are and have access to many external sources of information to determine if customers, and potential customers, are PEPs:

■ Commercial and other organizations’ databases■ Internet and media searches■ Government-issued PEP lists■ In-house databases and information sharing with other financial groups or countries■ Asset disclosure systems■ Customer self-declarations, and■ Information sharing by authorities

In addition to obtaining information about an individual’s likelihood of being a PEP, agents should be alert for known indicators that cast suspicion on the potential for misuse of the financial system. The following list is illustrative; the complete list can be found in the FATF Guidance:10

■ Shielding identity through the use of legal entities that obscure their beneficial owners■ Use of corporate vehicles without a legitimate business purpose■ Use of intermediaries that do not conform with normal business practices or for the seeming

purpose of shielding identity of one or more PEPs■ Use of family members or close associates as legal owner■ An inquiry by the individual about the AML or PEP policy of the financial institution, insurer,

or agent■ Hesitancy or reluctance to provide details about the source of wealth or funds■ Information provided by the individual contradicts information that is available publicly (i.e.,

asset declarations and official salaries)■ The provision of inaccurate or incomplete information■ The individual has been, or is, denied entry to the country (i.e., denial of visa), and/or■ The individual is from a country that does not allow, or limits, its citizens from holding

accounts or owning certain property in a foreign country

For additional information about how to determine if an individual is a PEP, and guidance about the use of information, applicable measures to use, supervision, and other issues, FATF issued a guidance: Politically Exposed Persons (Recommendations 12 and 22).11

9 http://www.fatf-gafi.org/media/fatf/documents/recommendations/guidance-pep-rec12-22.pdf10 http://www.fatf-gafi.org/media/fatf/documents/recommendations/guidance-pep-rec12-22.pdf11 http://www.fatf-gafi.org/media/fatf/documents/recommendations/guidance-pep-rec12-22.pdf


Red FlagsThe warning signs listed below were derived from transactions involved in actual court cases. They are examples of what real-world experience warns agents to look for. These red flags are mentioned briefly here and will be discussed in more detail later in the course:

■ A purchase inconsistent with a customer’s needs■ An unusual method of payment such as cash or a cash-equivalent (i.e., money order)—either

in a large, lump sum or broken down into smaller amounts (i.e., structured)■ Early termination of an insurance product at a cost to the customer if remittance was made in

cash or by an unrelated third party (early-termination charges are an accepted cost of business with relation to money laundering)

■ A policy benefit is transferred to an unrelated third party■ Borrowing the maximum cash value available soon after the insurance product is purchased.■ Reluctance to provide identifying information or providing seemingly fictitious information

when conducting an insurance transaction■ Showing little or no concern for the insurance product’s investment performance but great

concern about early cancellation features, and■ Allowing third parties to withdraw cash value

Willful BlindnessAccording to a recent Supreme Court opinion, willful blindness is a term used in law that describes a situation in which an individual purposely takes action to avoid learning a fact that he or she believes has a high likelihood of existing. In other words, the individual is virtually certain misconduct or illegal behavior has occurred and he or she deliberately behaves in a manner that prevents confirmation of the facts.

Failure to comply with the BSA relating to willful blindness may result in an individual being fined for noncompliance. The IRS publishes on its website BSA penalties.12 Under its AML Program Violations, the IRS calls for penalties for “Civil Willfulness,” which is “established by evidence showing a voluntary intentional violation of a known legal duty.” The IRS states that if a person does not know of the legal duty but it can be proven he or she made a conscious effort to avoid learning of the duty, the individual will be considered having acted with civil willfulness under the concepts of willful blindness or reckless disregard.

The compliance policy of a particular bank states that penalties may be levied against employees who violate the BSA by acting in either of two ways: by knowledge or by willful blindness.13 The bank defines the two terms as follows:

■ Knowledge exists when an employee knows or should have known that conducting a transaction will or might promote an unlawful activity.

■ Willful blindness exists when an employee intentionally fails to inquire about a transaction he or she considers suspicious or when the employee chooses to ignore the circumstances surrounding a suspicious transaction.

In connection with a District Court’s decision concerning the claims brought by the trustee of Bernie Madoff against investors, the court claimed the definition of willful blindness means an individual “intentionally [chose] to blind himself to the ‘red flags’ that suggest a high probably of fraud.”14

12 http://www.irs.gov/irm/part4/irm_04-026-007.html13 https://www.mibanc.com/files/BSA_Policy_2012-04-04.pdf14 http://www.chadbourne.com/files/Publication/8836dad5-9b7e-4be1-9c31-a64656dccec1/Presentation/PublicationAttachment/dbb2b979-c461-4528-b701-a7aa116da017/FSL_

Newswire_Dec2011.pdf

CHAPTER FOUR



This court case, along with many other judicial and regulatory decisions, confirms that ignoring information is not an acceptable excuse for sidestepping the legal consequences of misconduct or unlawful activity.

Suspicious Activity Report (SAR)The BSA requires the filing of specific forms via the BSA E-Filing System under certain circumstances.15 The BSA E-Filing System requires the following forms to be filed electronically; more information can be found online at http://bsaefiling.fincen.treas.gov/main.html:

■ Suspicious Activity Report (SAR), FinCEN Report 111■ Currency Transaction Report (CTR), FinCEN Report 112■ Designation of Exempt Person, FinCEN Report 110■ Registration of Money Services Business, FinCEN Report 107■ Report of Foreign Bank and Financial Accounts, FinCEN Report 114■ Report of Cash Payments Over $10,000 Received in Trade or Business, FinCEN Form 8300

FinCEN’s SAR filing instructions require the following financial institutions operating in the U.S. to file a report of any suspicious transaction that relates to a possible violation of law or regulation:16

■ Banks, including Bank and Financial Holding Companies■ Casinos and Card Clubs■ Money Service Businesses■ Brokers or Dealers in Securities■ Mutual Funds■ Insurance Companies■ Futures Commission Merchants and Introducing Brokers in Commodities■ Residential Mortgage Lenders and Originators

The types of transactions that must be reported include those involving at least $5,000 where the financial institution knows, suspects, or has reason to suspect the transaction (or a pattern of transactions):17

■ Is part of a plan to avoid any federal transaction reporting requirement or violate any federal law or regulation that:□ Involves money originating from illegal activity, or□ Is intended or conducted to disguise or hide money originating from illegal activity

(including the ownership, nature, source, location, or control of the money)■ Is designed to evade any requirement of the BSA or certain other federal laws■ Has no business or apparent lawful purpose or is not the type of transaction or transactions the

particular customer might ordinarily be expected to request AND the financial institution does not have any reasonable explanation for the transaction after reviewing all available facts, or

■ Involves the financial institution to conduct criminal activity

31 C.F.R. § 1025.320 indicates that insurers must report any suspicious transaction of $5,000 or more that involves a covered insurance product that relates to a possible violation of law or regulation.18 The most recent guidance issued by FinCEN concerning the filing of SARs and Currency Transaction

15 http://www.fincen.gov/forms/bsa_forms/16 http://www.fincen.gov/forms/files/FinCEN%20SAR%20ElectronicFilingInstructions-%20Stand%20Alone%20doc.pdf#page=217 Ibid.18 http://www.law.cornell.edu/cfr/text/31/1025.320


Reports contains details about the timeline and filing method, as well as characteristics of suspicious activity.19

Insurers are responsible for reporting transactions handled by their agents and brokers; however, certain agents may have a separate obligation to report suspicious transactions. If an agent is required to file a separate SAR, only one form needs to be filed so long as it contains all pertinent facts and includes the words “joint filing” in the narrative section, along with the names of the filing parties (i.e., agent and insurer). Both parties must comply with filing requirements, including the recordkeeping of supporting documentation.

Insurers issuing variable products have separate requirements, per 31 C.F.R. § 1024.320.

SARs are required to be filed by insurers within 30 calendar days of the initial detection of suspicious activity. If the insurer is not able to identify a specific suspect at that time, it may delay filing the SAR for another 30 calendar days during which it attempts to make identification. However, the SAR filing cannot be delayed more than 60 calendar days after the initial detection.

Situations such as suspected terrorist financing or ongoing money laundering schemes require insurers to make an immediate report, in addition to the filing of an SAR, by telephone to FinCEN or to the appropriate law enforcement agency. FinCEN’s Financial Institutions Hotline can be reached by dialing 866-556-3974.20

Insurance companies are required by law to retain copies of all SARs they file for five years from the date of filing. Supporting documentation must also be retained and will be considered filed with the SAR. As stated previously, if an insurer files an SAR jointly with another party, these same filing requirements apply.

With respect to insurance, the following transactions are typically reported with respect to suspicions of money laundering:

■ Excessive insurance■ Excessive or unusual cash borrowing against the policy or annuity■ Proceeds are sent to or received from an unrelated third party■ Suspicious life settlement sales take place (i.e., STOLIs and Viaticals)■ Suspicious terminations of the policy or annuity■ No insurable interest or the insurable interest is not apparent

With respect to securities, the following transactions are typically reported with respect to suspicions of money laundering:

■ Insider trading■ Market manipulation/wash trading■ Misappropriation■ Unauthorized pooling

SAR ConfidentialityFinCEN is committed to the vigilance of its requirements with respect to the sharing of information and the confidentiality of SARs. It issued a number of guidance reports for individual types of financial institutions, as well as its Confidentiality of Suspicious Activity Reports21 and Maintaining the Confidentiality of Suspicious Activity Reports.22 Rules pertaining to confidentiality of SARs can be found in 31 C.F.R. § 1025.320(e)23

19 http://www.fincen.gov/statutes_regs/guidance/html/FIN-2012-G002.html20 http://www.fincen.gov/fi_hotline.html21 http://www.gpo.gov/fdsys/pkg/FR-2010-12-03/pdf/2010-29869.pdf22 http://www.fincen.gov/statutes_regs/guidance/html/FIN-2010-A014.html23 http://www.law.cornell.edu/cfr/text/31/1025.320

CHAPTER FOUR



Essentially, the SAR itself, along with any information that might reveal its existence, is confidential and cannot be disclosed other than as authorized by law as follows:

■ Disclosure by insurance companies:□ No insurer—including its directors, officers, employees, and agents—may disclose the

existence of an SAR or any information that might reveal the SAR exists.□ If an insurer or its representatives is subpoenaed or requested to disclose a SAR or

information that would reveal its existence “shall decline to produce the SAR or such information, citing this section and 31 U.S.C. 5318(g)(2)(A)(i), and shall notify FinCEN of any such request and the response hereto.” 24

□ Insurers and their representatives may disclose the existence of an SAR if all the following apply:• No person involved in any reported suspicious transaction is notified the transaction

was reported; AND• The disclosure is made to:

o FinCENo A federal, state, or local law enforcement agencyo A federal regulatory agency that examines insurers for compliance with the BSA;

ORo The disclosure is consistent with Title II of the BSA

■ Disclosure by government authorities:□ No government authority—including its directors, officers, employees, and agents—may

disclose the existence of an SAR or any information that might reveal the SAR exists unless the disclosure fulfills official duties consisted with Title II of the BSA.

□ “Official duties” does NOT include responding to a request for disclosure of non-public information or a request for use in a private legal proceeding.

Insurance companies and their representatives cannot be legally liable for filing an SAR voluntarily (including joint filings) or for failing to disclose that an SAR was filed. FinCEN has the authority to examine insurance companies for compliance with SAR confidentiality regulations and, if an insurer violates confidentially laws or regulations, it may be found in violation of the BSA.

Potential civil and criminal penalties for unauthorized disclosure of SARs are:25

■ Up to $100,000 per violation for civil penalties■ Up to $250,000 and/or imprisonment up to five years for criminal penalties

In addition, if a financial institution is found deficient in its AML programs (i.e., with respect to internal controls or training), it may also be liable for penalties up to $25,000 per day for each day a violation continues.

Identifying Potential Money Laundering Situations in the Insurance IndustryAgents need to be on the alert for money laundering both during the sales process and after the sale. Although it does not happen often, it is not outside the realm of possibility that money laundering may be attempted at the agent or agency level. The following information addresses circumstances for which agents should be alert before, during, and after the sale of insurance.

24 31C.F.R.1025.320(e)(1)(i)25 http://www.fincen.gov/statutes_regs/guidance/html/FIN-2012-A002.html


Before the Sale■ The applicant tries to pay in large volumes of cash or cash equivalents, i.e.: cashier’s checks,

money orders, or bank drafts. If several payments are presented, be alert for sequential numbering. Though unlikely, a cyber-account is possible.

■ The applicant gives incomplete information or says he or she will get back to the agent with some of the information requested on the insurance application. Agents should be alert for mailing addresses outside the local area and applicants buying insurance in a state other than that of their home address.

■ The applicant wants to make a disinterested third party the beneficiary of a life insurance policy.

NoteIn most cases, the insurer will not process this type of request and will require a person with insurable interest in the life of the insured to be named as beneficiary.

■ The applicant authorizes a third party to have access to the policy as owner or co-owner.■ The applicant wants to buy an insurance product not in keeping with his or her stated standard

of living or lifestyle, or for which he or she has no apparent use or need.■ The applicant shows more concern about early termination fees than product performance.■ The policy is being paid for by a third party.■ The applicant purchases several policies at once, each on the life of a different person.■ The applicant promises that other people will be buying policies from the agent soon ... and

they do.

During the Sale■ A third party attempts to make changes to the policy.■ The agent is directed to withdraw funds and transmit them to a foreign account.■ Premium or additional funds are paid with a source different from the original payment source,

particularly if from a foreign account. Electronic or wire transfers are particularly suspicious.■ Additional funds are paid with currency or money orders that are numbered sequentially.■ The beneficiary is changed to a third or undisclosed party.■ Premiums are overpaid and a request is made to pay the excess premium amount to a third

party.■ Any degree of third-party involvement relating to premiums is suspicious.

After the Sale■ The policy is cancelled during the free look period. (Keep in mind that the insurance

company’s return-of-premium check is considered “clean” money.)■ The policy is cancelled although little or no cash value has accrued.■ Refund checks are requested to be transmitted:

□ To several payees□ To a financial institution other than the one that financed the premiums, particularly

foreign accounts□ To a third party; or□ By electronic or wire transfer

The warning signs mentioned are not guarantees that money laundering, or even something illegal, is occurring. However, they are suspicious and should always be investigated. In addition to the recognition of red flags and warning signs, an agent’s own instincts and experience are valuable tools in the process of detecting money laundering. If an agent is unsure about what constitutes suspicious activity, he or she should consult the insurer immediately.

CHAPTER FOUR



The following examples are actual instances of attempted money laundering through insurance products:

Scenario #1 – Telephone callCaller: “I want to buy life insurance.”Agent: “We have a variety of life insurance products. Are you looking for term or permanent

insurance?”Caller: “I want whatever will earn me extra money.”Agent: “We have great policies that are earning good returns.”Caller: “How long do I have to wait after I buy one to start making withdrawals?”Agent: “That depends on the premiums you pay into the policy. Ordinarily, it takes two to

three Caller: “What if I put in a lot of money up front?”Agent: “That definitely speeds up the cash value accumulation process.”Caller: “Okay, I’d like to put $25,000 down on a policy. I’ll bring in five money orders of

$5,000.”

What are the red flags?■ Caller wants to know how soon funds can be withdrawn from the policy.■ Caller wants to make a large payment in small increments. If payment is made in

person, the agent should check the money orders for sequential numbering, different issuers, different payees, and foreign bank sources.

What should the agent do?■ Inform the insurance company about the suspicious behaviors.■ Keep a detailed record of all calls, conversations, requests, etc. that relate to this initial

phone call—including dates and times.

Scenario #2 – Telephone callCaller: “I want to cancel my annuity.”Agent: “Because you purchased it six months ago, cancelling it now will result in a surrender

penalty. So far, the annuity is performing well and, in view of the penalty, I don’t recommend cancelling it. Is there a problem that requires you to terminate the contract?”

Caller: “No, I just want to cash it in.”Agent: “Okay, so long as you understand a surrender penalty applies, I’ll send you a

surrender form. Where do you want the premium refund check sent?”Caller: “I don’t want a check. I want three separate electronic transfers—one to a bank in

Iran, one to a trust in Nigeria, and the last one to a business in St. Croix.”

What are the red flags?■ The annuity is being surrendered shortly after purchase.■ Caller wants the refund sent electronically.■ Caller wants the refund split and sent to three separate foreign accounts.


What should the agent do?■ When the agent submits the surrender form to the insurance company, he or she

should inform the insurer of the suspicious circumstances surrounding the surrender and relay all information provided by the client.

■ Keep a detailed record of the conversation and any documents provided by the client. The agent’s records may be the most important element in whatever case develops.

Scenario #3 – Office visitApplicant: “I’d like to buy some insurance.”Agent: “What kind of insurance are you interested in?”Applicant: “Uh, I don’t really know. I just want some insurance in case my friend dies.”Agent: “Do you and your friend own property together or have a financial relationship?

Do you live together?”Applicant: “No. I just want insurance in case he dies.”Agent: “Okay, how much insurance do you think you need?”Applicant: “$500,000 should do it”Agent: “Is your friend here with you?”Applicant “No, he lives in another state.”Agent: “Oh, I see. Unfortunately, I’m not able to write life insurance on your friend

unless he is here at the time we complete the application and he signs it, right along with you. If you’d like to schedule an appointment for the two of you to return together, I’ll be happy to set one up.”

Applicant: “Just fill out the papers, give them to me, and I’ll get him to sign them. I’ll bring everything back tomorrow.”

Agent: “I’m sorry, but I can’t do it that way. I have to be present when each of you signs the application.”

What are the red flags?■ The man’s desire to purchase a large amount of insurance on a friend, a person in

whom he has no apparent financial (i.e., insurable) interest.■ The man’s insistence that his friend not visit the insurance agent’s office to be present

when the application is to be completed and signed.

What should the agent do?■ Report this incident to the insurance company immediately and document the

conversation.

CHAPTER FOUR



Scenario #4 – Office visitApplicant: “Hey there! I’m in the market for a hot new life insurance policy. What’s the

best one you have?”Agent: “Variable products are the newest thing in the life insurance market. We have

several to choose from depending on what kind of return you’re looking for.”Applicant: “I don’t really care about the return. All I want to know if there are any

penalties for taking the money back out. How much would I lose if I cancel the policy just before Christmas. You know, in case I need money for gifts?”

Agent: “That depends on what policy you buy and how much premium you pay. The highest yield policy has a 25% early surrender fee.”

Applicant: “No problem. I think I’ll go ahead and buy one for my mother-in-law.”Agent: “Yes, sir. I’ll need to meet with your mother-in-law to complete the

application. Why don’t we arrange a time for her to come in to the office?”Applicant: “No problem. And since you’ve been so nice, I’ll be sending five of my

friends to buy policies too!”

What are the red flags?■ The man was more concerned with the policy’s surrender penalties than with its

performance.■ The purchase of the policy did not seem to serve any legitimate purpose or need.■ The policy being purchased is on the life of someone else.■ The man promised more business from other sources if the agent sold him a policy.

What should the agent do?■ Report this incident to the insurance company immediately and document the

conversation.


1. What type of AML program is also referred to as "Know Your Customer?"

a. Customer identification program (CIP)b. Specially designated national (SDN)c. Politically exposed person (PEP)d. Willful blindness

2. A specially designated national (SDN) appears on OPAC’s list because of being under sanction for what crime?

a. Murderb. Embezzlementc. Theftd. Money laundering

3. Which of the following individuals is MOST likely to be a politically exposed person (PEP)?

a. A Canadian hockey playerb. An Irish musicianc. A British magistrate (judge)d. An Australian attorney

4. What is Andy guilty of if he claims he doesn't know a client was laundering money but he should have known about it?

a. Theftb. Willful blindnessc. Suspicious activityd. Insensitivity

5. When is one required to file a suspicious activity report?

a. Annuallyb. Monthlyc. When money laundering or terrorist financing is suspectedd. When theft or embezzlement is suspected

CHAPTER FOUR QUESTIONS


5Trends, Techniques, and Effects of Money Laundering

Regardless of laws and safeguards, dirty money always manages to find a way through the laundry cycle. Only because of the vigilance and underlying character of conscientious enforcers will money launderers be thwarted. Even then, the success of money launderers will only be hampered until they find the next available path to their destination.

Agents and brokers need to know money laundering can have a disastrous effect on the insurance industry, the economy, and national security. In addition to providing important general knowledge about the crime of money laundering, AML/CFT awareness should reinforce an agent’s determination to avoid any hint of complicity in money laundering schemes.

Most agents are unlikely to be approached by members of a drug cartel or a terrorist organization with requests to assist them with the commission of their crimes. However, although this turn of events is unlikely, it does not mean an agent will not be approached by someone wishing to transform dirty money into clean money. Despite the popularity of other partners in money laundering schemes throughout the financial marketplace, the insurance industry is being used more than ever and agents are often the first target of these criminals.

TrendsThe State Department issues a two-part annual report to Congress in accordance with the Foreign Assistance Act; Volume I of the report discusses drug and chemical control and Volume II discusses money laundering and financial crimes.1 2 According to the most recent issue of the report, the major money laundering countries include:

■ Afghanistan, Antigua and Barbuda, Argentina, Australia, Austria■ Bahamas, Belize, Bolivia, Brazil, British Virgin Islands, Burma■ Cambodia, Canada, Cayman Islands, China, Colombia, Costa Rica, Curacao, Cyprus■ Dominican Republic, France, Germany, Greece, Guatemala, Guernsey, Guinea-Bissau■ Haiti, Hong Kong, India, Indonesia, Iran, Iraq, Isle of Man, Israel, Italy■ Japan, Jersey, Kenya, Latvia, Lebanon, Liechtenstein, Luxembourg■ Macau, Mexico, Netherlands, Nigeria, Pakistan, Panama, Paraguay, Philippines■ Russia, Singapore, Somalia, Spain, St. Maarten, Switzerland, Taiwan, Thailand, Turkey■ Ukraine, United Arab Emirates, United Kingdom, United States, Uruguay, Venezuela,

Zimbabwe

It should be noted that these countries appear on the list because they are statutorily defined as one “whose financial institutions engage in currency transactions involving significant amounts of proceeds from international narcotics trafficking.”3

1 http://www.state.gov/j/inl/rls/nrcrpt/2014/2 http://www.state.gov/documents/organization/222880.pdf3 http://www.state.gov/documents/organization/222880.pdf

41

The Organized Crime and Corruption Reporting Project (OCCRP) reviewed the State Department’s report and said drug trafficking and money laundering are “inextricably connected:”4

“The connection is a two-way street: major drug throughways are likely to have weak rule of law, which allows for money laundering; at the same time, incoming floods of illicit funds—which money laundering allows—tend to lead to the breakdown of law enforcement and the corruption of public officials..”

The report itself concludes several facts. First, the complexity of current money laundering transactions makes it difficult to distinguish the proceeds of drug trafficking from the proceeds of other serious types of crime. Secondly, financial institutions that engage in transactions involving large sums of money related to serious crime other than drug trafficking are vulnerable to narcotics-related money laundering. Finally, current money laundering schemes no longer only involve banks and traditional financial institutions—they now involve non-financial businesses, professions, and alternative money and value transfer systems.

According to the FATF, global money laundering trends include:5

■ The purchase of real estate, large motor vehicles, boats, and jewelry■ Electronic payment systems■ Trade in precious metals, electronics, and energy■ Use of cash■ Tax evasion■ Terrorist financing■ The diamond trade■ Drug trafficking■ Hawalas and other similar service providers (HOSSPs)■ Use of non-profit organizations■ Illicit tobacco trade

TechniquesBlack Market Peso Exchange (BMPE)According to the Association of Certified Financial Crime Specialists (ACFCS), the Black Market Peso Exchange (BMPE) is a form of trade-based money laundering that uses the purchase and sales of merchandise in different countries to clean dirty money.6 The scheme involves at least three participants:

■ A criminal with an illegal business (i.e., a drug trafficker)■ A criminal with a lawful business (i.e., a business owner)■ A middleman (i.e., peso broker)

The peso broker handles the exchange of money and merchandise between the other two parties with the intention of making it appear like a legitimate transaction. The peso broker sends money to business owners in the United States, where the funds purchase merchandise sent to another country (usually Mexico and other South American countries). The merchandise is then sold in that other country in exchange for its currency (i.e., pesos). The pesos are then returned to the drug trafficker after the peso broker subtracts a commission for facilitating the exchange.4 https://occrp.org/occrp/index.php/en/ccwatch/cc-watch-briefs/1874-us-releases-report-on-major-money-laundering-countries-trends5 http://www.fatf-gafi.org/topics/methodsandtrends6 http://www.acfcs.org/la-raid-on-narco-money-laundering-shows-proliferation-of-tbml-and-black-market-peso-exchange

CHAPTER FIVE


TRENDS, TECHNIQUES, AND EFFECTS OF MONEY LAUNDERING

The BMPE is another form of the hawala system used in the Middle East and the schemes used by the Colombian cocaine cartels. These trade-based money laundering schemes are becoming more popular and widespread because financial institutions have become much more sophisticated in their AML efforts.

A recent example of a classic BMPE scheme involved a Chinese-American toy company that was investigated jointly by the U.S. Immigration and Customs Enforcement’s Homeland Security Investigations and the California Attorney General’s Bureau of Narcotics Enforcement.7 The company’s two owners were sentenced to serve more than three years in federal prison for their cash structuring scheme. Each of the company’s owners and the toy company were ordered to forfeit $1 million to the government and the toy company was fined $200,000. Each of the three pled guilty to laundering money through the toy company after it was illegally gained through drug trafficking.

Overseas Banks/Offshore Financial Centers (OFCs) According to the International Monetary Fund (IMF), offshore financial centers (OFCs) specialize in providing financial services to companies domiciled in other countries in return for low taxes, stability, and secrecy.8 The services provided by offshore financial centers include:

■ International banking■ Headquarter services (i.e., incorporating in the OFC)■ Foreign direct investment (for multinational firms)■ Insurance■ Collective investment schemes (i.e., hedge funds)

Although some OFCs provide legitimate services that foster economic growth and expansion, others support and promote tax evasion and money laundering. Many OFCs are viewed as “cost competitive” because they are located in jurisdictions with regulatory and supervision standards that are less stringent than those found in most other jurisdictions. While they involve reduced administrative and operating costs, they are often not compatible with international financial yardsticks. The IMF reports that the Caribbean hosts more than one-half of all OFC financial transactions and the Cayman Islands are responsible for almost 75% of all OFC transactions.9

Many of the financial scams that operated during the global financial crisis in 2008-2009 were conducted through OFCs, thus prompting international organizations to demand them to comply with international financial standards. One of the primary goals of money launderers using OFCs is to avoid paying taxes by hiding income and investment income, or shifting taxable income.

Global efforts at stemming the use of OFCs to conduct criminal activity include:10

■ Decreasing the incidence of tax evasion, led by the Global Forum on Transparency and Exchange of Information and the Global Forum/Organization for Economic Cooperation and Development (OECD)

■ Restricting legal tax avoidance, led by the OECD and the G-20 (a group of finance ministers and central bank governors from the European Union and 19 of the world’s largest economies)

■ Eradicating regulatory loopholes for financial institutions, led by the Financial Stability Board (FSB)

■ Reinforcing the battle against money laundering the financing of terrorism, led by the FATF and supported by the IMF

Of course, these global efforts have both positive and negative effects on OFCs, which only serves to intensify the conflicting opinions about them.

7 http://www.justice.gov/usao/cac/Pressroom/2012/021.html8 http://www.imf.org/external/pubs/ft/fandd/2011/06/gonzalez.htm9 http://www.imf.org/external/pubs/ft/fandd/2011/06/gonzalez.htm10 http://www.imf.org/external/pubs/ft/fandd/2011/06/gonzalez.htm


Underground Banking/Alternative Remittance SystemsThe Chr. Michelsen Institute (CMI) in Norway is an independent development research institute that focuses on local and global challenges relating to justice and the eradication of poverty.11 It operates the U4 Anti-Corruption Resource Center, which offers anti-corruption material through its web-based resource center.12

Underground BankingU4 defines underground banking as any informal banking arrangements which run in parallel and independently of the formal banking system. It involves the transfer of currency around the world without necessarily physically relocating it. Hawala and hundi systems are considered to be among its examples.

Other terms for underground banking include alternative remittance systems, informal funds transfer systems, and what FinCEN refers to as informal value transfer systems (IVTS).13 Specific types of systems also exist in particular parts of the world, such as:

■ Hawala, in India■ Hundi, in Pakistan■ Fei Ch’ien, in China; and■ Black Market Peso Exchange, in Mexico and South America

Because underground banking involves geographic diversity and a wide variety of methods to conduct business, it is difficult to regulate and, therefore, highly attractive to those wishing to launder money and undertake other criminal activities. Many underground banking transactions do not require either the sender or receiver of funds to be identified by anything other than a simple exchange of a password to access the account. Although money laundering is, by far, the criminal activity that utilizes underground banking the most, other illegal pursuits that utilize it include tax evasion, the smuggling of illegal immigrants, and crimes involving intellectual property.

According to a recent advisory issued by FinCEN, Informal Value Transfer Systems (IVTS) are permitted to operate legally as a type of Money Services Business (MSB) if they comply with applicable federal and state laws.14 Compliance includes registering with FinCEN and adhering to AML/CFT provisions of the BSA.

An example of an illegal IVTS that violated FinCEN and federal laws as well as OFAC sanctions resulted in the conviction of a resident of Iran. The multi-national scheme operated an unlicensed MSB in the United States that received several million dollars in its American bank account on behalf of American customers.15 The money launderer then utilized IVTS brokers in Iran to transfer funds to Iranian residents.

Shell CompaniesIn their most basic form, shell companies are established easily and used for lawful purposes, such as to act as a holding company—a company that owns enough voting stock in another company to control its management. Shell companies do not have operations and do not conduct business activities; all they do is own assets. Unfortunately, many shell companies are established for the sole purpose of disguising and carrying out criminal activities such as money laundering.

11 http://www.cmi.no/about/12 http://www.u4.no/info/about-u4/13 ttp://www.aic.gov.au/documents/A/0/C/%7BA0C5EAE8-9D4A-4BD6-8B6D-C65F46C3FBE8%7Dtandi300.pdf14 http://www.fincen.gov/statutes_regs/guidance/pdf/FIN-2010-A011.pdf15 http://www.fincen.gov/statutes_regs/guidance/pdf/FIN-2010-A011.pdf

CHAPTER FIVE



Shell Company or Shell BankThe FATF defines a shell company or shell bank as16 one without a “physical presence” in the country in which it is incorporated and licensed and which is not affiliated with any business associate or parent company to which supervision or regulation applies. “Physical presence” is defined as “meaningful mind and management located within a country. The existence simply of a local agent or low level staff does not constitute physical presence.”

Illegal shell companies often exist merely to serve as layers for money laundering schemes and other illegal pursuits such as tax evasion, terrorist financing, and the giving and taking of bribes.17 Banks dealing with shell companies have found they exhibit one or more of the following characteristics:

■ Their goods and services do not match the company’s profile■ They have frequent involvement with offshore financial centers.■ They often cannot or will not identify either the origin or ultimate destination of fund transfers■ They share the same mailing address with unrelated entities■ A large number and variety of beneficiaries receive wire transfers from one company■ They conduct a high level of sporadic activity inconsistent with the normal patterns of

businesses in their industry. For example, a toy company doing much more business in April than during the Christmas season would be suspect

Shell companies are used in both the placement and layering phases of the money laundering process to disguise the evidence trail. The following recent cases illustrate how shell companies are able to create layers between the criminal and the laundering process, and between the crime and the money.

Case #1Officials in Bangkok, Thailand searched an airplane that was carrying North Korean arms intended for delivery in Iran. Although it was learned a New Zealand shell company had leased the airplane, no records existed to indicate who owned or controlled the company.18

Case #2A Russian arms dealer was convicted of conspiracy to aid a terrorist organization. The arms dealer’s enterprise relied upon shell companies located around the world, including in Delaware, Florida, and Texas.

Case #3The son of the president of a West African country used a number of shell companies in California to launder money received from corruption activities in the U.S. The shell companies held bank accounts and title to the son’s $35 million mansion in Malibu, CA.

Investing in Legitimate BusinessThe integration phase of money laundering is usually accomplished by using a legitimate business owned or controlled by the money launderer—or with which the launderer has an arrangement. The business can pay the launderer a salary, a consulting fee, or some other form of legitimate compensation. The more clean money a business actually handles, the easier it is to disguise the dirty money.

Cooperative casinos and brokerage firms are prime examples of legitimate businesses that are used to launder money. Another way of using legitimate commerce for money laundering is through cash businesses, referred to as “fronts.” Bars, car washes, adult entertainment clubs, and check-cashing enterprises are common venues for fronts. They can provide legitimate goods and services while obscuring their real purpose: sifting dirty money into their daily cash deposits.

16 http://www.fatf-gafi.org/pages/glossary/s-t/17 http://www.economist.com/node/2156328618 http://www.griffith.edu.au/__data/assets/pdf_file/0008/454625/Oct2012-Global-Shell-Games.Media-Summary.10Oct12.pdf


Fronts accomplish their goals in two ways:

■ The launderer combines illegal funds with the business’ gross receipts, claiming on paper that more goods were sold, or more services were provided, than was actually the case; and/or

■ The launderer deposits illegal funds directly into the business’ account(s), bypassing receipts. In most service businesses, it is nearly impossible for investigators to crosscheck receipts against expenditures.

MispricingMispricing is a common practice that takes place between established economies and those in early stages of growth and development. In this complicated process, money in need of laundering is traded across international borders. International share prices or exchange rates are deliberately over- or understated, which can draw capital into a given market and is difficult to monitor because different countries have different computation methods and rules.

Little uniformity exists among jurisdictions when establishing risk levels; anonymity standards, thresholds, amount caps, and priorities also differ significantly among countries. One goal of mispricing is tax evasion, which is a staple of money laundering.

Global Financial Integrity (GFI) was established to promote policies aimed at reducing the cross-border flow of illegal money. GFI claims that more illicit money is moved across international borders via mispricing than by any other money laundering method. Some nations have claimed to lose more than $100 billion dollars in tax revenue each year through this tactic—with total losses estimated at over $1 trillion in recent years.19

New Payment Methods (NPM)The FATF has issued a number of reports and guidances in recent years concerning new payment methods (NPMs) and new payment products and services (NPPS).20 21 As technology and global communications have advanced, new payment methods have taken hold in both legal and illegal financial transactions. Cash is the preferred underworld currency, but new payment methods (NPMs)—a variety of electronic methods of payment—are becoming more prevalent.

NPMs generate a transaction record, and possibly an IP address tracing the actual location of the purchase, whereas cash does not. As the use of electronic forms of payment become more common, criminals find innovative ways to use them. With the increased use of NPMs in the legitimate marketplace, money laundering and terrorist financing groups are also using them.

The FATF’s first assessment of these methods compared projections to actual experience. In this context, new payment methods do not necessarily mean how recently they were developed; “new” also refers to the date financial institutions began utilizing them. In addition to banks, insurance companies and quasi-financial firms (i.e., tax-filing super stores) began using new payment methods. The use of NPMs for money laundering and terrorist financing includes:

■ Third party funding (including straw men and nominees).■ Exploitation of the anonymity of NPM accounts; and■ Complicit NPM providers and/or their employees.

Some of the major factors that add to the appeal of NPMs for money launderers are the anonymity, high negotiability, use of funds, and global access to cash through automatic teller machines (ATMs). Anonymity may be considered direct (without requiring customer identification) or indirect (using fake or stolen identities, straw men, or nominees). NPM providers, commercial banks foremost among them, can mitigate risks of money laundering by:

19 http://www.gfintegrity.org/report/the-implied-tax-revenue-loss-from-trade-mispricing/20 http://www.fatf-gafi.org/media/fatf/documents/reports/ml%20using%20new%20payment%20methods.pdf21 http://www.fatf-gafi.org/media/fatf/documents/recommendations/guidance-rba-npps.pdf

CHAPTER FIVE



■ Requiring identification for each transaction■ Limiting transaction amounts and frequencies■ Implementing strict monitoring systems

NPMs have filled a need in the marketplace for alternatives to the traditional financial services. They have also been used to connect with those who have been excluded from the traditional services: individuals with low credit scores, children and those who have not yet attained legal age, and those living in areas without banking services. Prepaid cards, Internet payment services, and mobile payments have become more widely used in recent years and have emerged as a viable alternative to the traditional financial system in a number of countries.

Prepaid CardsPrepaid cards have become a common new payment method. Two basic types of prepaid cards exist: open loop and closed loop. The open loop type, so-named because the cards can be refilled, is far more common that closed loop type. Closed loop cards expire when their value is exhausted; most store gift cards are closed loop prepaid cards. Although the smart card (a card embedded with a chip that contains customer information) is available, the overwhelming choice is still the magnetic strip type.

Prepaid cards can be an alternative to a variety of traditional banking products and services, such as debit cards, credit cards, and travelers’ checks. Because prepaid cards can be passed to anonymous third parties, it is important to identify the primary account holders. Open loop prepaid cards can enable customers to:

■ Make international payments■ Receive payments from third parties■ Perform cross-border remittances by issuing several twin or partner cards to one customer,

which can then be passed on to remittance receivers anywhere in the world. These twin or partner cards grant their holders access to the original cardholders´ funds through the global ATM network

Millions of these cards are now issued in the United States in lieu of paper checks to recipients who do not have bank accounts. Anyone who has purchased a new cell phone with a rebate attached to it knows most telephone carriers now issue the rebate in the form of a prepaid debit card.

Several years ago, Pakistan issued prepaid cards to over 300,000 families who had been displaced by war. Point-of-sale terminals were then set up at stores for their use. By using cards rather than cash, their government provided immediate help through this NPM.

Prepaid cards appeal to money launderers partly because of portability (i.e., it is far easier to board an airplane with a prepaid card than $50,000 cash in luggage briefcase) and partly because identity requirements for use are lax or non-existent (i.e., no one asks for identification when a customer presents a gift card).

Internet-Based Payment ServicesFinancial institutions and retail businesses continuously develop their websites and the electronic payment transactions they utilize. Some of these services include digital wallets, digital currencies, virtual currencies, and electronic money such as:

■ Pre-funded accounts permit the transfer of electronic funds between individuals and businesses that hold accounts with the same provider (i.e., PayPal)

■ Digital currency providers permit the exchange of national currencies with electronic currency, which is issued and redeemed through agents who may or may not be affiliated with the provider


■ Proprietary currency is used by gambling and virtual entities that only permit the use of their currency. Participants hold the currency in their accounts for use when transferring funds connected to transactions with the entity, other participants, or associated retailers. The proprietary currency may be exchanged for currency issued by the participants’ country when they leave the virtual world.

Mobile Payment ServicesA variety of mobile payment services exists today, most of which have evolved from the mobile phone’s ability to obtain balance inquiries and transfer funds between an individual’s bank accounts. These services range from initiating the financial transaction involving electronic money with a mobile phone to partnering with other types of payment services such as mobile network operators.

■ Mobile Financial Information Services – Users may view personal account data and general financial information on their smartphones or tablets; however, financial transactions cannot actually be conducted. As a result, this payment method is often considered low risk.

■ Mobile Bank and Securities Account Services – Users are permitted to make financial transactions from mobile devices in a fashion similar to Internet banking. The service is tied to individual bank or security accounts and is, therefore, (like Internet banking) not considered a NPM in the strictest of senses. Additionally, mobile bank and securities account services are likely to be regulated and supervised in a fashion similar to Internet transactions.

■ Mobile Payment Services – Non-bank and non-securities account holders are permitted to make payments with mobile devices. The independent payment service providers may be non-traditional financial institutions with widely varying controls and supervision measures.

■ Mobile Money Services – Subscribers are able to store actual value on their mobile devices. They use phone credits or airtime as tender for payment. Such systems offer versatility but may often fall entirely outside the realm of regulation and supervision.

Risk Factors of New Payment MethodsAlthough new payment products and services are subject to AML regulations, they are vulnerable to certain common money laundering and terrorist financing risks. Clearly, agents should evaluate each NPPS for all risk factors and not assume serious risk exists simply because a single risk factor is apparent.

■ Absence of Credit Risk – Funds for use with NPMs are generally prepaid by being deposited into an open-loop card. Therefore, no credit risk exists and the provider may have little incentive to obtain full and accurate information about the customer and the nature of the business relationship.

■ Speed of Transactions – NPM transactions can be carried out, and funds withdrawn or converted, more quickly than through more traditional payment channels. Instant electronic transfers have the ability to complicate monitoring and frustrate efforts to freeze laundered funds.

■ No Face-to-Face Business Relationship – Many NPM business models do not include the necessity for face-to-face business relationships and transactions. This increases the risk of fraud by impersonation. Customers may not be who they claim to be.

■ Wide Geographical Reach – The wider the geographical reach of a NPPS, the higher the risk for money laundering and terrorist financing. Acceptance of NPMs across international borders makes them attractive to money launderers and enables providers to conduct their businesses from jurisdictions that are not subject to adequate AML regulation and supervision—and where they may be outside the reach of thorough law enforcement investigations.

CHAPTER FIVE



Red Flags of New Payment MethodsPerson-to-person transactions are not immune to money laundering schemes. The red flags that accompany NPMs apply equally to other types of payment transactions. Warning signs of suspicious activity include the use of a product that deviates from its intended use. Another red flag is a transaction that does not make economic sense.

Cash withdrawals in foreign jurisdictions, for example, are to be expected with a tourist’s prepaid card but when the card is held by an 87-year-old widow who resides in a nursing home, a foreign cash withdrawal is highly suspect. When the transaction does not match the product’s intended use, agents should be alert. If a business or insurer relies heavily on NPM transactions, they should take note of the following:

■ Discrepancies between the information submitted by the customer and information detected by monitoring systems or an IP address

■ Individuals holding a high volume of NPM accounts with the same provider■ A large source of funds from diverse locations being used to fund the same NPM account (i.e.,

cash uploads from four different locations in a foreign country on the same day)■ Multiple accounts from banks located in various cities being used to fund the same NPM

account■ Loading or funding of the account being transacted by third parties■ Numerous cash loading in amounts just under the reporting threshold of $10,000 onto the

same prepaid card(s) conducted by the same individual(s) on a number of occasions■ Multiple third party funding activities on a NPM account, followed by the immediate transfer

of funds to unrelated bank account(s)■ Loading or funding of the account followed shortly thereafter by ATM withdrawals

NPM SummaryInternet and mobile payment services are at high risk for use by money laundering operations and terrorist organizations. Technological developments in mobile payment systems have facilitated their integration with traditional payment methods, as well as with other NPMs, including:

■ Offering open-loop (able to be re-loaded) prepaid cards connected to customer accounts. These prepaid cards allow cross-border services, thus granting customers or third parties in possession of the prepaid card (and password) access to the global ATM network.

■ Allowing ATM withdrawals without the need for a card. Customers can initiate person-to-person transactions by passing on a certain code to third parties, who can then enter the code into an ATM in order to receive the amount of money linked to that specific code.

■ Cooperation with traditional money remittance services (i.e., Western Union). This enables third parties who are not customers of the mobile payment service provider to send funds to, or receive them from, a customer—also across borders.

Mobile payments have increased in use, although not to the same extent as Internet payments. Advances in cell phone technology and the migration from paper to electronic payments will only increase the potential for abuses in this area.

TrustsTrustThe Internal Revenue Service defines a trust as22 a relationship between two or more parties where one person holds title to property and is obligated to keep or use the property for the benefit of another.

22 http://www.irs.gov/Charities-&-Non-Profits/Definition-of-a-Trust


Trusts are legal entities created under state law. This discussion of trusts includes certain other corporate services providers, as well, because they are often included under the general definition of trust. FATF refers to these entities collectively as Trust and Company Service Providers (TCSPs).23

The FATF definition of TCSP only pertains to those who provide trust and company services not addressed by the FATF Recommendations; this means the definition does not apply to financial institutions, lawyers, notaries public, and legal independent professionals (i.e., accountants). TCSPs take different forms in different countries. In some jurisdictions, they may be primarily lawyers or accountants; in other jurisdictions, they may be bank subsidiaries.

According to a recent FATF report, TCSPs are used frequently in the establishment and administration of the majority of legal entities; therefore, they serve as financial gatekeepers.24 Unfortunately, if a country does not include TCSP oversight in its AML/CFT regulations, trusts and company service providers are often used in money laundering activities. The FATF addresses three basic issues concerning TCSPs:

■ Customer Due Diligence – Trust owners and beneficiaries must always be identified accurately.■ Transparency – The establishment of trusts and other company service providers must have

legitimate purposes, which can be determined by the issuer without invading privacy and confidentiality concerns.

■ Secrecy Laws and Cross-Border Exchange – The current FATF recommendations regarding trusts and other legal arrangements may be hindered by the current laws in some jurisdictions.

The IRS has access to some beneficiary owner information when distributions are made or when income is earned by a trust. However, this information can only be revealed to law enforcement agencies in the course of a criminal investigation. To obtain information about the trust, a court order must first be obtained.

TCSPs are attractive to money launderers and terrorists, particularly in the layering stage. A money launderer may establish trusts in multiple jurisdictions, which hampers investigation efforts. Some jurisdictions do not even require identification of beneficial owners or disclose identities when requests are made by competent authorities. Some jurisdictions may not even have a system in place to combat money laundering and terrorist financing or, worse, they may be complicit in these criminal activities.

Such jurisdictions are natural havens for money laundering and terrorist financing activities. Once a legal trust has been established, it is difficult to identify links between illicit proceeds and the principals of the criminal trust.

Lack of oversight in various jurisdictions makes the layering and integrating of dirty money through sham entities relatively easy for money launderers. In addition, advances in technology, financial engineering, and innovation have contributed significantly to the use of trusts and other company service providers in money laundering and terrorist financing operations. These factors have made it more difficult to identify who is actually controlling the structures and accounts, resulting in a lack of transparency.

The following example provided by the FATF helps illustrate this point:25

23 http://www.fatf-gafi.org/documents/riskbasedapproach/rba-tcsps.html24 http://www.fatf-gafi.org/topics/methodsandtrends/documents/moneylaunderingusingtrustandcompanyserviceproviders.html25 http://www.fatf-gafi.org/media/fatf/documents/reports/Money%20Laundering%20Using%20Trust%20and%20Company%20Service%20Providers..pdf

CHAPTER FIVE



ExampleBank X was a licensed offshore bank in a small jurisdiction known for its bank secrecy laws. One of Bank X’s wholly-owned affiliates was a corporate service company used primarily to form the trusts and corporations for the bank’s account holders. These trusts and corporations, known as International Business Corporations (IBCs), routinely received director and shareholder services from the corporate service company.

A year after being licensed, Bank X became the center of a money laundering scheme established by a U.S. citizen who operated a fraudulent high-yield investment program that targeted U.S. citizens. The criminal relied on Bank X and the corporate service company to establish IBCs for himself, his victims, and his business associates. He then opened accounts in Bank X for these IBCs in his name and subsequently deposited his victims’ investment funds into the accounts. In the next step of his scheme, the criminal transferred the money into various other accounts belonging to himself and his co-conspirators and, from there, the funds were transferred again to other accounts and locations in a classic example of layering.

When U.S. law enforcement officials investigated the scheme, Bank X refused to provide information law enforcement requested, citing BSA laws. Eventually, the criminal authorized Bank X to provide information about the bank accounts and transactions and officials were able to complete their investigation. Despite the fact that few offshore banks were licensed in the jurisdiction, Bank X received very little regulatory supervision.

Although TCSPs may play marginal roles in larger jurisdictions, they play a major role in the economies of smaller countries where the financial services industry is a considerable source of revenue through taxes and fees (and bribes). In these jurisdictions, trusts are major players in the placement, layering, and integration phases of money laundering.

According to the FATF, the primary obstacle to money laundering prosecution in some countries is the reluctance of the owners and beneficiaries of trusts and other corporate service providers to cooperate. Another concern is the lack of training about money laundering that banks provide to their employees. The final major concern is the inability to pierce secrecy laws to monitor the business activities of trust owners and others who may fund them.

Red Flags and TrustsAccording to the FATF, the following money laundering indicators apply to trusts:

■ Transactions requiring implementation of complex and non-transparent legal entities and arrangements

■ The payment of consultant fees to shell companies established in foreign jurisdictions or jurisdictions known to have formed numerous shell companies

■ The transfer of funds in the form of loans from trusts and non-bank shell companies that facilitate a system of regular such transfers as loan repayments

■ Corruption involving bribes to secure a contract■ The use of trusts in jurisdictions that do not require corporations to document beneficial

ownership■ The use of legal persons and legal arrangements established in jurisdictions with weak or

absent AML/CFT laws and/or a poor record of supervision and monitoring of trust instruments■ The use of legal persons or legal arrangements that operate in jurisdictions with secrecy laws■ The use by prospective clients of nominee agreements to hide the beneficial ownership of

client companies


■ Conducting multiple inter-company loan transactions and/or multi-jurisdictional wire transfers that have no apparent legal or business purpose

■ Clients who require the use of pre-constituted shell companies in jurisdictions that allow their use but do not require updating of ownership information

■ Trust instruments that are marketed as facilitating anonymity and disguising asset ownership

SportsJust like any other business, sports can be used by criminals to launder money. According to the FATF, the connection between money laundering and sports has become more prevalent around the world as the “economic importance of sports” has grown.26 After undertaking a study, the FATF issued a report recently about the use of sports to launder money. Some of the report’s findings include:

■ Globally, the sport of soccer (called football in countries other than the United States) is most favored by money launderers

■ Money laundering techniques range from basic to very complex and include the use of cash, cross-border transfers, tax havens, front companies, non-financial professionals, and PEPs

■ The sports most vulnerable to money launderers are soccer (i.e., “football” in other countries), cricket, rugby, horse racing, motor racing, car racing, ice hockey, basketball, and volleyball

A recent letter sent by FinCEN to the president of the American Gaming Association (AMA) emphasized the increasing incidence of sports betting on behalf of third parties to facilitate criminal activity.27 According to the letter’s author—the FinCEN Associate Director, Policy Division—this type of activity poses a financial risk to the financial system of the United States. The letter states specifically that casinos can ask customers if they are betting for a third party and, in some circumstances, should do so.

Obviously, the risk of money laundering is far greater in the illegal sports betting industry—which is not regulated—than it is in the legal gaming industry; the AMA claims it “is committed to aggressively addressing illegal gambling, including illegal sports betting...”28 Agents should be aware the Professional and Amateur Sports Protection Act (PASPA) bans betting on sporting events in states where betting was not legalized at the time the law was enacted or that legalized sports betting within a year. Four states qualify for this exemption: Delaware, Montana, Nevada, and Oregon.29 30

Laundering Through InsuranceAs mentioned previously, money launderers have become increasingly creative with their schemes due to global AML/CFT efforts. Many money launderers no longer use banks and similar financial institutions because of the difficulty to engage successfully in untraceable transactions. The IRS reports the following recent money laundering cases using the insurance industry.31 32

Case #1Seven insurance companies were defrauded of over $5 million when a group of nine individuals operated an arson-for-profit ring in Detroit, Michigan. One of the conspirators was sentenced to 137 years in prison for arson and other crimes related to money laundering, wire fraud, and mail fraud. It was proven the criminals purchased property insurance on vehicles, dwellings, and businesses and later burned, vandalized, or flooded the insured property before filing fraudulent insurance claims.

26 http://www.fatf-gafi.org/media/fatf/documents/reports/ML%20through%20the%20Football%20Sector.pdf27 http://www.fincen.gov/statutes_regs/guidance/pdf/01162015.pdf28 http://www.law360.com/articles/612591/feds-warn-casinos-of-laundering-risks-in-sports-betting29 http://www.americangaming.org/government-affairs/key-issues/past-issues/sports-betting30 https://www.govtrack.us/congress/bills/102/s474/text31 http://www.irs.gov/uac/Examples-of-Money-Laundering-Investigations-Fiscal-Year-201332 http://www.irs.gov/uac/Examples-of-Money-Laundering-Investigations-Fiscal-Year-2014

CHAPTER FIVE



Case #2An insurance company investment advisor in Ohio was convicted of money laundering and wire fraud for obtaining investments from his clients in exchange for shares of stock in a company he established for the sole purpose of promoting a fraudulent investment scheme. The advisor’s clients believed they were investing in silver and gold or in a grand prix race that would be coming to Cincinnati when, in fact, funds from the fraudulent scheme were laundered and then used to purchase a Lincoln MKX vehicle for the advisor’s own personal use. The advisor was sentenced to 27 months in prison, ordered to pay more than $350,000 in restitution, and ordered to forfeit all assets he acquired as proceeds of the fraudulent scheme.

Case #3An Arizona woman was sentenced to 22 months in prison, three years of supervised release, and ordered to pay more than $950,000 in restitution in connection with her guilty plea for committing mail fraud and an illegal monetary transaction. While employed as a representative of a financial services firm, she sold life insurance and brokerage services to clients living in the U.S. and Mexico. During that time, the woman and her husband established a corporation, embezzled her clients’ premium payments, and then deposited the embezzled funds into the corporation’s bank account. The couple then transferred the funds into their own personal bank accounts.

In order to disguise their illegal financial transactions, the couple opened a number of post office boxes in the names of the woman’s clients and then changed the clients’ addresses in the insurance company’s computer system so their insurance and investment account statements would be sent to the couple rather than the clients. Then, the couple designed and hand-delivered phony account statements to the clients and made premium payments on the life insurance policies in amounts sufficient to keep them from lapsing.

Case #4A number of insurers paid more than $700,000 in fraudulent health insurance claims when an Iowa woman devised a fraudulent billing scheme that invoiced insurance companies fraudulently more than 6,000 times. The fraudulent scheme invoiced more than $1,000,000 in phony medical bills through a counseling center.

The woman who contrived and supervised the scheme was a former nurse and the CEO of a counseling center; she ordered her employees to use the names and provider numbers of physicians who did not perform the services for which invoices were issued. In some cases, she actually used the name and provider number of a physician who never even worked at the counseling center.

The woman pled guilty to health care fraud and money laundering and was sentenced to 12 months and 1 day in prison (sentences of more than 12 months constitute a felony rather than a misdemeanor). She was also ordered to pay restitution of over $720,000.

Case #5In Jefferson City, Missouri, the owner of a company that performed environmental services for property owners who used or operated petroleum storage tanks was sentenced to 30 months in prison, ordered to pay a $50,000 fine, and ordered to pay restitution to the state’s Petroleum Storage Tank Insurance Fund. At the time of sentencing, the business owner had already paid more than $1.5 million to the Insurance Fund in connection with his subsequent guilty plea of money laundering and mail fraud.


During a period of ten years, and upon receipt of invoices from his sub-contractors, the business owner created and submitted phony invoices with inflated charges and received more than $900,000 in excess payments from the Insurance Fund. He also received more than $300,000 from the Insurance Fund by submitting other, separate, fraudulent invoices.

Case #6A man who served as the administrator of a student health insurance program at a Virginia college was sentenced to 18 months in prison and ordered to pay $1.2 million in restitution for two counts of money laundering, mail and wire fraud, and conspiracy to violate RICO for his part in a scheme that defrauded through fraudulent practices. Specifically, the man’s company collected health insurance premiums from colleges, universities, and students and then paid claims and provided reports to both the insurers and universities. In exchange for the administrative services rendered, the insurers paid the man’s company a commission or fee that was usually a percentage of premiums it collected for insurance.

The man and his co-conspirators devised a scheme that altered health insurance claims statistics for insurance issued by one particular college’s program that overstated claims paid and loss ratios, thereby resulting in higher premium costs being charged. The man admitted to overstating claims paid by more than $1 million during 6 consecutive school years. Two other individuals pled guilty to various offenses related to the case, specifically: filing false tax returns and conspiracy to commit money laundering, mail fraud, and wire fraud. One of the two individuals paid $250,000 in restitution to the college for his role in the scheme.

Currency SmugglingThe international smuggling of bulk cash became a federal crime under the USA PATRIOT Act.33 The largest investigative agency in the Department of Homeland Security is the Homeland Security Investigations (HSI) arm of U.S. Immigration and Customs Enforcement (ICE). HSI’s authority extends to enforcing a number of federal laws, including those pertaining to: 34

■ Financial crimes, money laundering, and bulk cash smuggling■ Commercial fraud and intellectual property theft■ Cyber crimes■ Human rights violations and human smuggling and trafficking■ Immigration, document, and benefit fraud■ Narcotics and weapons smuggling and trafficking■ Transnational gang activity■ Export enforcement■ International art and antiquity theft

Bulk Cash SmugglingICE defines bulk cash smuggling as35 the deliberate attempt to evade a currency reporting requirement by concealing more than $10,000 in currency or monetary instruments on one’s person or in any conveyance, article of luggage, merchandise, or container and transporting it between the United States and any other jurisdiction. This includes the attempt to smuggle cash.

Although it is commonly believed that cash smuggling only takes place at U.S. borders, specifically the Mexican border, this is not always the case. Federal statutes governing bulk cash smuggling require proof the individual intended to cross the border. An example of a complex scheme subject to federal law might involve a Colombian drug trafficking organization with bulk cash originating in Providence, Rhode Island that travels all over the United States before arriving at the Mexican border and moving on to Panama and several other countries before arriving in Colombia.33 http://www.ice.gov/bulk-cash-smuggling-center34 http://www.ice.gov/hsi35 http://www.ice.gov/bulk-cash-smuggling-center/faq

CHAPTER FIVE



ICE reports that annually, hundreds of individuals attempt to smuggle cash in amounts over $10,000 across the borders of the United States for the purpose of avoiding financial reporting requirements. In one recent year, ICE seized more than $59 million after arresting more than 520 individuals attempting to smuggle bulk cash or monetary instruments. In addition to damaging the U.S. economy by removing billions of dollars from our country’s commerce, bulk cash smuggling feeds criminal enterprises that engage in drug trafficking, violent crimes against people and property, the funding of terrorism, human trafficking, and commercial fraud.

U.S. Customs and Border Protection (CBP) permits individuals to physically bring into, or take out of, the United States any amount of money—including transportation via the U.S. Mail. However, if the amount of money being physically transported is more than $10,000, it must be reported to CBP on the Report of International Transportation of Currency or Monetary Instruments (FinCEN Form 105).

Penalties for failure to comply with federal law pertaining to the filing of Form 105 are severe and include:36

■ A fine up to $500,000■ Imprisonment up to 10 years, and/or■ Seizure or forfeiture of the cash or monetary instrument

These penalties also apply to the filing of a false or fraudulent Form 105 or filing a Form 105 that contains a material omission or misstatement.

Monetary InstrumentsForms of money issued by any country that are used in a fashion similar to cash and include coins, currency, traveler’s checks, checks, promissory notes, money orders, securities or stock in bearer form or in a form that passes to another upon delivery. Monetary instruments include negotiable instruments in bearer form, endorsed without restriction, issued to a fictitious payee, or issued in a manner that allows ownership of the money to be passed when it is delivered. Monetary instruments also include incomplete instruments, meaning they have been signed but the name of the payee is not included.

The following are NOT considered monetary instruments by ICE:

■ Checks and money orders made payable to a specific person if they have not been endorsed or if they contain restrictive endorsements

■ Warehouse receipts, or■ Bills of lading

Penalties for committing bulk cash smuggling include imprisonment up to five years and forfeiture of any real or personal property involved in the smuggling offense, including any property traced to that property.

Red Flags of Bulk Cash SmugglingFinCEN, the DEA, and ICE have devised a list of activities that often indicate bulk cash smuggling is taking place:37

■ American banks selling an increased amount of large denomination AMERICAN bills to Mexican institutions

■ Mexican financial institutions exchanging large denomination American bills in their possession for small denomination American bills that are smuggled into Mexico

■ Mexican exchange houses transporting large amounts of small denomination American bills by armored car or selling them directly to American banks

36 http://www.fincen.gov/forms/files/fin105_cmir.pdf37 http://www.bankinfosecurity.com/blogs/how-to-spot-bulk-cash-smuggling-p-604/op-1


■ Mexican exchange houses conducting numerous wire transfers that direct American financial institutions to transmit funds to countries other than Mexico when the transactions have no clear business relationship with the exchange houses (those receiving these funds may be individuals, businesses, entities in free trade zones, and entities that conduct activities similar to those conducted by Black Market Peso Exchanges)

■ Deposits by exchange houses to their own accounts at American financial institutions that include third party monetary instruments

According to the U.S. Drug Enforcement Administration, it has identified three major money laundering threats relating to the movement of drug proceeds to Mexico:38

■ Bulk currency smuggling■ Mexican currency exchange houses (i.e., also called Casas de Cambio and Centros Cambiario)■ The cutback of drug proceeds being sent through American-based money remitters

Intelligence gathered by the DEA, ICE, and other U.S. law enforcement agencies indicates the majority of drug proceeds are smuggled out of the U.S. to Mexico in the form of bulk currency instead of being deposited directly into the financial system in this country. Once the proceeds of drug trafficking are received in Mexico, it can then be transmitted all over the world. Usually, it is deposited into the Mexican financial system through its banks and exchange houses and then transmitted back to the United States through correspondent banking (i.e., foreign banks). The cash is also used to purchase equipment for the manufacturing of drugs, real estate, businesses, and other assets in Mexico. Sometimes, the cash is smuggled from Mexico to Colombia, Guatemala, Panama’s Free Trade Zone, or other Latin American countries.39

Keeping track of cash is crucial. Paper money, which represents the value of goods and services, is devalued when too much of it is in circulation. When billions disappear from circulation, additional currency must be issued to replace it.

It should also be kept in mind that the goods represented by laundered and smuggled money are untaxed, which results in lost revenue. Currency smuggling, therefore, threatens the U.S. economy’s currency value and tax base.

Digital and Virtual CurrencyDigital or virtual currency, unlike cash and coins, is not tangible. According to FinCEN regulations, currency and virtual currency are defined very differently:40

Currency or Real CurrencyThe coin and paper money of the U.S. or any other country that is (i) designated as legal tender and that (ii) circulates and (iii) is customarily used and accepted as a medium of exchange in the country of issuance.

Digital Currency or Virtual CurrencyA medium of exchange that operates like a currency In some environments, but does not have all the attributes of real currency. In particular, virtual currency does not have legal tender status in any jurisdiction.

If virtual currency has an equivalent value in real currency, or if it acts as a replacement for real currency, it is referred to as “convertible” virtual currency. An example of convertible virtual currency is bitcoin, which can be traded digitally or purchased for, or exchanged into, American dollars, Euros, and other types of real or virtual currency.

38 http://www.dea.gov/ops/money.shtml39 http://www.justice.gov/archive/ndic/pubs25/25921/finance.htm40 http://fincen.gov/statutes_regs/guidance/html/FIN-2013-G001.html

CHAPTER FIVE



FATF’s definition of virtual currency and convertible virtual currency coincides with that of FinCEN. A FATF report provides detailed definitions and descriptions of convertible virtual currency and non-convertible virtual currency:41

Convertible Virtual Currency (open)Has an equivalent value in real currency and can be exchanged for real currency; examples include Bitcoin, Second Life Linden Dollars, and WebMoney.

Non-convertible Virtual Currency (closed)Intended to be used by a specific virtual domain and cannot be exchanged for e-money; examples include Project Entropia Dollars, Q Coins, and World of Warcraft Gold.

According to a notice issued by the IRS, it recognizes that virtual currency is often used to purchase goods and services and held for investment.42 The notice states that virtual currency “is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. In some environments, it operates like ‘real’ currency...”

FinCEN published two rulings recently pertaining to requirements of the BSA and whether a person’s conduct with respect to convertible virtual currency meets the BSA’s definition of a money transmitter.43 The first ruling states a person is not a money transmitter under the BSA to the extent he or she creates or “mines” a convertible virtual currency solely for his or her own purposes. The second ruling states a company is not a money transmitter if it purchases and sells convertible virtual currency as an investment exclusively for its own benefit. Clearly, the rulings illustrate FinCEN’s requirement that people and companies involving convertible virtual currency on behalf of another IS a money transmitter and, therefore, subject to BSA and other requirements.

These rulings clarify an earlier guidance that addressed FinCEN’s application of regulations to those administering, exchanging, or using virtual currency. If an individual or business meets the definition of a money services business (MSB), it is a money transmitter; as such, it must register with the Department of the Treasury and meet specific requirements of the BSA.

The Effects of Money LaunderingCultureIn addition to affecting the economy, money laundering affects society and culture. When it succeeds, money laundering encourages criminals to continue and intensify their illegal activities. For example, increased drug trafficking translates into more crime and more lives ruined. More business executives will plunder corporate funds; more workers will lose their pensions; and law enforcement, already stretched to the limit, will be further challenged.

Loss of Tax RevenuesMoney laundering has a debilitating effect on individuals, businesses, governments, and the economy—both domestic and global. The tax revenue lost through laundered money is offset by increased taxes for those who pay them. Legitimate small businesses often find it difficult to compete against front companies, whose goal is hiding money—not turning a profit through the use of fair and legitimate trade practices. Illegal businesses have so much cash coming in, they are able to sell their products and services at much lower prices than the competition—sometimes even at a loss—and still remain in business.

41 http://www.fatf-gafi.org/media/fatf/documents/reports/virtual-currency-key-definitions-and-potential-aml-cft-risks.pdf42 http://www.irs.gov/pub/irs-drop/n-14-21.pdf43 http://www.fincen.gov/news_room/nr/pdf/20140130.pdf


Hindrance of Growth in Developing CountriesDeveloping countries that have yet to institute AML/CFT regulations are at high risk of having their currency laundered. In the past, numerous banks in the Baltic States were victimized precisely because of their economic climate. When the abuses became known, honest bank patrons panicked, fearing loss of their deposits. They withdrew their money en masse and several major banks collapsed. The erosion of trust created by money laundering, including the appearance of money laundering, scares investors away and hinders economic growth and development of the world’s newer democracies.

Policy Development and AdjustmentAnother problem created by money laundering is the indirect influence large influxes of cash can have on a particular financial sector. For example, while the use of an individual variable life insurance policy in a money laundering scheme, or even a few of them, is unlikely to have a significant ripple effect, large sums deposited into many such policies might cause particular sub-account units to soar in price. The price increases would not be a true reflection of actual value and the spike in share price would be temporary because the funds were only being used as holding pens. The deposits would soon be withdrawn and the artificially inflated prices would plummet.

On a personal scale, those who invested and expected favorable results would suffer losses on a grand scale; it is not difficult to imagine a degree of financial chaos spreading from the affected products into entire financial sectors. The potential for loan defaults and bank collapses may seem extreme, but events of the recent past prove otherwise.

When the price of gold approached $1,000 per ounce, huge investments in the silver market drove the price of that precious metal to record levels at record speed. Suspecting market manipulation, regulators moved in and halted trading, thereby stabilizing the silver market. The perpetrators lost almost half a billion dollars, which in itself was a form of justice, but thousands of innocent individual investors suffered losses they could not afford.

In an example of market manipulation with global significance, property values in Kenya were soaring at the same time the U.S., European, and Asian real estate markets were suffering significant losses. Many countries in Africa are inexperienced with respect to implementing and enforcing AML protections, including the use of real estate and insurance products to launder money. Kenya shares a 500-mile border with Somalia, which is rife with the illicit proceeds from piracy. Piracy proceeds were used to buy Kenyan real estate, which resulted in highly inflated property values. Such manipulations can, in turn, lead to misinterpretation of economic data—even by entire governments, which are then prone to making decisions that harm the interests of their countries.

Terrorist FinancingGlobally, terrorist activity is illegal and, therefore, must be financed illegally. Disguising the funding of terrorist financing through multi-layers is an essential component of money laundering because no individual, organization, or nation wants to be identified with terrorist funding. Banks in jurisdictions that tolerate and/or encourage terrorism are used to move funds. Such banks are not generally subject to the anti-money laundering regulations and controls imposed on most commercial banks. While they may voluntarily comply with AML guidelines, often they do not—either though carelessness or by intention.

CHAPTER FIVE



ConclusionThe fact that insurance professionals are required to complete AML training is an indication of the pervasiveness of the crime of money laundering in our society. Perhaps, the cliché most relevant to exposing money laundering is follow the money!

When the banking and securities sectors of the global financial world initiated training, discipline, and control against money laundering, criminals found new methods of laundering money—one of these methods was the use of the insurance industry. Until regulators, insurers, and agents manage to destroy money laundering at its roots, it will continue to undermine both the strength and the progress of the insurance industry.

Thousands of regulations and laws are in place across many industries and jurisdictions, and numerous government agencies and international organizations exist for the sole purpose of eradicating money launderers. The SEC is also aware of the continuing and ever-changing threats posed by the practice of transforming dirty money into clean money.

Insurance agents and brokers are not expected to keep abreast of all the latest modifications, amendments, and regulatory statues regarding efforts to combat money laundering the financing of terrorism. That responsibility lies with insurers; however, agents and brokers have the responsibility to understand and implement measures that are in place to mitigate the crime of money laundering and its consequences within the insurance industry.

The success of AML/CFT efforts do not rely entirely upon individuals. Computers utilize technology that includes software programs that assess and evaluate an infinite amount of information and data about clients and prospective clients. These programs are designed to call attention to abnormal or unusual activity. However, technology and computer programs are only responsible for a limited amount of success. Some automated anti-money laundering software is still experimental; some is already obsolete and some does not always produce the desired results.

Despite the sophistication of modern technology, when it comes to the insurance industry’s vulnerability to money laundering, insurance agents, brokers, and producers are the first line of defense. Without them, electronic progress will not keep up with the ever-increasing prevalence of financial chicanery. There is no substitute for the well-trained agent who interacts with the public every day. An agent’s level of competence, knowledge, and experience may well be the key to uncovering the next money laundering scheme and putting its masterminds out of business.


1. Which of the following is NOT a system for deregulated currency trading?

a. Hawalab. Hundic. Fei ch’iend. FinCEN

2. What type of company has no physical presence except a mailing address, employs no one, and produces nothing?

a. Shell companyb. Insurance companyc. Credit uniond. International bank

3. Which of the following is NOT a New Payment Method (NPM)?

a. Prepaid cardb. Internet payment servicec. Cashd. Mobile payment

4. Each of the following is a category of Internet Payment Services, EXCEPT:

a. Online bankingb. Cashc. Prepaid Internet payment productsd. Digital currency

5. What is a major consequence of the loss of tax revenue generated by money laundering?

a. Money laundering doesn’t generate consequencesb. Taxes, in general, decreasec. Taxes, in general, increased. Taxes remain the same

CHAPTER FIVE QUESTIONS


Chapter 11. C In general, money laundering is a term that describes the concealment of the original source of

illicit funds.2. A The primary reason individuals and businesses launder money is to avoid reporting the income

of their illegal activities—and paying taxes on it.3. B The Money Laundering Control Act of 1986 declared money laundering a federal crime.4. D Methods of money laundering include structuring (known as smurfing), using cash businesses,

establishing shell corporations, using gambling casinos, and purchasing real estate.5. C The process of money laundering takes place in three phases: placement, layering, and

integration.

Chapter 21. B The FATF 40 Recommendations are recognized as the international standard for combating

money laundering, the financing of terrorism, and the proliferation of weapons of mass destruction.

2. C FinCEN is the financial investigation unit of the United States government and is responsible for enforcing regulations spelled out in the Bank Secrecy Act and its amendments.

3. B The BSA requires insurance companies to report all suspicious activities that might indicate criminal conduct is occurring, including tax evasion and money laundering.

4. A Mail/Wire Fraud, terrorism, and drug trafficking are specified unlawful activities under the Money Laundering Control Act.

5. B The BSA requires financial institutions to report to the IRS on Form 8300 aggregate daily cash transactions in excess of $10,000.

6. D Knowing a transaction was intended to avoid the filing if an SAR is one of the four specific intentions required for a person to be guilty of money laundering.

Chapter 31. B Agents are excluded from requirements to develop and implement their own AML training

programs, however, they are required to comply with those of the insurers they represent.2. A Insurance companies already registered with the Securities and Exchange Commission (SEC) as

broker-dealers are required to utilize AML programs under statute.3. C The following types of insurance are exempt from AML training requirements: P&C, term life,

reinsurance, health, and group.

RETENTION QUESTIONS ANSWER KEY


Chapter 41. A Customer identification programs are based on Section 26 of the USA PATRIOT Act,

sometimes referred to as “Know Your Customer.”2. D OPAC maintains a list of SDNs who are under sanction for money laundering.3. C PEPs are individuals who are or have been entrusted with prominent public functions in

a foreign country, for example Heads of State or government, senior politicians, senior government, judicial or military officials, senior executives of state owned corporations, or important political party officials.

4. B A person is guilty of willful blindness when he or she manages not to know something but should have known it.

5. C Filing a suspicious activity report (SAR), or a suspicious transaction report (STR), is required when money laundering or terrorist financing is suspected.

Chapter 51. D Three recognized systems for deregulated currency trading are hawala, hundi, and fei ch’ien.2. A A shell company has no physical presences, employs no one, and produces nothing.3. C Prepaid cards, Internet payment services, and mobile payments are new payment methods.4. B Cash is not an Internet Payment Service.5. C Tax revenue lost through laundered money is offset by increased taxes for those who do pay

them.

RETENTION QUESTIONS ANSWER KEY


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