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  Anti-Money Laundering
  Business Requirements
The basic AML business requirement is compliance with the
USA Patriot Act and the underlying Bank Secrecy Act .
These Acts lay out three basic categories of anti-money laundering requirements:
    1. Know Your Customer (KYC)
    2. Currency Transaction Reporting (CTRs)
    3. Suspicious Activity Reporting (SARs)

To maintain these capabilities, certain steps are specifically required
    1.   Designate an AML compliance officer
    2.   Develop internal policies, procedures, and controls
    3.   Conduct on-going employee training programs
    4.   Perform independent audit functions to test program

Failure to comply can lead to serious regulatory consequences and damage
   to reputation.

“Know your customer” has several dimensions:

 Taken literally, the bank must know who its customers are. What businesses
  are corporate customers in? What are the normal business transactions the
  bank should expect the customer to be using?
       If the bank has no ID standards (or enforcement) they may be in violation.
       If the bank does not even know the SIC code for corporate customers, how well do
        they “know” those customers?

 Customers must be screened against the OFAC list. Typically this is done
  with software and an OFAC database. International customers may present
  special risks.

 What is the history of the account’s activities in dollar amount and volume of
  various transaction types? Is the customer’s current activity now different, (and
  therefore, potentially suspicious)? Analytical engines are typically used to
  address this requirement.

Currency Transaction Reporting typically is supported by a
specific system designed for CTRs.

     The bank’s CTR system produces and files reports of transactions involving
      $10k of cash or more for customers (except some which are exempt).

     The CTR system may or may not have the capability of identifying instances of
      multiple transactions adding to more than $10K in a day (a practice known as

     Filing a CTR does not relieve the bank from responsibility to determine if a
      Suspicious Activity Report (SAR) needs to be filed as a result of the same
      transaction. If the transaction involves structuring, an SAR must be filed.

     We have observed that there is opportunity for to improve monitoring of the
      consistency of CTR reporting by
         Using analytic engines as a cross-check on CTR reportsto catch structured deposits
         Tracking branch net cash flows and comparing them to CTR totals
 SARs require more judgment than CTRs to determine when
 they need to be filed. To quote the Bank Secrecy Act (BSA):
The SAR should be filed if the bank knows, suspects, or has reason to suspect

1. The transaction involves funds derived from illegal activities or is intended or
   conducted in order to hide or disguise funds or assets derived from illegal activities
   (including, without limitation, the ownership, nature, source, location, or control of
   such funds or assets) as part of a plan to violate or evade any federal law or
   regulation or to avoid any transaction reporting requirement under federal law;

2. The transaction is designed to evade any regulations promulgated under the Bank
    Secrecy Act; or

3. The transaction has no business or apparent lawful purpose or is not the sort of
    transaction in which the particular customer would normally be expected to
    engage, and the bank knows of no reasonable explanation for the transaction after
    examining the available facts, including the background and possible purpose of the

In practice these are not easy judgments to make.
 The first line of compliance the account officer, who has the primary duty to know the
     With millions of retail accounts in a large bank, this is not very practical.
     For commercial accounts, however, having accurate knowledge at this level and calling accounts
      to the attention of compliance personnel is a vital step in AML compliance.

 The second line of defense in the banker assisting in a transaction. This may be on
  the teller line, in the wire room, in a call center, or anywhere else a banker helps a
  customer perform a transaction. They must determine if the transaction might meet one
  of the BSA requirements and, if so, report it to the AML compliance group.

 Finally, there are analytic engine capabilities:
     To identify patterns of prior account, customer and peer group activity and compare current
      activities against these.
     To identity activity failing to pass pre-specified hurdles expressed in the form of Boolean logic
     To identify activity in hot-listed accounts
     To track the disposition of alerts being investigated through workflow capabilities.

The basic principle of most analytic engines:
All “suspicious” activities are somehow unusual. But not all unusual
activities are suspicious.

    To find the suspicious, analyze the unusual.

                             All Transactions

                                                   Unusual Transactions

Analytic engines key function:
Activities noted as “unusual”, hot-listed, or in violation of business
rule logic are ranked and sent for human review.
 The unusual activity, hot-listed activity, and business rules violations should be
  designed, weighted, and tuned to sort out for human attention the activities
  most likely to require filing of SARs.

 “Unusualness” weightings are used to rank the degree to which, for any
  account or customer or correspondent bank…
       is the volume or dollar amount of transaction activity…
       for the day or month…
       significantly different from historic patterns for the entity or its peer group?

 The better the system can correlate its rankings with the regulators’ sense of
  what the bank should deem “suspicious”, the more effective and efficient the
  banks AML compliance program will be.

To understand what types to patterns to look for it is useful to
understand what techniques are used to launder money and how a
bank might spot such activity:             Techniques, page 1 of 5
 Structured Transactions
    Also known as Smurfing, this is the use of many small deposits into multiple accounts
      through multiple branches and (usually) multiple banks. There is usually one or more
      consolidation account into which the funds are transferred for disbursement or access.
    Systems can be used to spot unusual volumes of cash deposits or cash deposits of
      over $10,000 a day to a single customer (if properly linked to accounts). The
      concentration accounts will typically be making international wires or large checks
      outgoing. They may be spotted due to the size, frequency, or destination of wire
      transactions being odd versus a useful peer group.
 Hawalas
    Also known as Hindis, this is an international network of small businesses which do
      money transfer on the side or in the back room as their real primary source of income.
      A store owner in the US takes cash, then calls a friend in Pakistan and tells him to
      give rupees to a specific individual there. The US cash gets mixed into the daily till
      deposit for the retailer. In the other direction, Al Quad may fund operatives in the
      US. by the reverse route. Periodically the storekeepers settle with the network of
      friends on a net basis via a few occasional wires.
    The best way to spot Hawala activity is flagging their occasional net settlement via wire.
      While both the volume and amount may be small, no such wires would be “normal” for
      similar small businesses.
Laundering techniques, continued.                                                              2 of 5
 Corporate fronts
     Any business might be used as a laundry. Companies dealing with cash sales or
      expenditures might be involved or may have employees doing substituting cash for
      checks received then using legitimate customer checks to deposit in their own
      accounts. There are many variations of use of corporate fronts to gain the
      appearance of legitimacy.
     Unusual activity in cash or wires is the most likely way to identify corporate money
      laundering. Accurate and useful peer grouping is required for this to be effective.
      Industry code is probably the best peer group for comparison.

 Black Market Peso Exchange
     A sophisticated matching of the needs and assets of multiple players:
         US or foreign exporting or importing companies
         Wealthy foreign individuals wanting to hold US dollars as a hedge against local currency risks
         Drug dealers have dirty $ and want clean funds in any currency.
     Unusual activity in cash or wires in corporate or private banking accounts is the most
      likely way to identify this activity. Again, accurate and useful peer grouping is required
      for this to be effective.

Laundering techniques, continued.                                                          3 of 4
 Loans
     Give someone cash, get a “loan” which is never paid off. Alternatively, get a loan then pay it
       off in cash. This is likely to involve a bank employee in the scheme.
     Look at all accounts which might be used to apply cash against a loan. These might be
       internal DDAs. If they are GL accounts then the bank may want to change procedures to
       utilize DDAs instead.
 Anonymous asset plays
     Assets might be used (gold, diamonds, real-estate, stocks, coffee beans, etc.). The assets
       might be bought for cash and sold for clean looking funds. They might be moved or
       repackaged in some way. Or they may be used as loan collateral to get funds then
     This activity may show up in unusual cash and/or wire transactions. Again, accurate and
       useful peer grouping is required for this to be effective.
 Gambling
     Bet in cash, take winnings by check or international wire. Work with a casino employee or own
       a casino or Internet gambling site.
     Look for erratic deposit patterns in individuals (vs. history and peers). Internet sites are
       usually offshore so international wires or collection items might be signs of this activity.

Laundering techniques, continued.                                                            4 of 5
 Own a bank
     A number of banks exist for little other reason. Internet banks based offshore are a growing
       element. Money Service Businesses, check cashiers, currency exchanges and similar
       “pseudo-banks” pose similar risks. “Pay-through” accounts may be utilized.
     Look for unusual wire transfer patterns with specific banks and for unusual cash transactions
       levels for “pseudo-banks”.

 Insurance scams
     There are several approaches: Purchase an annuity using cash then cash it in, purchase a
       policy on an asset then make a claim, various forms of insurance fraud on policies paid for
       in cash, and there have even been instances life policies issued to people later found

 Terrorist Financing (Reverse laundering)
     This involves setting up a charity or business that takes in clean funds then sends them to
       terrorist's networks. Usually they will use multiple apparently legit intermediaries (lawyers,
       consultants, CPAs, corporates, other charities).
     Look for unusual patterns of deposits, especially ACH credits and incoming wires.
Laundering techniques, continued.                                                    5 of 5
Tactics: Within each of these strategies, any number of specific tactics may be
 employed. Common tactics include…

      Layering - Moving funds between bank accounts in order to make investigation of the
       flow of funds more difficult.
      Refining - Changing small bills into large to facilitate movement
      Reverse Flip - Buying goods or properties for well below the true price and making up
       the difference in cash to the seller
      Loan-back - Giving a company cash and then having them loan it back to you.
       Typically no payments are made on the loan
      Trade Price Manipulation - Over-pricing or under-pricing of an international trade deal,
       then making up the gap to the true value of the goods by delivering cash in either the
       exporting or importing country

Presented by:

Jim G. George