HOW WELL DO YOU REALLY “KNOW YOUR CUSTOMERS”? Two Day Course MODULE I May 26 th – 27 th, 2011 Presented by: Caribbean Association of Indigenous Banks.

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HOW WELL DO YOU REALLY “KNOW YOUR CUSTOMERS”?

Two Day Course

MODULE I

May 26th – 27th, 2011

Presented by: Caribbean Association of Indigenous Banks & Compliance Aid

© Compliance Aid 2011

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Introduction• The purpose of this training course is to make all participants aware of their responsibility and the role that they play in the Anti-Money Laundering, Know your Customers regulations that govern your respective financial institutions.

• Financial Institution are the front-line gatekeepers who are required to take reasonable actions to identify, detect and manage any risks that illegal financial activity may pose to an institution.


© Compliance Aid 2011 3

InstructorMichelle N. Martin, CAMS, ACA

• Ms. Michelle Martin is the President of Compliance Aid and a Partner at Compliance Solutions Consultants with over seventeen years of experience in banking, insurance, regulatory compliance, public and private accounting. She is a Certified Anti-Money Laundering Specialists (CAMS) and founding co-chair of the ACAMS South Florida Chapter.

• Born and raised in Antigua, she attended the Christ the King High School and Antigua State College. Ms. Martin started her financial career in Antigua with Canadian Imperial Bank of Commerce (CIBC). In 1996, Ms. Martin moved to Miami to pursue a higher education. She obtained a Bachelor in Accounting and a Master in Accounting Information Systems at Florida International University (FIU) in 2002.

• Ms. Martin professional experience in the United States (US) began in public accounting as an Auditor with KPMG, LLP for two years then moved on to Ernst & Young LLP. In 2004, she transitioned to the private sector as a Franchise Auditor within the Internal Audit department at Burger King Corporation then moved into the insurance industry by joining Assurant, Inc as an Internal Audit Manager in mid 2005. In 2007, Ms. Martin worked as an Assistant Vice President & AML/BSA Project Manager at Ocean Bank headquarter, and in 2008 worked as a Compliance/OFAC Officer with Banco Do Brasil where she was responsible for implementing a Compliance Program for their New York, Orlando and Miami Offices in addition to coordinating other regulatory efforts for the Bank.

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Course OverviewDay one

During today’s course we will cover:

Role of Financial Institutions (FI’s) in Combating Money Laundering

History of Anti-Money Laundering (AML) Overview of Anti-Money Laundering & Essentials of an effective

AML Program Know your Customer (KYC) Applying a Risk Based Approach to Due Diligence High-Risk Customers and Enhanced Due Diligence (EDD) AML Challenge


Course OverviewDay two

During tomorrow’s course we will cover:

AML Suspicious Activity AML Red Flags Keys to Writing effective SAR Narrative Questions & Course Wrap-up


Role of Financial Institutions (FI’s) in Anti - Money Laundering


Role of Financial Institutions (FI’s) in Anti - Money Laundering

Financial Institutions have the information and the expertise to detect money laundering and terrorist financing.

Law Enforcement agencies rely on Suspicious Activity Reports (SARs) filed by Financial Institutions to aid in terrorist and other criminal investigations.


Why should you care?

Reputation Risk – Negative Publicity

Individual, Corporate Civil and Criminal liability.

Fines and Imprisonment

Suspension of License

“It take twenty years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently”.

Warren Buffett


History of Anti-Money Laundering (AML)


Anti - Money Laundering Legislation

Bank Secrecy Act (1970) Implemented reporting system for large financial transactions (over $10,000) - Created a “paper trail”

Money Laundering Control Act (1986):• Criminalized money laundering and structuring.• Introduce civil and criminal forfeitures for AML violations.

Annunzio -Wylie Anti-Money Laundering Act 1992 Death Penalty for Financial institutions

USA PATRIOT Act - Post September 11th


THE USA PATRIOT ACT Uniting & Strengthening America by Providing Appropriate Tools

to Restrict, Intercept & Obstruct Terrorism Act

The USA PATRIOT Act was enacted by the Congress after the 9/11 terrorist attack and requires:

• Verification of Customer Identification • Enhanced Due Diligence Program; and• Establishment of AML Programs across the Financial service industry,

which must be in writing and must include at a minimum the following:

- Development of internal policies, procedures, & controls; - The designation of a compliance officer; - An ongoing employee training program; and - An independent audit function to test programs.


THE USA PATRIOT ACT

Title III - International Money Laundering Abatement & Anti-Terrorist Financing Act of 2001

• Enhanced Due Diligence on Correspondent Banks, Private Banking, Non-Cooperative Countries and Territories (NCCTs), Politically Exposed Persons (PEPs).

• Shell Bank Prohibition.

• Maintenance of Certain Information for Correspondent Banks.


International Anti-Money Laundering Efforts

Financial Action Task Force

FATFFATA is an intergovernmental organization founded in 1989 on the initiative of the G7. The purpose of the FATF is to develop policies to combat money laundering and terrorist financing.

Issued 40 recommendation to combat money laundering

Issued 9 Special Recommendations (SR) on Terrorist Financing


Financial Action Task ForceFATF)

The Financial Action Task Force (FATF) can be seen as the international standard-setter in the fight against terrorist financing and money laundering. It was established in 1989, by a Group of Seven (G-7) Summit held in Paris.

The summit recognised the growing threat posed by money laundering to the banking system and financial institutions and set up the FATF to develop and promote national and international policies, globally, to help eliminate this threat.

In 2001, the FATF took over responsibility for the development of standards in the fight against terrorist financing

http://www.anti-moneylaundering.org/FATF.aspx



Caribbean Financial Action Task Force

The Caribbean Financial Action Task Force (CFATF) was designed to encourage the co-ordination of and the participation in anti-money laundering and terrorist financing training programmes. It is aimed at assessing the degree to which its members have implemented the recommendations of the FATF and CFATF.




Caribbean AML/CTF Principles

1.PREAMBLE

The Caribbean Association of Indigenous Banks (CAIB) has agreed that these Principles constitute global guidance on the establishment and maintenance of internationally accepted banking standards to prevent money laundering and the financing of terrorism, and the application of these Principles will serve to enhance the integrity of Correspondent Banking relationships.

www.caribbean-principles.com


Caribbean AML/CTF Principles

4. RISK-BASED DUE DILIGENCE

By this Declaration, CAIB member banks will ensure that they cooperate fully with the risk-based approach and the requirements arising from their Correspondent Banking relationships. Caribbean institutions recognize the necessity to meet all international banking standards as defined by their Correspondent Banks and understand that under a risk-based review they may be subjected to a higher level of due diligence.



Caribbean AML/CTF Principles5. DUE DILIGENCE STANDARDS

CAIB member banks will operate in accordance with local and international AML/CTF standards and subject their account holders to appropriate due diligence that will seek to assure that the institution is comfortable conducting business with all its clients and be able to assess each client’s risk profile. It is appropriate for a Caribbean institution to consider the fact that a Correspondent Banking relationship will wish to assess that its Caribbean client operates in a regulator y environment that is internationally recognized as adequate in the fight against money laundering.



Overview of Anti-Money Laundering &

Essentials of an effective AML Program


ANTI-MONEY LAUNDERING (AML)

Money Laundering is the process criminals use to exchange their dirty money (funds they made through

illegal activity) for clean money (funds that can’t be traced back to the crime or the criminals).


Stages of Money Laundering?

It usually involves three stages:

Placement is the initial stage of the process, when the money launderer introduces the illegal proceeds into the financial system;



Layering is the stage that involves converting the proceeds into another form and creating complex financial transactions to disguise the audit trail and the source and ownership of funds. The layering can involve such transactions as wire transfer of deposited cash from one account to another, the conversion of deposited cash into monetary instruments (e.g. travelers checks);



Integration: This involves placing the laundered proceeds back into the economy to create the perception of legitimacy.


Money Laundering Stages

How Money Laundering is Done.

Cash is generated by Illicit Activity i.e. drug trafficking

1 - Placement Cash is converted to monetary instruments or deposited into financial institution accounts

2 – Layering Funds are moved to other financial institutions to obscure origins

3 - Integration – Funds are used to acquire legitimate assets or to fund further illicit activities


How is money laundered?

Structuring

Smurfing

Interbank wire transfers

Misinvoicing

Smuggling


Your AML Program must:

Be in writing and must include:

• The development of internal policies, procedures, and controls;

• The designation of a compliance officer;

• An ongoing employee training program; and

• An independent audit function to test AML program.


Internal Controls Risk-focused approach

Board and management oversight

Written policies and procedures

Monitoring and due diligence

Management succession (common mistake not including the AML Officer)

Strong management information system


AML Officer

Has policy/decision making authority

Has sufficient resources

Qualifications, knowledge, and training

Communication line to Board of Directors


Training For directors, senior management, and all staff

Conducted at least annually by qualified source

New employees should be trained ASAP

Should include regulatory requirements and policies/procedures

Example of teller selling monetary instrument to non-customer – job specific

Document attendance (track those that have not attended and perform make up training)* important


Independent Testing

Performed by individuals independent from the compliance function

Auditor should have sufficient knowledge of AML laws and regulations

Risk-based audit program

Transaction testing


AML Penalties for Non-Compliance

C I V I L :

Any financial institution, Officer, or employee who willfully violates the AML provisions, is liable for fines. For example, the penalty could be imposed if the institutions consistently fail to file reports and/or file incorrect reports.

Failure to comply with the AML Act can have serious consequences for you and your institution.


CRIMINAL:

Any person who willfully violates the AML Act through illegal activity is liable to fines; imprisonment; or both.

Willful Blindness:

You cannot ignore when you suspect about the legitimacy of the funds. Ignoring RED FLAGS can constitute “Willful Blindness”, and as such may be grounds for prosecution.

AML Penalties for Non-Compliance


BREAK


Know your Customer (KYC)


Know your Customer (KYC) In an effort to prevent money laundering financial

institutions are required to establish Know your customer Program that meet certain requirements.

Before opening an account for any entity (individual or business), you must:

• Record identifying information;• Verify that information is valid by using documentary or

non/documentary methods;• Check all new customers against sanction list.


KYC GUIDELINES

Identifying the customer and verifying that customer’s identity (Individual / Commercial)

Determine the source of funds and purpose of account

Commercial entities: Identifying the beneficial owner, and taking reasonable measures to verify the identity of the beneficial owner

Conduct on-going review to determine that activity is consistent with profile


The financial institutions must make a strong effort to accept only those clients whose Source of Wealth and Funds that can be reasonably established to be legitimate.

The primary responsibility for this function lies with the front-line staff who has the contact with the customer and introduces the client for acceptance.

Simply fulfilling the internal procedures or providing basic information, does not relieve the front-line staff his/her responsibilities.

Client Acceptance


Financial institutions must identify whether the client is acting on his/her own behalf.

Beneficial ownership must be established for all accounts.

Identify and inform your Compliance Department of customers that may pose a higher risk to the bank. (e.g. Politically Exposed Persons “PEP”).

Client Acceptance


What is a Politically Exposed Persons – PEP’s

A person identified as a senior foreign political figure, any member of their immediate family and any close associate.


Due diligence is designed to detect and report any known or suspect money laundering or suspicious activity.

It is the financial institution staff responsibility to provide accurate information as well as to maintain the Profile up to date.

Due Diligence


Customer due diligence is essential when establishing any customer relationship and it is critical for high profile customers. For example, private banking clients.

In order to identify an unusual or suspicious activity, it is essential to Know Your Customer (KYC).

Due Diligence


Essential information to collect and record:

Customer Background

Purpose of the account

Expected activity

Source of Funds

Source of Wealth

Know Your Customer

KYC


Relevant information includes:

Employer,

Occupation,

Type/Nature of Business,

Position/Title,

Years in the Area of Business,

Salary

Customer Background


Others Source of Income,

Referred by,

Nationality,

Achievements,

Products or Services of Interest and

Any other Appropriate Information

Customer Background


Identify/mention if the customer is related to any other account in the financial institution.

Identify/mention very clearly if the customer is a Politically Exposed Person (PEP).

Remember to assign a HIGH RISK for customers classified as (PEP).

Customer Background


Purpose of the Account

Is the intention/objective for opening the account including (but not limited to):

Salary account,

Investment account or

Checking account


Expected Activity

Information about the expected activity in the account is an important and essential tool to monitor the customer’s account activity in order to identify any unusual activity.


For funds that are coming from US, mention the amount in USD, the exchange rate at the time the profile is being written, and the approximate amount in E.C Dollars.

Expected initial deposit amount must be mentioned.

Source of Funds


Source of funds include (but are not limited to):Business / Employment (specify)Rental Income (specify) Investments (specify)Foreign Investments (specify)Sale of property (specify)Other (specify)

Source of Funds


Documentation supporting the customer’s Source of Wealth, serves to prove that the wealth is compatible with the alleged deposits or investments that the customer plans to have with the financial institution.

Source of Wealth


Cases must be analyzed on a case-by-case basis, though some cases may have some similarities but each case is by nature different and must be treated separately.

“Common sense” is the answer to most of the questions as to whether the document provided supports or not the customer’s wealth.

Source of Wealth


Although several documents can be presented to support the source of wealth and confirm other information; the income tax is the most comprehensive document and is therefore mostly recommended (note: it is recommended, not mandatory).

Source of Wealth


Advantages of the Income Tax:

Proof of employment,

Proof of residence,

Overall list of assets,

Occupation,

Tax Identification number,

Possible Sources of Funds,

Earnings.

Source of Wealth


Know your Customer• Collect minimum information (All Accounts):

NameAddressDate of Birth-if individualIdentification Number

• Verify customer information timelyDocumentaryNon-DocumentaryAdditional Verification

• Maintain appropriate records

• Records Retention (x years after account closed)

• Consult government sanction terrorist lists


Know your Customer Customer Due Diligence (CDD)

CDD begins with verifying the customer’s identity and assessing the risks associated with that customer;

Obtain information at account opening sufficient to develop an understanding of normal and expected activity for the customer’s occupation or business operations;

Common exceptions include incomplete forms (transaction activity)


KYC INDIVIDUALS Name

Date of Birth

Street Address

Tax ID Number

Identification type and Identification Form (unexpired government issued photo-identification)

Place of employment & occupation are helpful for knowing new customers.


KYC Commercial Entities Name of Business

Street Address

Tax ID Number

Must obtain documentation to verify Information Provided by Commercial Customer


KYC Sole ProprietorshipsA type of business entity that legally has no separate existence from its owner.

Most proprietorships will register a trade name or operate as “Doing Business As”.

Obtain information about the business in the same manner in which you would obtain information from individual.

Also need specific information regarding source of funding, line of business and expected activity.


KYC PartnershipsPartnership refers to an association of persons or an

unincorporated company with the following major main features:

Formed by two or more persons

The owners are all liable for legal actions and debts the company may face personally

Created by agreement as proof of existence

Obtain information about the partnership in the same manner in which you would obtain information from individuals. Obtain partnership agreement. Identify all partners. Also need specific information regarding source of funding, line of business and expected activity.


KYC CorporationsA corporation is a legal entity which has a separate legal personality from its members.

The defining legal rights and obligations of the corporation are:

The ability to sue and be sued;

The ability to hold assets in its own name;

The ability to hire agents;

The ability to sign contracts; and

The ability to make by-laws, which govern its internal affairs

Obtain information to verify the existence of company; Governing Documents, Beneficial Owners, Government Issued Identification Number, Identify of Directors/Signors; Source of Funds and Nature of Activity.


KYC

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AML COMPLIANCE

KNOW YOUR CUSTOMERS

IDENTIFY SUSPICIOUS ACTIVITY

REPORT TO COMPLIANCE DEPARTMENT


KYC Tips

Search Public Web-site for Filings

Obtain Financial Statements is available on line

Conduct Media Searches

Obtain Parent Information if company not firmly established


LUNCH


Applying a Risk Based Approach to Due Diligence


Applying a Risk Based Approach to Due Diligence

Two step process Identification Analysis

Products/Services

Customers/Entities

Geographic location



Monitoring of transactions

Client contacts (meetings, discussions, in-country visits etc.)

Third party information (e.g. newspaper, internet etc…)

Financial institution internal knowledge of the client’s environment (e.g. political situation in his/her country).

Risk Mitigation


If you are in doubt about a specific transaction/case, contact your immediate supervisor or Compliance Department.

Compliance is not only a responsibility of the Compliance Department, it evolves all the Departments in the Financial institution, and it is a shared responsibility.

Risk Mitigation


Risk Approach Common problems

Incomplete list of products and services

Failure to update annually or when things change

No explanation for the risk ratings


High-Risk Customers and Enhanced Due Diligence (EDD)



Policies, procedures, and processes should be developed for EDD

Understand anticipated transactions

Implement monitoring system



File SARs if applicable

Common exceptions include:

• Infrequent/inconsistent monitoring

• Lack of documentation of monitoring

• Not obtaining complete and accurate information at account opening (transaction activity)


HIGH RISK CATEGORIES

High Risk Products / Services Private Banking, Correspondent Banking, Cash Services.

High Risk Geographies FATF Countries, International Narcotics Control Strategy Report

(INSCR) “Countries of primary concern”, OFAC SDN Countries, Designated by Secretary of State, EU Blacklist.

High Risk Customers Non-Bank Financial Institutions (MSB’s), Non-governmental

obligations, cash-intensive businesses, Politically Exposed Persons, Foreign Correspondent Banks, Private Investment Legal Vehicles (PILVs) such as Int’l business Companies, Private Investment companies –PICs ( Bearer Shares, Power of Attorney), Trusts and Foundations.


Products & Services to Monitor

Products:

• Non-interest Bearing Checking Account (DDA)

• Time Deposits, Fix Deposits (CDs)

• Loans• Mutual Funds• Securities• Debit/Credit Card

Services:

• Funds Transfers (Wires)• Pouch Services• Negotiable Instruments:

Official Checks• Internet Banking • Investment Banking• Bill Payment


High-Risk Products/Services

Electronic funds payment services:

Stored value cards,

Wires,

Third-party payment processors,

Automated clearing house transactions,

Automated teller machines


High-Risk Products/Services Electronic banking

Private banking (domestic and international)

Trust and asset management services

• Monetary instruments

• Foreign correspondent accounts

• Trade finance (letters of credit)

• Loans secured by cash collateral


Enhanced Due Diligence Information

Purpose of the account

Source of funds and wealth

Beneficial owners of the accounts

Customer’s (or beneficial owner’s) occupation or type of business

Financial statements/banking references

Domicile (where the business is organized)


Enhanced Due Diligence Information

Proximity of customer’s residence, place of employment, or place of business to the bank

Description of the customer’s primary trade area and whether international transactions are expected to be routine

Description of the business operations, the anticipated volume of currency and total sales, and a list of major customers and suppliers

Explanations for changes in account activity (Implies ongoing monitoring)


High Risk CorporationsOFFSHORE CORPORATIONS

Incorporated in Offshore / Haven Jurisdictions. Not legally able to operate in the haven, and normally have secrecy provisions to protect identity. Very easy to create corporation in offshore havens, with very little documentation.

BEARER SHARE CORPORATIONS

Bearer shares are corporation stock certificates which are owned simply by the person who holds them, the "Bearer".


High Risk Corporations

U.S. HAVEN JURISDICTIONS

States such as Delaware, Florida and Nevada are known tax havens, which operate similar to Offshore Jurisdictions.

SHELL CORPORATIONS

A shell corporation is as "a company that is incorporated, but has no significant assets or operations." Shell corporations are not in themselves illegal and they may have legitimate business purposes. However, they are a main component of underground economy specially those based in tax havens. They may also be known as International Business Corporations (IBCs), Personal Investment Companies (PICs), Front Companies, or "mailbox" companies.


AML Challenge


DESIGN AND DEVELOP A MONEY LAUNDERING SCHEME.

ENSURE THAT IT CONTAINS EACH ELEMENT OF MONEY LAUNDERING

AML Challenge


Questions ????


DAY TWO


Course OverviewDay two

During today’s course we will cover:

AML Suspicious Activity AML Red Flags Keys to Writing effective SAR Narrative Ethics AML/Ethics Challenge Questions & Course Wrap-up


AML Suspicious Activity


Introduction• In today’s constant changing Financial environment, it is

important to be aware of latest guidelines on money laundering and suspicious activities.

• We will illustrate common red flags based on product types.

• It is important to note that one cannot replace constant vigilance in protecting the interests of the institution. In doing so, it is just as important to rely on your instinct when conducting your daily tasks.


What is a Suspicious Activity? Any transaction involving funds derived from illegal activities

and/or any attempt to hide or disguise funds from illegal activities, as part of a plan to violate or evade any law.

Any attempt to evade requirements under the Anti-Money Laundering Act.

Transaction has no business or apparent lawful purpose, or is inconsistent and unexplained for the “normal” activity of a customer.

Any attempt to access financial institution's computer system to customer funds, information or to damage information.


Customer has an unusual or excessively nervous demeanor.

Customer is reluctant to proceed with a transaction after being told it must be reported.

Customer threatens an employee attempting to deter a record keeping or reporting duty.

Customer makes large cash deposit without counting the cash.

Suspicious Activity


Customer deposits checks and/or money orders that are not consistent with the intent of the account or nature of business.

Customer attempts to take back a portion of a cash deposits that exceeds the reporting threshold after learning that the currency transaction report will be filed on the transaction.

Customer makes frequent purchases of monetary instruments for cash in amounts less than the reporting threshold.

Suspicious Activity

Suspicious Activity Detected?Contact Your AML Officer Immediately!


AML Red Flags


What are Red Flags?

Indicators as to which customers may warrant additional attention based on entity type , geography, product usage, activity or other factors.


AML Red FlagsThere is a list of money laundering red flags (warning signs) all financial institutions employees should watch for.

If you were to encounter any of the following behaviors or activities, you should notify your designated supervisor immediately and provide as much detail as possible.


AML Red Flags Structuring at multiple branches or at the same branch with

multiple individuals

Corporate Layering between bank accounts and charitable organizations

Wire transfers by charitable organizations

Lack of apparent funds raising activity

Cash debiting schemes / attempts (ATMs)


• Structuring at multiple branches or at the same branch with multiple individuals.

• Corporate Layering between bank accounts and charitable organizations.

• Wire transfers by charitable organizations.

• Illegitimate fund raising activity.

• Cash debiting schemes / attempts (ATMs).

• Movement of funds through FATF designated NCCTs.

AML RED FLAGS


• Inconsistent activity for client profile.

• Activity not commensurate with occupation.

• Use of multiple account for no legitimate purpose.

• Structuring of deposits to avoid AML requirements.

• Refusal to provide identification.

• Use of personal accounts for business purposes.

• Abrupt change in account activity.

• Deposit maintained for short period, and wired out.

AML RED FLAGS


AML Red Flags Refusal or reluctance to proceed with a transaction, or abruptly withdrawing a transaction.

Customer reluctance to provide information or identification.

Structured or recurring, non-reportable transactions.

Multiple third parties conducting separate, but related, non-reportable transactions.


AML Red Flags Multiple even dollar amount transactions.

Transactions structured to lose the paper trail.

Significant increases in the number or amount of transactions.

Transactions which are not consistent with the customer’s business or income level.

Transactions by non-account holders.


Deposit Accounts Red Flags Lack of references or identification and/or minimal, vague or

fictitious information provided.

Customer with multiple accounts.

Frequent deposits or withdrawals with no apparent business source.

Multiple accounts with numerous deposits under $10,000.00

Numerous deposits under $10,000.00 in a short period of time.

Accounts with high volume of activity and low balances.


Deposit Accounts Red Flags Large deposits and balances.

Deposits and immediate requests for wire transfers.

Numerous deposits of small incoming wires or monetary instruments, followed by a large wire

debits Accounts used as a temporary repository for funds.

Funds deposited into several accounts, transferred to another account, and transferred outside of your territories.


Deposit Accounts Red Flags

Disbursement of certificates of deposit by multiple bank checks.

Early redemption of certificates of deposits.

Sudden, unexplained increase in activity or balance.

Inconsistent deposit and withdrawal activity.

Strapped currency -frequent deposits of large amounts of currency, wrapped in currency straps that have been stamped by other banks.

Client, Trust, and Escrow accounts - large cash deposits in these types of account.


Wire Transfers Red Flags

Frequent wire transfers with no apparent business reason.

High volume of wire transfers with low account balances.

Incoming and outgoing wires in similar dollar amounts.

Large wire by customers operating cash business.

Cash or bearer instruments used to fund wire transfers.


Wire Transfers Red Flags•.

Outgoing wire transfers requested by non-account holders.

International funds transfer which are not consistent with customer’s business.

International transfers funded by multiple monetary instruments.

Other unusual domestic or international transfers.

No change in form of currency - proceeds of cash deposit may be wired to another country without changing the form of currency.


Monetary Instruments Red Flags Structured purchases of monetary instruments -

purchases of monetary instruments with currency in amounts below the $3,000.00 reporting threshold.

Replacement of monetary instruments - the use of one or more monetary instruments to purchase another monetary instruments.

Frequent purchase of monetary instruments without apparent legitimate reason – repeatedly buying a number of official checks or traveler’s checks with no apparent legitimate reason.


Monetary Instruments Red Flags

Deposit or use of multiple monetary instruments.

Incomplete or fictitious information -- customer may conduct transactions involving monetary instruments that are incomplete or contain fictitious payees, remitter, etc.

Large cash amounts - the customer may purchase cashier’s checks, money orders, etc. with large amounts of cash.


Lending Red Flags Certificates of deposits used as collateral - customer purchases

certificate of deposit and then uses them as loan collateral.

Sudden/unexpected payment on loans.

Reluctance to provide purpose of loan, or the stated purpose is ambiguous.

Inconsistent or inappropriate use of loan proceeds.

Overnight loans.

Loan payments by third parties.

Loan proceeds used to purchase property in the name of a third party, or collateral pledge by a third party.


Lending Red Flags

Permanent mortgage financing with an unusually short maturity.

Attempt to sever paper trail.

Wire transfer of loan proceeds.

Disbursement of loan proceeds by multiple bank checks.

Financial statement inconsistent with those of similar business.


Credit/Debit Cards Red Flags

High balances paid off within short time.

Over payment of balances.

Credit received from third parties, not related to account.

Multiple requests for credit refunds.

Multiple cash withdrawals from different ATMs.

Identify theft indications: such as multiple pay phone calls, multiple daily purchases not exceeding $2000, various internet transactions etc.

Activities not consistent with customer general profile.


Internet Banking Red Flags Large volume of activity with equal amount of debits and

credits.

Suspicious movement of funds. Movement of funds from one institution, into another institution, and back into the first institution can be indicative of money laundering.

Unusual transfer of funds among related accounts, or accounts that involve the same or related principals.

Payments or receipts with no apparent links to legitimate contracts, goods or services.

•


Internet Banking Red Flags Large volume of wire transfers deposited into, or

purchased through, an account when the nature of the account holder’s business would not appear to justify such activity.

Large incoming wire transfers on behalf of a foreign client with little or no explicit reason.

Activity that is unexplained, repetitive, or shows unusual patterns.

Transfers that are unexplained, repetitive or shows unusual patterns.


Customer and/or Bank Employee Red Flags

Questions or discussions on how to avoid reporting/record-keeping.

Customer attempt to influence a institution employee not to file a report.

Lavish lifestyles of customers or bank employees.

Short-term or no vacations.

Circumvention of internal control procedures.

Multiple incorrect or incomplete Currency Transactions Reports.


BREAK


Keys to Writing effective SAR Narrative


SUSPICIOUS ACTIVITY REPORT (SAR)

Each employee at a financial institution should be on the lookout for suspicious activity.

If you get a feeling something’s “just not right about a customer’s behavior, a transaction, or a pattern of transactions, tell your designated supervisor, and Compliance Department immediately

(Do not tell anyone else besides your designated supervisor and Compliance Department).

SUSPICIOUS ACTIVITY REPORT (SAR)Confidentiality

In order not to breech your institution’s safe harbor protection, it is essential that suspicions and Suspicious Activity Reports (SARs) be kept confidential.

Discuss these matters with no one but your designated supervisor and Compliance Department.

Neither the banks or its employees are permitted to notify any person involved in the transaction that an SAR has been filed, except where such request has been made by your FIU/ONDCP.


The Importance of Filing a SAR

Identifies potential & actual illegal activity:

Money Laundering Terrorist Financing Other Financial Fraud & Abuse

Detects & prevents flow of illicit funds.

Establishes emerging threats through analysis of patterns & trends.

It’s Required By LAW!


Do not assume the reader is familiar with your institution’s internal terminology, acronyms, operational processes, or has other knowledge related to the reported violation.

Writing effective Suspicious Activity Report (SAR)


The Narrative should:

Be concise & clear

Provide a detailed description of the known or suspected criminal violation or suspicious activity

Identify the essential elements of information (the 5 W’s)

Be chronological & complete



Essential SAR Elements

SARs narratives should contain the “5 Ws and the How" of the transaction being reported in a SAR:

Who? What?

When? Where?

Why? How?


Who is conducting the criminal or suspicious activity?

Describe additional details about the suspect(s) :

Employer & occupation information

Relationship between the suspect & the filing institution

Length of the financial relationship



What instruments or mechanisms facilitate the suspect activity/transactions?

Identify & describe the transactions raising the suspicions of the financial institution. Examples include:

Cash deposits and/or withdrawals

Checks & other monetary instruments (money orders; traveler’s checks; cashiers or bank checks)



Additional types of transactions raising the suspicions of the financial institution:

Wire or other electronic transfers (ATM, ACH)

Foreign currency



When did the criminal or suspicious activity occur?

If a one-time occurrence, identify the date

If a pattern of activity occurred over a span of time, state when the activity first initiated and then describe the activity during the duration

Identify when the activity was detected



Where did the suspicious activity take place?

Identify the branch/department location or locations within the institution where the activity occurred (name of branch, office or department and the street address for each)

Identify all account numbers & types of accounts affected by the transactions/activity

Indicate if suspect transactions involve other domestic or international banks & identify the banks, their locations, account numbers, etc.



Why does the institution think the activity is suspicious?

First, describe the filer’s type of institution



Why does the institution think the activity or transaction is suspicious (cont.)?

Next, describe concisely but fully, why the institution considers the activity as suspicious

Be sure to include any relevant information about suspicious customer activity that the institution has in its files at the time the SAR is filed



How did the suspicious activity occur?

In a concise, accurate and logical manner, describe how the suspect transaction or pattern of transactions were completed

For account activity, provide as completely as possible an explanation of the cycle of funds including the source of the funds in the account & application of those funds



Suggested structure of the narrative

Introduction Body Conclusion


130© Compliance Aid 2011

The Introduction

Provide a brief statement of the SAR’s purpose

Generally describe the known or suspected violation

Identify the date of any SARs previously filed on the subject & the purpose of that SAR

Indicate any internal investigative numbers used by the filing institution to maintain records of the SAR



131

The Body Provide the relevant facts about

all parties facilitating the suspect activity or transactions

Answers Who?

The Body Provide the relevant facts about

all parties facilitating the suspect activity or transactions

Answers Who?



132

The Body (cont.)

Identify all involved accounts and transactions in chronological order by date and amount – do not use or insert tabular objects, tables, or pre-formatted spread sheets

Answers What? Where? When?

The Body (cont.)

Identify all involved accounts and transactions in chronological order by date and amount – do not use or insert tabular objects, tables, or pre-formatted spread sheets

Answers What? Where? When?



133

The Body (cont.)

Explain in detail the filer’s position that the activity or transaction is illegal or suspicious

Answers Why?

The Body (cont.)

Explain in detail the filer’s position that the activity or transaction is illegal or suspicious

Answers Why?



134

The Body (cont.)

Describe the method of operation of the subject:

Manner in which the activity and/or transactions were completed;

Any relationship to other transactions, accounts, conductors, etc.; and

Subsequent results of the activity

Answers How?

The Body (cont.)

Describe the method of operation of the subject:

Manner in which the activity and/or transactions were completed;

Any relationship to other transactions, accounts, conductors, etc.; and

Subsequent results of the activity

Answers How?



135

The Conclusion

Summarize the report & include:

Any planned or completed follow-up actions by the institution

Names & telephone numbers of persons with additional information about the reported activity

Location within the institution where all SAR-related records are maintained

The Conclusion

Summarize the report & include:

Any planned or completed follow-up actions by the institution

Names & telephone numbers of persons with additional information about the reported activity

Location within the institution where all SAR-related records are maintained



SAR - Penalties

Failure to file a report.

Filing report containing material omission or misstatement.

Failure to maintain required records.

Failure to secure identifying information.


Your Responsibility

Be familiar with your institution AML program

Comply with KYC procedures

Conduct enhanced Due Diligence

When in doubt . . . Ask and look it up

Identify and report any suspicious activity or transactions to your Compliance Officer

Review new customers against the sanction List

“KNOW YOUR CLIENT”

What is Ethics

Ethics describes a system of moral principles, rules or standards that govern the conduct of members of a group.

Ethics deals with right and wrong – and the moral consequences of what we do.

Ethics also is indelibly linked with trust – and, in our industry, trust is everything.

WHY HAVE AN ETHICS POLICY

Reason # 1: People are diverse. An Ethics policy establishes a common understanding – among all employees – as to what is ethical behavior.


Reason # 2: An Ethics Policy Sets Clear Expectations.

An official code of Ethics tells you exactly what is expected in terms of ethical behavior and the consequences should you fail to live up to those expectations.


Reason # 3: An Ethics Policy Can Provide Legal Protection.

An Ethics policy may protect an institution in potential action against a rogue employee.


Reason # 4: Ethics & Compliance go Hand-In-Hand.

Your Compliance with your ethics policy will support your institution’s compliance with consumer protection laws.


Reason # 5: Good Ethics are Good Business

In an ethical organization, the best interests of employees and customers always win out. This result in increased loyalty from both.

What Should An Ethics Policy Say

It should be a workable guide for all employees.

It should be unique to the institution’s organization and business practices.

It should spell out rare situations in which the policy may be waived.

It should contain a special “whistleblower” clause to protect from fear of reprisal employees who report those engaged in suspected illegal or unethical conduct.

What Should An Ethics Policy Say

Every Ethics Policy should address:

Conflicts of interest

Gifts and gratuities, including dollar limits, if applicable and

Privacy of records and information


AML/Ethics Challenge


Questions ????


Michelle N Martin, CAMS, ACAPresidentE-mail [email protected]

Telephone:Miami, Florida, U.S.A. +1 (305) 772-9712St. John's Antigua, W.I. +1 (268) 784-9423

Compliance Aid

Compliance Solutions

Consultants

Michelle N Martin, CAMS, ACAPartner

Website http://compliancesolutionsconsultants.comE-mail [email protected]

Telephone:Miami, Florida, U.S.A. +1 (305) 772-9712St. John's Antigua, W.I. +1 (268) 784-9423

http://compliancesolutionsconsultants.com/

mailto:[email protected]


AML KYC Training

If you have any questions, do not hesitate to contact us!

CAIB & Compliance Aid

HOW WELL DO YOU REALLY “KNOW YOUR CUSTOMERS”? Two Day Course MODULE I May 26 th – 27 th, 2011 Presented by: Caribbean Association of Indigenous Banks.

Documents

president of compliance

compliance program

regulatory compliance

financial career

course overview day

illegal financial activity

todays course

tomorrows course