Commonalities, money laundering, ethics, international standards, gac 2 24-14

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Information about Commonalities, money laundering, ethics, international standards, gac 2...

Published on March 7, 2014

Author: ACFCS



Slide Deck for CFS Prep Session 2-24-14

CFCS Examination Preparation Series February 24, 2014 Part 1: Financial Crime Commonalities Money Laundering Ethics International Standards Global Anti-Corruption Presented By Charles Intriago Brian Kindle

Brian Kindle Executive Director Association of Certified Financial Crime Specialists Miami, FL

Charles A. Intriago President and Founder Association of Certified Financial Crime Specialists Miami, FL

Certification | News Guidance | Training | Networking Global Private and Public Sector Community

CFCS Certification The Mark of Knowledge and Skill The Designation the Times Demand

What the CFCS Certification is • Universal and not based on the laws or regulations of any country • Allows diverse professionals to demonstrate skill and knowledge across multiple fields • Designed for private and public sector specialists • Promotes career growth, better jobs and pay, confidence

Construction of CFCS Certification • Eight month process – Identification of Job Tasks – Worldwide survey – Writing of exam items based on job task and survey findings – Detailed review and selection of items by 60 experts and psychometricians • Experienced ACFCS staff that has built 3 prior certifications

Demand for CFCS Certification • More than 1,000 professionals in 64 countries have earned CFCS certification, or registered for it, since its release in late May 2013 • 15 global institutions and organizations have purchased certifications in bulk numbers for their staffs

CFCS Exam Study Aids • An extensive 347-page Exam Study Manual, regularly revised and updated • Live Online Exam Training Course and prerecorded versions on • Topic specific online training courses now available on crucial subjects, such as – The US Foreign Corrupt Practices Act – The Foreign Account Tax Compliance Act (FATCA)

About the Exam • 145 scenario based, four choice, multiple choice questions • Four hour exam session with no breaks, at one of over 730 testing centers or online proctored • Passing rate is 68% • Results given immediately

Preparation Suggestions • Recommended three weeks of study, if you commit 6 – 8 hours a week • Review manual in detail, including referenced materials in appendix • Prepare based on your own strengths and weaknesses • Exam based on best practices, not what particular organizations do

CFCS Examination Preparation Series February 24, 2014 Financial Crime Commonalities

Defining Financial Crime and its Permutations • Crimes that have money or economic advantage as goal • Non-violent action resulting in unlawful taking, moving or disguising of money or other value by artifice, corruption or deception for benefit of perpetrator or another • ACFCS does not include profit-motivated crimes, like drug and human trafficking at their source • But, nearly all criminals become ‘financial criminal’ when they possess or control the criminal proceeds

The Financial Crime Spectrum • Money Laundering • Fraud • Corruption • Tax evasion •Terrorist financing •Asset recovery • Sanctions • Compliance • Enforcement

Globalization of Financial Crime • FCPA, UK Bribery Act, GAC crackdown • FATCA, IGAs, multinational tax enforcement • OECD call for automatic financial account data sharing •Global push against secrecy havens •G20 call for greater financial transparency, cooperation •FATF’s changing standards pointing to convergence

Technology and Financial Crime • Identity theft, data breaches, other cybercrimes • Compliance and enforcement technology-driven • Data analytics in transaction monitoring, investigations, customer due diligence • Data security grows in importance for public, private sectors

Commonalities of All Financial Crimes • Require money laundering • Require a financial institution • Result in tax evasion • Have interface with a government agency • Create necessity to recover assets • Often involve multiple countries • Often involve public or private corruption

Benefits of Convergence  Regulatory expectations, emerging best practice  Government agencies doing it  Leveraging data, systems, tools to access and study data  Common case management system  Helps manage stakeholder interests, expectations  Can produce better SARs  All financial crime cases have AML component  Many cases involve complicit employees; security, HR  Broader career choices for staffs of converged units 18

Practical Considerations on Convergence  A single financial crime job family  Sharing best practices  Merge organizations or just work together?  History and culture clash  Skills – some units have skills others lack  Managing internal stakeholders’ expectations  Managing external stakeholders’ expectations 19

CFCS Examination Preparation Series February 24, 2014 Money Laundering

Overview and Definition • Actions or conduct designed to conceal source, movement, control or ownership of money illegally derived • Movement of money derived through legitimate means, but which is intended or destined to further a crime • Common element of all financial crimes 21

Stages of Money Laundering • Placement • First step in the process • Infusion of criminal proceeds into traditional or nontraditional financial institutions • Typically most vulnerable to detection at this point • Moving assets away from their source • Structured deposits • Changing currency into other financial instruments • Using non-bank institutions, like casinos • Complicity of banks, brokers or other institutions 22

Stages of Money Laundering • Layering • Separates criminal proceeds from source through layers of transactions • Often involves multiple participants and entities, like shell corporations, cross-border transactions • More layers, more difficult it is to trace funds to perpetrator • Wire transfers • Asset movement among entities perpetrator controls • Purchasing multiple financial instruments 23

Stages of Money Laundering • Integration • Puts laundered proceeds into legitimate economy to appear legitimately derived, allowing funds to return to financial criminal • Makes it difficult to distinguish legitimate, illegitimate funds • Detecting integration often requires informant, undercover agent, forensic accounting. Examples: • Real estate investments • Trade-based money laundering • Loans, business arrangements among complicit entities 24

AML Compliance Programs • Obviously better to prevent illicit funds from entering financial system than chasing them after the fact • Key is robust anti-money laundering programs: • Customer due diligence measures, including ongoing due diligence • Customer profiling and risk assessment • Automated transaction monitoring systems • Customer screening • Investigation of suspicious or atypical customer transactions and behavior • Enhanced due diligence procedures for higher-risk customers • Will be described in more detail in later section 25

Characteristics and Indicators of Money Laundering • Red flags are situation-specific, depend on type of organization, customer and scenario • Key is to understand customer’s behavior, source of funds to establish “normal” behavior • Create customer profile, compare activity, transactions against expectations and peer group • Good KYC and customer due diligence programs, monitoring essential for detecting laundering 26

Characteristics and Indicators of Money Laundering Potential red flags • Account activity inconsistent with customer profile • Account operated by third party • Funds transfers from/to tax haven • Funds transfers to offshore jurisdictions with no rationale • Large cash transactions over short period • Multiple deposits to account by different people • Multiple transactions on same day from different geographic locations • Many large deposits by ATM • Same home address for funds transfers by different people • Structuring of transactions • Variations in spelling of names, addresses • Withdrawing all or most funds in short period 27

Money Laundering Methods and Vehicles Financial Institutions, Intermediaries and Other Entities • • • • • • • • Correspondent Accounts Private Banking Securities Brokers Insurance Real Estate Agents Precious Metal Dealers Casinos Gatekeepers: Lawyers, Accountants, Auditors, Notaries, Others 28

Money Laundering Methods and Vehicles Financial Vehicles and Value Transfer Systems • • • • • • International Trade Price Manipulation Prepaid Cards Mobile Money Credit Facilities and Lending Black Market Peso Exchange Hawala 29

Money Laundering Methods and Vehicles Structures to Conceal Beneficial Ownership • • • • • • Shell Companies Shelf Companies Trusts Bearer Bonds and Securities Nonprofits, Charities and Foundations Fronts and Nominees 30

Money Laundering and Beneficial Ownership • Determining “ultimate beneficial ownership” is persistent issue in AML field • Corporate registries are one key source • Business data providers, open source intelligence can also be useful • Increasing regulatory scrutiny, attention being focused on the issue 31

Money Laundering Trends and Technologies • Money laundering risks in new technologies • Mobile payments • Digital currencies • Virtual worlds • Online banking and securities trading • Money laundering schemes becoming more complex • Facilitated by many institutions and intermediaries, including company formation agents 32

Key Lessons • Money laundering a constant element of all financial crimes; each has money laundering nexus • Unraveling complex corporate structures, determining beneficial ownership is key to due diligence, investigations • AML compliance relies heavily on customer profile, risk assessment, expected transactions and activity • “Three stages” are useful way to frame, analyze suspicious activity 33

Practice Question A compliance officer at a major insurance company has recently noticed a pattern of potentially suspicious transactions from a longtime customer. The customer is employed in a consulting position that requires her to travel internationally on an unpredictable schedule and she often resides overseas for extended periods. The customer has several properties insured with the company for large amounts. In the past three years, she has overpaid her premiums numerous times and then requested a refund be issued. Concerned that the customer may be laundering funds through the overpayment of premiums, the officer is investigating the transactions. Which fact would BEST indicate money laundering may be taking place? 34

Practice Question A. The customer often requests that refunds be made by wire transfer to banks outside of the country. B. The customer makes the overpayments at different times of the year and in varying amounts. C. The customer has recently taken out a sizeable new insurance policy on a commercial property with your company. D. The customer has requested that refunds on excess premiums be made to an offshore corporation 35

Review Question You are an AML officer at a local bank, which holds accounts for a variety of businesses in your region. Most businesses are tied to the tourism and hospitality industry, as the region is a major vacation destination during the summer months. Many accountholders are small businesses that deal primarily in cash. You are investigating an alert produced by your transaction monitoring system on an account held by a local, family-owned restaurant located near one of the largest tourist resorts in the area. After reviewing KYC information on the account, you determine the family lives in a neighboring country. Upon reviewing the account’s activity, you learn the following information. Which fact best supports the possibility that the restaurant account may be used for money laundering? 36

Practice Question A. The restaurant makes large cash deposits into its account biweekly from June until early September. B. The account shows a pattern of funds transfers each month to an account held at a bank in a neighboring country. C. The restaurant’s account shows consistent deposit activity throughout the calendar year. D. The restaurant’s cash deposits were made through a combination of counter and ATM deposits. 37

CFCS Examination Preparation Series February 24, 2014 Ethics

Overview • There is no one accepted international standard • Ethical standards for different professions and organizations – compliance, regulation, enforcement, law, investiga tion, etc. • Financial crime professionals confront numerous ethical risks • “If you have to ask about it, it’s probably wrong.” 39

Duties to Client • Financial crime specialist owes highest duty of honesty, transparency and professionalism to constituents, client, organization, colleagues • Identifying who is your client in broad terms, acting in their best interests is key to ethical behavior • Does not permit unethical or illegal behavior to further “best interests” of client 40

Conflicts of Interest • Take variety of forms – personal interests, current and past clients, multiple clients • Maintaining ethical standards relies on finding fair and equitable resolution to conflicts • In most cases, one client’s interests should not be privileged over another 41

Conflicts of Interest • Organizations should screen for conflicts of interest at the start of relationships: • Assess services, activities, types of employees to identify areas where conflicts of interest may arise • Implement written disclosure policies • Designate conflict of interest officer or committee • Create “conflicts of interest database” • Training programs for employees on conflicts of interest and their ethical resolution 42

Conflicts of Interest • Conflicts should be recognized early in relationship • If not, timely response is required, which can include: • Promptly disclosing to past or present colleagues, clients or organizations the nature of a potential conflict of interest • Asking these persons and organizations to waive conflicts of interest that may exist, if it is appropriate • Creating an information wall or other safeguards to assure that persons who were involved with a prior matter will not see or have access to files from the new matter, and will not participate in the new matter • Declining to accept the prospective matter or case 43

Data and Privacy Concerns • Financial sector professionals often have access to sensitive financial, personal information • Organizations need policies and procedures to ensure information of customers, clients, and other parties is managed ethically • “Information barriers” to separate sensitive data and reduce potential for conflicts of interest • Multi-tiered access systems to limit information to essential staff • Processes to end relationships and purge or delete information 44

Ethics Policies and Procedures • Code of ethics • Employee training, ethics policies • Confidential reporting, escalation policies • Commitment, communication from top leadership 45

Key Lessons • Acting in client’s best interests guides ethical behavior • Information barriers are essential safeguard at financial institutions • Conflicts of interest are common ethical dilemma; understanding how to resolve them is critical 46

Review Question • What should be one element of an organization’s ethics policies? A. Senior management approval for all new customer relationships B. Dismissal of any employees with conflicts of interest C. Reporting of ethical violations through business lines D. Regular communication on ethics from senior management 47

CFCS Examination Preparation Series February 24, 2014 International Standards

Overview • Combating financial crime is an international and cooperative affair • Financial crime is global phenomenon, requires coordinated action at international level • International standards set the pace for most of the formal financial sector • Some national laws have an extra-territorial “international standards” effect 49

United Nations • UN Security Council Resolutions – Sanctions programs • United Nations Convention Against Corruption 50

UNODC • IMOLIN database –Legal library of AML and related laws –

Transparency International • Anti-corruption NGO with over 100 chapters worldwide • Provides research, analysis and reporting on corruption, corporate and financial transparency issues globally • Releases Corruption Perceptions Index annually • rview 52

Corruption Perceptions Index 53

OECD • OECD Anti-bribery Convention • Initiatives related to: – Anti-money laundering – Tax fairness and sharing • Database of tax sharing agreements – Corporate transparency – Illicit financial flows

FATF • Outgrowth of OECD • Formerly 40 + 9 Recommendations, now 40 Recommendations • Sets standards for AML cooperation among countries • Peer reviews • “Non-cooperative” jurisdictions, black or grey lists 55

World Bank • Stolen Asset Recovery Initiative (StAR) • • Doing Business Reports – Database of business laws, regulations and data on business climate and transparency –

Basel Committee • Establishes principles relating to banking supervision • • Basel III Accords • Customer Due Diligence for Banks • Consolidated KYC Risk Management 57

Wolfsberg Group • Group of largest international banks – Set standards for private banking, correspondent banking relationships • Wolfsberg AML Principles for Private Banking • Wolfsberg Principles for Intermediaries – Maintains Due Diligence Repository database –

EGMONT Group • Organizations of FIUs meeting standards • Provides cooperation between FIUs 59

INTERPOL • Cooperative effort among police of countries • Issue Notices to members that share information, provide warnings, or request that members track or detain suspects

FATF-style Regional Bodies • Modeled after FATF on regional basis • APGML • Others • Conduct peer reviews

National Laws with International Effect • US: • USA Patriot Act • FCPA • FATCA • UK: • UK Bribery Act • EU: • Directives 62

Key Lessons • May not be used on day-to-day basis, but international standards shape public and private efforts • International best practices may not be your best practices • Review source documents where possible 63

Review Question • What organization would likely provide the most useful sources of information for assessing corruption risks of a country? A. Basel Committee B. Transparency International C. Interpol D. Wolfsberg Group 64

CFCS Examination Preparation Series February 24, 2014 Global Anti-Corruption

Overview • Corruption has many definitions, takes many forms • “Grand” corruption • Petty corruption • Commercial bribery and corruption • Widespread negative consequences of corruption to economic development, fair markets and competitiveness, civil society • ACFCS focuses on corruption of public officials, especially involving corporations, business entities 66

What is a Corrupt Payment? • Bribe or corrupt “payment” does not have to be made in cash • Made from “payor” to recipient • Can include nearly anything that induces recipient to grant some official favor or advantage that payor should not or would not otherwise have received • Luxury goods • Services • Free use of property or goods • Access and influence 67

Methods to Make and Conceal Corrupt Payments • • • • • • • Gifts, travel and entertainment expenses Charitable contributions, contributions to nonprofits under control of government official Direct payment of campaign expenses Payments to fictitious employees, or adding associates of official to company payrolls Payments to fictitious businesses, inflated payments to businesses for the products or services provided Payments through loans, or allowing official free use of services or property Third parties – sales agents, vendors, contractors, attorneys 68

Red Flags of Corrupt Payments • Records of fee payments to a third party are significantly higher than other third parties in the same industry sector, without compelling business rationale • Abnormal compensation arrangements, such as excessive commissions or unusual reimbursements • Payments to domestic businesses, persons made to offshore accounts • Substantial payments to contractors , employees or third parties with little experience in the field they purportedly work in 69

Red Flags of Corrupt Payments • Invoices from companies or third parties that are vaguely worded or do not clearly describe services performed • Employees or third parties with close ties or past business associations with government officials • Employees or third parties who have entered into business arrangement or transaction at request of a government official • Third parties using multiple shell companies to conduct transactions, or are themselves a shell company 70

NGOs and Anti-Corruption Advocacy • Non-governmental organizations, with and without backing of national governments, have been active in anti-corruption • World Bank • Transparency International • Corruption Perceptions Index, other publications • United Nations and UN Office on Drugs and Crime • Convention Against Corruption with 140 signatories • Organization for Economic and Cooperation and Development • Anti-Bribery Convention with 40 signatories 71

What Is the Foreign Corrupt Practices Act? • US law enacted in 1977 • Two areas - Anti-bribery provision - Books and records/internal controls provisions • Enforceable by DOJ and SEC - DOJ: Criminal, civil jurisdiction over US companies, their subsidiaries - SEC: Civil jurisdiction over US “issuers”

Who the FCPA Covers • Any issuer under US securities laws • Domestic or foreign public companies registered required to file periodic reports with SEC • Domestic concerns, including US companies, citizens, nationals, residents • Person or entity that engages in any act in furtherance of corrupt payment while in US territory • International scope – 9 of top 10 largest FCPA cases are non-US companies 73

FCPA Anti-Bribery Provision • Prohibits corruptly making, offering or promising to make a payment, gift, or anything of value, directly or indirectly, to a foreign official for purpose of obtaining or retaining business

FCPA Enforcement

FCPA Enforcement

Who Is A Foreign Official? • • • • • • • Very broadly defined Not limited to high-level officials Includes people acting on behalf of government entity Includes employees of government-owned or government-controlled entities - "Instrumentality" = fact-specific inquiry Includes political parties, party officials and candidates Includes employees of international organizations Effective "control" of the entity is key

Books and Records Provisions • Only applicable to issuers under US securities laws -BUT: Should still be part of robust compliance program for private companies • Issuers must "[m]ake and keep books, records… which… accurately and fairly reflect transactions and dispositions of assets of the issuer“ • Issuer also must "devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances" that transactions are: - Executed and access to assets is permitted only in accordance with management authorization - Transactions are recorded in a way to permit financial statements to be prepared according to GAAP

UK Bribery Act • Enacted in 2010, effective July 2011 • Goes beyond FCPA in enforcement scope, strictness • Covers any UK citizen, all corrupt activities in UK, and any company with operations in UK • Stiff penalties – unlimited fines for corporations, 10 years for individuals • Very limited enforcement so far 79

Provisions of UK Bribery Act • Blanket prohibition on bribing any person, public or private • Specific provision criminalizing bribery of public officials – can be any “financial or other advantage” • Creates standalone offense of “failing to prevent bribery” at an organization • Organizations can avoid prosecution by demonstrating effective anti-corruption compliance 80

Anti-Corruption Compliance US, UK have provided guidance, along with many public and private-sector organizations. Best practices include: • Commitment from senior management • Effective procedures for risk assessment and internal audit • Clearly articulated compliance policies, procedures, code of conduct • Compliance program oversight by senior management with autonomy, adequate resources • Ongoing training for new and current employees, as well as third parties 81

Anti-Corruption Compliance • Procedures for confidential reporting of corruption violations and internal investigation • Updating compliance programs and policies through testing and review • Risk-based due diligence on third parties and transactions • Due diligence on mergers, acquisitions and proper integration after acquisition, merger, or joint venture 82

Third Parties • Managing third-party relationships is critical for FCPA, anticorruption compliance • Three steps to retain third parties, reduce FCPA exposure 1. Due diligence on third party's background, reputation, experience, connections with local government officials 2. Contractual provisions (FCPA representations, warranties) 3. Active oversight to ensure third party's commitment to FCPA, other laws

Key Lessons • Corrupt payments are increasingly made through complex channels – not just stacks of cash and a bag man • Third parties are a recurring risk, should be one focus of anti-corruption programs • US FCPA has international reach, has acted as standardsetter in many respects – should be understood

Practice Question Global Widget Co. recently acquired a local company in Benistan, a country with a high level of state involvement in the economy and history of corruption. Before purchasing the company, Global Widget hired a major international law firm to conduct a due diligence review and uncover any potential violations of global anti-corruption laws. When the review came back free of problems or issues, Global Widget completed its acquisition. Three years later, Global Widget compliance executives were conducting their first anticorruption training with employees from the Benistan office. During the training session, Global Widget was alerted by Benistan-based employees that the distributors the company uses may be bribing local government officials. Global Widget had not conducted a review of the distributors in Benistan. When it looked into the allegations, it found widespread potential Foreign Corrupt Practices Act (FCPA) and UK Bribery Act violations. What are two weaknesses in Global Widget anti-corruption compliance program? 85

Practice Question A. Global Widget did not include its distributors in Benistan when it conducted its anti-corruption due diligence and training. B. The due diligence review should have been conducted exclusively by local counsel in Benistan because they would be better versed in the country’s culture and laws. C. Global Widget should have conducted anti-corruption compliance training as soon as possible after acquiring the company in Benistan. D. Global Widget failed to reach out directly to government agencies in Benistan to request information on any history of corrupt payments at the company it was acquiring. 86

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