Car Dealers: Do you know your KYC/AML obligations?

Luxury cars are often used to launder money

On March 6th, John Frank Mussari Jr., the owner of a luxury car dealership was sentenced to 2 years in prison for money laundering.

Cars, especially luxury cars, are often used to launder money.  Auto dealers routinely deal in transactions exceeding the AML regulatory limits, usually $10,000 or similar amount in Euros, Pounds or other local currency.

Mussari’s case is a very good example.  Mussari owned a dealership specializing in Ferrari, Lamborghini and other luxury cars.  Mussari developed a relationship with a “good client” who bought several sports cars from him.  Over the course of this relationship, he was paid $132,000 for a Ferrari 360 Spyder, $147,000 for a Porsche 911 Turbo Cabriolet and $320,000 for two Lamborghini Gallardos, among others.

In what could have been a scene out of Miami Vice, Mussari was stopped by Federal Agents leaving the client’s Fallbrook house in a yellow Ferrari.  Over the course of their relationship it became apparent to Mussari that the client’s source of funds was from drug dealing, yet he never reported any transactions to the authorities.  When this came to judgement in court, Mussari was found guilty and sentenced to two years in prison.

Clearly, it is important to have a reasonable KYC system in place in order to protect your business from the risk of money laundering.  Mussari probably only made a few tens of thousands of dollars on the sales, yet will spend two years in prison for it.  A basic KYC/AML procedure could have prevented this.

The first step is in obtaining the identification of the buyer and to have them declare the source of funds, e.g. savings, sale of another asset, or so forth.  Once this is done, some basic research should be conducted, such as checking sanctions and wanted lists.  If there is any hint of doubt regarding the client or the source of funds, a detailed media check should be made.  There are many tools available to do this, from self service KYC tools through to outsourced enhanced due diligence consultants who perform a full background check and provide a detailed report.

Mussari is a reminder that we should remember that auto sales also have an AML obligation that must be taken seriously.

Estate Agents: Are Your Clients Full of Dirty Money?

A poorly kept secret among those in the know, the Guardian has finally decided to expose the London property boom based on massive money laundering of dirty money from abroad for everyone to see.

The Guardian investigation revealed that more than 36,000 properties were bought in London area with hidden ownership and offshore structure companies, making this a haven for “billions of pounds” of ill gotten funds to be safely stashed in real assets.

The “how-to” sidebar describes a “corrupt official” who steals £30,000,000 from Russian taxpayers, layering the funds through a series of offshore and secretive jurisdictions using nominee shareholders and directors finally purchasing of one or more properties in London using an offshore company structure.

Aside from driving up prices in London with a subsequent adverse effect on honest buyers on the area, the lack of due diligence is allowing and encouraging corrupt behaviour by foreign officials and corrupt individuals in foreign countries with the obvious negative effect on the populations of those countries who often are in desperate need of infrastructure improvements and social services.

As long as the influx continues as it has in the past few years, there seems to no will in the UK to change the system, which only requires estate agents to conduct KYC due diligence on the sellers, leaving the buyer to be any corrupt official with cash to hide.

As a result, over 60% of the company owned properties in London are held by opaque offshore companies, mostly in the British Virgin Islands, Jersey, Guernsey and the Isle of Man.

Detective Chief Jon Benton, director of operations at the Proceeds of Corruption Unit, says,

In nearly all the grand corruption cases we investigate, we find – what we suspect is – proceeds of corruption being used to purchase high-value properties.

Even if KYC due diligence is not required on the current buyers, estate agents should already employ a robust KYC process in order to protect themselves today.  And when these shady buyers become sellers, we can anticipate some very serious due diligence problems to arise.

Estate agents would be wise to stay ahead of the curve and have an appropriate KYC process and tools in place before this happens.

Original article at The Guardian: London property boom built on dirty money

 

CBI Demands Less Anti-Money Laundering Regulation

Just today, the Confederation of British Industry said that the UK needs to come up with simpler and easier AML/CFT regulations or British business will suffer.  CBI boss, John Cridland, says that Britian will not meet its 2020 goal of 1 trillion pounds in exports because of current anti-money laundering (AML) requirements.

The CBI’s position is a blatant and crude display of the most longstanding problem for the compliance function: compromising to revenue interests.  In August 2014, FinCEN published a series of guidelines (PDF) regarding effective compliance of financial institutions.  One would hope that in the U.K. the FCA is issuing similar advice.  The second item in the FinCEN list is titled Compliance Should Not Be Compromised By Revenue Interests and it reads in part:

Compliance staff should be empowered with sufficient authority and autonomy to implement an institution’s AML program. An institution’s interest in revenue should not compromise efforts to effectively manage and mitigate BSA/AML deficiencies and risks, including submission of appropriate and accurate reports to FinCEN. An effective governance structure should allow for the BSA/AML compliance function to work independently and to take any appropriate actions to address and mitigate any risks that may arise from an institution’s business line and to file any necessary reports, such as Suspicious Activity Reports (SARs).

Relationships around CBI as seen by KYC3.com

Giving the regulator the benefit of doubt, if AML could be simpler without being less effective, it probably would be.  The regulations and guidelines are fairly clear and flexible.  The problem may actually not be with them.  Bank aversion to risk and to regulatory sanction may be driving the problem.  The problem may be in how banks and financial professionals have implemented their processes and the tools they have selected in doing so.  Client on-boarding and transaction monitoring are difficult to get right 100% of the time and can be very annoying when they go wrong.  Part of the solution is to provide business development and customer facing employees access to self-service KYC tools so that they can do a “sanity check” of any new client right on the spot and business can continue uninterrupted.  Customers never like “waiting for compliance”.

While anti-money laundering and counter terror finance controls are often an inconvenience, the potential gain in business may not outweigh the cost to society of invasive corruption, crime and terrorist funding that would follow relaxing KYC/AML regulations.

The SEC Wants More Suspicious Activity Reports!

SEC Headquarters in Washington D.C.

According to Andrew Ceresney, director of the SEC Division of Enforcement, the SEC is considering enforcement cases against brokerages that fail to report suspicious activity.

According to the SEC, many U.S. brokerages are simply failing to report possible money laundering.

Citing statistics of that put the average number of reports at just 5 reports on average per brokerage firm per year, it would seem the SEC has a point.

Indeed, it is hard to believe that with billions of individual securities transactions conducted amongst millions of counter-parties across the 4,800 registered brokerages in the United States, that just 18,000 to 25,000 total suspicious activity reports would be filed per year.

Ceresney confirms that the SEC is still trying to figure out why the firms are not filing SARs.  Could it be that their KYC/AML tools are not up to the task?  Or perhaps they simply don’t want to be bothered with the time and effort required to interact with the regulator in filing them… either way, when the SEC comes knocking, Ceresney made it clear that the action “will send a strong and clear message”.

Read more at Many U.S. brokerages fail to report possible money laundering: SEC official.

Bank Executives to be Held Personally Liable for Money Laundering

In what is clearly a continuing trend, the State of New York is considering to hold bank executives personally liable for failures of their bank anti-money laundering (AML) systems and processes.

According to Benjamin Lawsky, superintendent of New York’s Department of Financial Services, in sworn attestations similar to those required by the Sarbanes-Oxley Act, the state may begin requiring senior executives to attest to the adequacy of their banks’ systems for monitoring customer transactions, just as they have to verify financial statements.

This will be backed up by random audits of bank’s AML systems that will be conducted by Lawsky’s department.  Lawsky has already conducted at least one model audit using sophisticated data mining tools to examine bank transactions for signs of money laundering and claims that the results were stunning in the number and value of suspect transactions that his audit revealed had passed through the AML system.

This move should cause banks to re-examine and improve their AML systems and procedures, starting from the front-line KYC tools all the way to real time transaction monitoring and ongoing media monitoring of customer behaviors.

Compliance officers held PERSONALLY liable for compliance failures

As reported by the Wall Street Journal, Thomas Haider the former Chief Compliance Officer of MoneyGram Inc, has been personally fined $1 million due to compliance failures of his former employer.  This is a rare, but increasingly common, case of a compliance officer being held responsible for the company’s failure to follow prescribed anti-money laundering laws.

In what appears to be a “shoot the messenger” approach, the compliance officer is being personally punished, rather than the board level executives who ultimately hold responsibility for the company’s failure.

This is a lesson to all compliance officers to be very wary of potential compliance failures within an organization.  The end result of such actions will be to pressure compliance officers into an “insider threat” mode whereby they will need to amass data on potential failures and at the merest whiff of potential trouble must either have immediate and serious attention from senior management, and failing that become a whistle-blower to outside regulators and enforcement.

The end logic of such an approach would be to change the role of the compliance officer from one of internal employee of the organization to one that involves an employee of the responsible regulatory regime being embedded within the organization.

This may not be such a bad end-game given that the last few months have seen increasingly more reporting regarding the problem within the banking industry as extending “beyond just a few bad apples“.  If indeed the entire industry standard of behavior is broken by a culture of corruption and greed, then perhaps it is time to surgically insert the anti-bodies directly into the sick institutions.

In any case, every compliance officer should ensure that they have the authority and resources to perform their duties.  This means both good quality and adequate staff as well as all of the access and tools that they require to complete their mission.  If this is not the case, it would be advised make a very visible audit trail of the lacking resources or inappropriate organizational support so that any attempt to hold the compliance officer responsible for any failures could be clearly documented as a problem of senior management, where the ultimate responsibility for compliance failures should be placed.

 

FinCEN demands Casinos do KYC too

FinCEN, the U.S. financial crimes enforcement arm of the Treasury Department, is demanding that casinos do more to prevent their use as vehicles for money laundering.

To this effect, casinos will be required to know the source of their customers’ funds.  Of course, the first step in understanding the source a customer’s funds is to Know Your Customer.

Source: Wikimedia Commons

Secondly, FinCEN also demands that casinos adopt a Risk Based Approach to managing their exposure to financial crime, particularly money laundering and terrorist financing.  A successful Risk Based Approach requires several well planned and functioning elements.  These include 1) the process and guidelines in place to ensure that the approach is methodically applied within the organization, 2) well trained staff with the authority to make decisions related to the assessment of risk and a corporate culture that gives them the freedom and respect to make independent assessments of risk based on the situation and their experience, and 3) professional tools to support the research and evaluation of subjects of risk facing the organization.

As a third demand, FinCEN insists that casinos improve their information sharing with regulatory and law enforcement authorities.  This means that casinos are required to voluntarily file Suspicious Activity Reports for any suspicious activity that would be identified within the casino.  They also request that the casinos provide additional specific customer information for any unusual activity.  As a matter of fact, it is well known that within the Department of Treasury Law Enforcement community there are many who believe that Suspicious Activity Reports should be changed to Unusual Activity Reports, but that is a topic for another post.

Finally, FinCEN has issued a warning against a high risk behavior called, “Chip Walking”.  This involves using casino chips as a placement instrument for purposes of money laundering or facilitating illegal transactions.  For example, suppose a bad guy obtains a hundred thousand dollars worth of chips and places those in a casino lock box.  The bad guy can then take the key to that box out and give it to the bad guy who has brought him a load of illegal drugs.  Deal done and no messy briefcases of cash to handle.

Of course, if the casino would know its customers, this suspicious activity would be noted and may eventually lead to reporting and arrest of the bad guys.  And this is the whole point of the FinCEN demand.

 

Anti-money laundering officers urged to be vigilant over Ukrainian cash movements

Recently, FATF regime governments have been urging caution with respect to Ukrainian assets.  At this sensitive time, there is a real risk of expropriation and plundering of assets that should remain within the Ukraine.  From Reuters:

Money laundering reporting officers must balance extra vigilance about suspicious Ukrainian cash entering or leaving the UK following the ousting of President Victor Yanukovich but they cannot afford to jump to conclusions, officials said. Serious civil unrest has followed in recent days with scores of people killed.

Campaign group Transparency International (TI) issued a risk alert on Ukraine saying it believed corrupt assets might be laundered through or into the UK following the devastating upheaval in the country. It called on the government, money laundering reporting officers (MLROs), law and accountancy firms plus luxury estate agents to be on the lookout for dirty funds emerging from the country. TI said lessons needed to be learnt from the Arab Spring where, it said, there had been a slow international response to freezing assets.

The article goes on to discuss the potential for capital flight and how Money Laundering Reporting Officers (MLROs) should vigilantly report and suspicious activity to the authorities and that the government must respond to suspicious activity reports (SARs) without any delay.

What is not mentioned in the article is that financial institutions should know their existing customers and now is a good time to review any Ukrainian client accounts already in your institution.  This should be done with a specific focus on their political exposure and the source of funds of any significant accounts, especially in comparison to the means of the account holder.

A quick look in KYC3.com reveals many Ukrainian businesses using corporate structures in western jurisdictions such as the United States and Luxembourg.  These should be of particular interests as these offshore trading companies are often the vehicle of choice for capital flight from troubled regions.

A quick look at Ukrainian company links in Western jurisdictions using kyc3.com

As sanctions are being considered against some Ukrainian and Russian officials, it would not be foolish to get a handle on your current accounts so that compliance can be assured quickly and efficiently in the event that sanctions materialize.

For the full Reuters article, please read here.