AML interview prep

What is money laundering?

The process of concealing the origins of criminally sourced funds to make them seem as though it came from legitimate sources.

3 Stages of Money Laundering

Placement, Layering, Integration.

Placement is the procurement of funds from criminal activities, usually via structuring, offshoring, or the use of cash intensive businesses.

Layering is the process of mixing illicit funds with legitimate funds to make the origins harder to trace. Can be achieved by transferring money between several entities or in different formats, usually involves shell companies, overseas entities, or crypto laundering.

Integration is the stage at which money has transitioned from dirty to clean, and criminals begin to reinvest it into the legitimate economy by buying things.

Primary Governing Agencies

FinCEN - primary domestic AML enforcement authority. Implements and enforces BSA.

FATF - primary international AML enforcement authority. Establishes policies for AML standards and takes anti crime action.

FINRA - establishes investor/broker ethics and oversees compliance.

OFAC - Issues sanctions and freezes assets of traffickers and terrorists.

Bank Secrecy Act (BSA)

Foundation of AML regulation and policy. Established currency transaction reporting (CTR) processes and record keeping/reporting requirements for financial institutions, required financial institutions to establish risk-based approaches to their AML control programs.

USA PATRIOT Act

Domestic security regulations passed following the 9/11 attacks.

Title III specifically established more specific regulatory compliance requirements for financial institutions and transactions. Also requires financial institutions to form a reasonable belief that they know the true identity of each customer.

Established enhanced due diligence requirements (EDD). Expanded reporting obligations from simply money laundering to cover terrorist financing as well.

BSA vs. USA PATRIOT act

BSA focuses primarily on ML, USA PATRIOT Act targets terrorism and enhancing national security.

FATF Recommendations

International standards issued by the FATF for AML compliance and frameworking.

USA PATRIOT Act Section 326

Increased identity verification requirements for any customer of a financial institution. Established customer identification program (CIP) requirements for know your customer (KYC) procedures.

USA PATRIOT Act Section 313

Shell banks pose too high of an ML risk, prohibits U.S. banks from providing correspondent accounts to banks with no physical presence in any country.

USA PATRIOT Act Section 314(a)

Allows law enforcement agencies to locate accounts and transactions of individuals suspected of ML/TF. Makes financial institutions search records and report matches to FinCEN, and allows law enforcement to track money trails more quickly.

USA PATRIOT Act Section 314(b)

Encourages financial institutions to share information with each other to identify and report activities that seem like ML/TF. Allows for multi-institution ML/TF to be caught and tracked down easier.

FinCEN Form 112

Currency transaction report (CTR)

Filed for every cash transaction of $10,000 or more. Filed within 15 days of transaction.

FinCEN Form 111

Suspicious Activity Report (SAR)

Filed when there is a transaction of minimum $2000 (for MSBs) or $5000 (for banks, credit unions, casinos) and the financial institution has reason to believe the transactions are uncharacteristic of the entity or designed to avoid BSA reporting requirements. Must be filed within 30 days of detection, or 60 days if no suspect was identified.

IRS Form 8300

Filed by trades/businesses when they have a transaction of $10k, filed within 15 days of transaction.

FinCEN Form 114

Report of Foreign Bank and Financial Accounts (FBAR)

Report of foreign bank and financial accounts. Yearly reporting of foreign bank account ownership/involvement.

BOIR

Beneficial ownership information report.

Beneficial ownership information report. Must be filed by any foreign entity registered to do business in the U.S.

Know Your Customer

1. Customer Identification Program (CIP)

   1. Name, DOB, address, identification number

2. Customer Due Diligence (CDD)

   1. Identify ultimate beneficial owner (UBO) which is anyone who owns 25% or more of the entity doing business

   2. understand nature of entity business relationships

   3. use risk based approach to identify high risk clients

   4. analyze media portrayal of clients

   5. sanctions screening

3. Enhanced Due Diligence (EDD)

   1. locate supporting documentation for elements of CDD

   2. Source of Funds and Source of Wealth analysis

   3. analyze media portrayal of clients on a deeper level

4. Ongoing monitoring

CDD vs. EDD

CDD gets a high level understanding of the customer and their behaviors, EDD examines the actual documentation that supports that behavior to build a more nuanced customer profile (tax returns, portfolio statements, transaction behavior, etc.)

EDD red flags

Inconsistent information

Reluctance to provide information

Unexplained changes in transaction behavior

Associations with bad media

Politically Exposed Persons (PEPs)

anyone holding a high position at internation or domestic organizations with media and government exposure.

Identifying PEPs

• Use of corporate intermediaries or shell companies

• History of allegations

• Unusual transaction patterns

• Involvement in banking, finance, arms trade, mining

• Geographic location

• Complex ownership structures

• Refusal to provide information

Risk Based Approach

• Identify Risks

  • Industry

  • jurisdiction

  • types of transactions/cash intensive?

  • types of third parties dealt with

  • UBO(s)

• Mitigation + Contingency planning

  • EDD

  • ongoing monitoring and transaction reviews

  • Staff AML training

  • financial risk displacement via insurance

• Monitor and review risk profiles via periodic profile reviews

Elements of AML compliance programs

• account monitoring and detection

• thorough and regular risk assessments

• internal controls

• training

• third party reviews from independent auditors

Structuring vs. smurfing

structuring is the act of funds being deposited just under reporting thresholds to avoid being noticed. smurfing refers to the use of mules to deposit funds from several different accounts into one beneficiary account.

Shell companies

a legal entity that only exists on paper with minimal assets, business operations, or employees.

Useful in layering operations since they can elect nominee directors to disguise UBO and make transactions seem more legitimate.

Cash heavy businesses in AML

Illicitly sourced funds can easily be mixed in with the cash generated by cash heavy businesses like laundromats and arcades, making them harder to trace.

Trade based money laundering

Overstating or understating the monetary value of trade goods, money can be laundered internationally

Invoice/PEP laundering

Bribes and illicit funds can be disguised as consulting fees or government contracts.

Crypto Laundering

• When criminals accept payment in cryptocurrency their wallet address is immediately linked to the crime

  • Mixing/tumbling: services exist that pool cryptocurrency from a bunch of different wallets or users, and then split it back in amounts that each person pooled in so that it becomes harder to trace which coin belonged to who

  • Multiple wallets: criminals can just send the money between a bunch of different wallets, which makes tracing a little harder

  • Chain hopping: by converting cryptocurrency into different forms (bitcoin to ethereum, then to an NFT, then to a privacy coin, etc.) it becomes harder to trace

  • Privacy coins: some cryptos (like monero) are built to hide user, transaction size, and recipient, which become much harder to trace