CAMS Examination Study Guide - Detailed Notes

Credits and Copyright

• CAMS Examination Task Force

• Executive Chair: John J. Byrne, CAMS

• Project Manager: Catalina Martinez

• Thanks to individuals for their significant contribution in the development of the CAMS Examination and Study Guide.

• acams.org

Introduction

• ACAMS Mission:

  • Advance professional knowledge, skills, and experience in detecting and preventing money laundering.

  • Promote sound anti-money laundering policies and procedures.

• ACAMS achieves its mission through:

  • Promoting international standards for detecting and preventing money laundering and terrorist financing.

  • Educating professionals in private and government organizations about these standards.

  • Certifying the achievements of its members.

  • Providing networking platforms for AML/CFT professionals worldwide.

• ACAMS sets professional standards for anti-financial crime practitioners, offering career development and networking.

• Objectives:

  • Career enhancement through education, certification, and training.

  • Forum for exchanging strategies and ideas.

  • Assist practitioners in developing and upholding proven AML practices and procedures.

  • Help institutions identify individuals with the CAMS designation.

About the CAMS Designation

• Addresses the increasing need for AML expertise due to the growing threat of money laundering and terrorist financing.

• CAMS credential signifies specialized AML knowledge and positions individuals as leaders in the industry.

• Pursuing it may lead to career advancement, international recognition, and respect among peers and superiors.

Risks and Methods of Money Laundering and Terrorist Financing

Overview

What Is Money Laundering?

• Money laundering: Disguising criminal proceeds to conceal their illegal sources and use the funds for legal or illegal activities.

• Goal: Use illicit funds without drawing attention to the underlying criminal activity.

• Methods: Disguising the source of funds, changing the form of the currency, or moving the money to a less conspicuous location.

• Predicate crimes: Arms sales, narcotics trafficking, contraband smuggling, organized crime, embezzlement, insider trading, bribery, computer fraud.

• Financial Action Task Force (FATF):

  • Formed in 1989 to set standards and foster international action against money laundering.

  • Demonstrated that money laundering can occur through any medium, financial organization, and business.

• Palermo Convention (United Nations 2000 Convention against Transnational Organized Crime) definition of money laundering:

  • Conversion or transfer of property derived from a criminal offense to conceal its illicit origin.

  • Concealment or disguise of the true nature, source, location, disposition, movement, or rights with respect to property derived from a criminal offense.

  • Acquisition, possession, or use of property knowing it was derived from a criminal offense.

• Important prerequisite: Knowledge that the property is derived from a criminal offense.

  • This can be inferred from objective factual circumstances; several jurisdictions also use the legal principle of willful blindness.

  • FATF and EU directives include the concept of inferring knowledge from objective factual circumstances.

• Willful blindness: "Deliberate avoidance of knowledge of the facts" or "purposeful indifference," equivalent to actual knowledge.

• Post-9/11, FATF expanded its mandate to include countering the financing of terrorism (CFT).

• Terrorist financing differs from money laundering:

  • Money laundering involves funds derived from criminal activities.

  • Terrorist financing can involve funds from legitimate sources.

• Terrorist financing concealment aims to hide the purpose for which funds are used, not necessarily the source.

• Terrorist funds may be used for operating expenses or material support of terrorist acts.

• Terrorists value the secrecy of transactions regarding their destination and purpose.

• FATF's 40 recommendations (revised in 2012) include preventing, suppressing, and disrupting the proliferation of weapons of mass destruction (WMD).

Three Stages of the Money Laundering Cycle

• Often involves a complex series of transactions.

• Three stages: Placement, layering, and integration.

Stage One: Placement

• Physical disposal of cash or other assets derived from criminal activity.

• Introducing illicit proceeds into the financial system.

• Accomplished by placing funds into circulation through formal financial institutions, casinos, and legitimate businesses.

• Examples of placement transactions:

  • Blending of funds: Commingling illegitimate funds with legitimate funds.

  • Purchasing significant stored value cards with currency.

  • Foreign exchange: Purchasing foreign exchange with illegal funds.

  • Breaking up amounts: Dividing cash into small amounts and depositing it into numerous bank accounts to evade reporting requirements.

  • Currency smuggling: Cross-border, physical movement of cash or monetary instruments.

  • Loans: Repayment of legitimate loans using laundered cash.

Stage Two: Layering

• Separation of illicit proceeds from their source by layers of financial transactions to conceal the origin of the proceeds.

• Converting the proceeds of the crime into another form and creating complex layers of financial transactions to obscure the source and ownership of funds.

• Examples of layering transactions:

  • Electronically moving funds from one country to another and dividing them into advanced financial options and/or markets.

  • Moving funds from one financial institution to another or within accounts at the same institution.

  • Converting the cash placed into monetary instruments.

  • Reselling high-value goods and prepaid access or stored value products.

  • Investing in real estate and other legitimate businesses.

  • Placing money in stocks, bonds, or life insurance products.

  • Using shell companies to obscure the ultimate beneficial owner and assets.

Stage Three: Integration

• Supplying apparent legitimacy to illicit wealth through the reentry of the funds into the economy in what appears to be normal business or personal transactions.

• Using laundered proceeds in seemingly normal transactions to create the perception of legitimacy.

• Investing funds in real estate, financial ventures, or luxury assets.

• Difficult to distinguish between legal and illegal funds.

• Increases the launderer's wealth with the proceeds of crime.

• Hard to identify unless there are great disparities between a person’s or company’s legitimate employment, business, or investment ventures and a person’s wealth or a company’s income or assets.

• Examples of integration transactions:

  • Purchasing luxury assets, such as property, artwork, jewelry, and high-end automobiles.

  • Entering into financial arrangements and other ventures in which investments can be made in business enterprises.

The Economic and Social Consequences of Money Laundering

• Money laundering is a result of any crime that generates profits, knows no boundaries, and jurisdictions lacking effective AML/CFT laws are most vulnerable.

• Large, well-developed financial centers are also vulnerable due to high transaction volumes and services that enable convenient transactions.

• Launderers aim to move funds through stable financial systems.

• Money laundering has significant negative economic and social consequences, especially for developing countries and emerging markets.

• Upholding legal, professional, and ethical standards is critical to the integrity of financial markets.

• Macroeconomic consequences of unchecked money laundering include:

  • Increased exposure to organized crime and corruption.

  • Undermining the legitimate private sector.

  • Weakening financial organizations.

  • Dampening effect on foreign investments.

  • Loss of control of, or mistakes in, decisions regarding economic policy.

  • Economic distortion and instability.

  • Loss of tax revenue.

  • Risks to privatization efforts.

  • Reputation risk for the country.

  • Risk of international sanctions.

  • Social costs.

• Typical Characteristics of Money Laundering and Terrorist Financing Havens

  • Limited predicate crimes for money laundering

  • Limited types of organizations and persons covered by money laundering laws and regulations

  • Little to no enforcement of laws and weak penalties or provisions that make it difficult to confiscate and freeze assets related to money laundering

  • Limited regulatory capacity to effectively monitor and supervise compliance with money laundering and terrorist financing laws and regulations

• If money laundering is prevalent, there is more likely to be corruption.

• Criminals might bribe government officials, lawyers, and employees of financial and nonfinancial organizations.

• A comprehensive AML/CFT framework helps curb criminal activities, eliminates profits, and discourages criminals.

• Undermining the Legitimate Private Sector

  • Money launderers use front companies: businesses that appear legitimate but are controlled by criminals.

  • Front companies have a competitive advantage due to access to illicit funds.

  • Money laundering proceeds can be used to control whole industries and sectors of the economy, leading to monetary and economic instability.

• Weakening Financial Organizations

  • Money laundering and terrorist financing can harm the soundness of a country’s financial sector and the stability of financial organizations.

  • Noncompliance with AML/CFT programs can result in penalties and loss of charter.

• Dampening Effect on Foreign Investments

  • Foreign direct investment can be dampened when a country is perceived as being compromised by organized crime.

• Loss of Control Regarding Economic Policy

  • Illicit proceeds might dwarf government budgets, leading to loss of economic policy control or policy mistakes.

  • Money laundering can adversely affect currencies and interest rates.

• Economic Distortion and Instability

  • Money launderers invest in activities not necessarily economically beneficial to the country.

  • Economic growth can suffer when funds are redirected from sound investments to low-quality investments.

• Loss of Tax Revenue:

  • Money laundering diminishes government tax revenue and makes tax collection more difficult.

  • The International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) are involved in efforts to improve tax collection and transparency.

• Threatens efforts to reform economies through privatizing state-owned properties.

• Diminishes legitimate global opportunities, as foreign financial organizations avoid working with organizations in money laundering havens.

• Diminishes legitimate global opportunities because foreign financial organizations require extra scrutiny when working with organizations in money laundering havens.

• Increases the potential for adverse publicity, loss of profitable business, liquidity problems, termination of correspondent banking facilities, investigation costs, asset seizures, loan losses, and reduced stock value.

• Adverse publicity regarding an organization’s practices can cause a loss of public confidence.

• Operational Risk:
  *Potential for loss results from inadequate internal processes, personnel, or systems, or from external events.
  *Increased borrowing or funding costs are also a component of operational risk
  *Legal Risk:
  *Victims of a financial crime could sue the financial organization for reimbursement.
  *Investigations can be conducted by regulator/enforcement authorities, leading to increased costs, fines.

• certain contracts could be unenforceable due to fraud on the part of the criminal customer
  *Concentration Risk:
  Lack of knowledge about a customer relationships to other borrowers can place an organization at risk.

Economic and social consequences of money laundering (Case example)

• 2017, Minneapolis, Minnesota, US: 21 people were indicted on sex trafficking and money laundering charges.

• The organized crime group (OCG) trafficked women from Thailand to cities across the US for sexual exploitation.

• The OCG dealt primarily in cash and conducted a sophisticated international money laundering ring to promote, redistribute, and conceal illegal profits.

• Funnel accounts were used to launder and route cash from cities across the US to money launderers in Los Angeles.

• The transaction amounts keep under the AML reporting requirements in an attempt to avoid detection.

• funds were withdrawn in Los Angeles and then wired, transported as bulk cash, or mailed to Thailand.

• The investigation resulted in 20 arrests, recovery of victims, and seizures of hundreds of thousands of dollars and weapons.

• Predicate crimes included sex trafficking, fraud, threats of force, and money laundering.

• The operatives of the money laundering ring helped their victims attain fraudulent visas and travel documents, forged bank statements forged

• OG recruited money mules to carry large volumes of cash on trips to Thailand and used a hawala system to transfer money to Thailand.

• Organizations need to sufficiently train frontline officers to identify fraudulent documents and red flags associated with human trafficking.

• The method undermines the legitimate financial system and exploits various markets, such as the labor market.

• Collaboration among agencies and the private and public sectors is necessary to fight financial crime.

• Key takeaways:

  • Money laundering promotes crime and corruption and slows economic growth.

  • Money laundering exploits institutional loopholes and undermines the legitimate financial system and markets.

  • Money laundering perpetuates other crimes, such as smuggling, fraud, and corruption.

  • Collaboration among various agencies and the private and public sector is necessary to fight financial crime.

AML/CFT Compliance Programs and Individual Accountability

• Regulatory guidance and legislation place individual accountability at the senior levels of regulated entities when they contribute to AML/CFT and sanctions compliance deficiencies.

• FinCEN advisory (2014): Financial organizations must maintain a strong culture of compliance, and the entire staff is responsible for AML/CFT compliance.

• Yates Memo (2015): Criminal and civil investigations into corporate misconduct should focus on individuals who perpetrated the wrongdoing.

• Financial Conduct Authority (FCA) Senior Managers and Certification Regime (SM&CR): Improve individual accountability in the banking sector.

  • Explicit responsibility to a senior manager (e.g., MLRO) for effectively designing and implementing financial crime efforts.

  • Senior manager is personally accountable for misconduct within the organization’s AML/CFT regime.

• The New York State Department of Financial Services (DFS) issued a Final Rule which includes very specific requirements concerning the implementation of transaction monitoring systems, including:
  *Risk-Based Models
  *MOdel calibration
  *End-to-End implementation and testing

Individual accountability and consequences (Case example)

• In August 2020, Steven David Kinch was suspended and fined for repeatedly breaching his professional anti-money laundering obligations.

• In vicarious liability, an organization could be found criminally liable for the acts of its employees.

• There is, however, increasing focus on individual liability for professionals when their behaviors and actions encourage, tolerate, or lead to regulatory violations or criminal activity.

• On August 12, 2020, the UK Solicitors Disciplinary Tribunal suspended lawyer Steven David Kinch He failed to check source of funds and perform customer and third-party due diligence when establishing new business relationships.

• Individual professionals are increasingly being held accountable for sector- specific crimes, through prosecution of linked financial crime offenses such as fraud.
  *Compliance professionals should ensure that they are fully up-to-date with legislative and regulatory requirements specific to their role and sector.
  *Key takeaways:
  professionals, including prosecution and imprisonment.

• Criminal courts can impose a range of sanctions against guilty

Methods of Money Laundering

• Money laundering is a constantly evolving activity that must be continuously monitored in all its various forms.

• Illicit money can move through numerous commercial channels and financial intermediaries.

• A shift in laundering activity into the nonbank financial sector and nonfinancial businesses and professions has risen.

• FATF and FSRBs publish periodic typology reports to monitor changes and better understand money laundering and terrorist financing.

Banks and Other Depository Institutions

Electronic Transfer of Funds

• Banks are important mechanisms in all three stages of money laundering.

• Electronic Transfer of Funds:

  • Initiated by electronic means (e.g., internet-based transfers, ACH, ATMs, mobile phones).

  • Can happen within a country and across borders.

• Electronic funds transfers are one of the fastest ways to move money.

• Systems such as Fedwire, SWIFT, and CHIPS move millions of wires and transfer messages daily.

• Money launderers may:

  • Initiate unauthorized domestic/international transfers (e.g., ACH debits or cash advances on stolen credit cards).

  • Steal credit cards and use the funds to purchase merchandise that can be resold for cash.

• Electronic transfers of funds used in the layering stage, moving funds from account to account and jurisdiction to jurisdiction.

• To avoid detection, launderers may vary amounts sent, keeping transfers small and under reporting thresholds.

• Transaction monitoring software providers develop sophisticated algorithms to detect suspicious activity.

• Electronic transfers of funds have tightened verification processes.

• Following are some indicators of money laundering using electronic transfers of funds:

  • Funds transfers occur to or from a financial secrecy haven or high-risk geographic location without an apparent business reason or when the activity is inconsistent with the customer’s business or history.

  • Large incoming funds transfers are received on behalf of a foreign client, with little or no explanation or apparent reason.

  • Checks and money orders are used to receive many small, incoming transfers of funds or to make deposits. Upon credit to the account, all or most of the transfers or deposits are wired to another account in a different geographic location in a manner inconsistent with the customer’s business or history.

  • Funds activity is unexplained, repetitive, or reveals unusual patterns.

  • Payments or receipts are received that have no apparent link to legitimate contracts, goods, or services.

  • Funds transfers are sent or received from the same person to or from different accounts.

Remote Deposit Capture

• Allows customers to scan a check and transmit an electronic image to the bank for deposit.

• Convenient but can be abused by money launderers because they no longer need to go into the bank and risk detection.

• Correspondent banking increasingly uses RDC because it streamlines the deposit and clearing process.

• Without proper controls, RDC can also be misused to facilitate violations of sanctions requirements, for example, by processing transactions in a sanctioned country.

• Risk:

  • Fraud is a more prominent risk related to RDC.

  • RDC minimizes human intervention in reviewing cleared items, it decreases the ability to identify potential fraud indicators

• Controls to mitigate money laundering and fraud risks include:

  • integrate RDC processing into other controls, such as monitoring and fraud-prevention systemsReview is required for sequentially numbered checks and money orders without payees.

  • The total volume of activity processed for an account via RDC is incorporated into the overall transaction monitoring system

  • Appropriate limits are placed on a customer’s ability to deposit checks via RDC

  • The product is offered to customers to whom it is appropriate,

• Appropriate action is taken quickly when fraud is detected via RDC times.

Correspondent Banking

• An arrangement whereby one bank acts as the agent of another bank in a foreign country.

• A local bank contracts with a foreign correspondent bank to provide services that a local bank cannot provide because it lacks presence
  *. Vulnerable to financial crime because correspondent banks rely on respondent bank’s internal controls and have little first hand contact with the customers
  *Due diligence indicators to look at:
  *geographic risk
  *ownership and management structures
  customer base
  services offered
  In risk of correspondent banking:

• The correspondent does not or cannot conduct due diligence to know the customers of the respondent

• The correspondent does not have data on respondent transactions that typically enable transaction monitoring controls to identify unusual patterns.

• The correspondent can identify the respondent’s regulators, but not always the degree of supervision to which the respondent is subject.

• The correspondent might have limited information on the respondent’s anti-financial crime controls

• The Nested accounts further shield correspondent. banks from knowing the parties involved.

Correspondent banking (Case example: Methods of money laundering)

• New York State Department of Financial Services (DFS) fine to Deutsche Bank AG (US$150 million). DFS cited compliance failures as some suspicious transactions from Danske Bank Estonia (Danske) and FBME Bank.

• Deutsche Bank failed to monitor its correspondent banking relationships with both as high risk. . Billions of dollars in suspicious transactions passed through Deutsche Bank’s accounts.

• Deutsche Bank’s internal compliance controls had flagged concerns with FBME as early as 2005 and with Danske Bank Estonia from the start of the relationship in 2007.

• Deutsche Bank rated FBME bank as high risk, yet identified 826 suspicious transactions associated with FBME Bank after that rating.
  *FBME Bank declined to respond to Deutsche Bank’s queries regarding the ultimate beneficial owners (UBOs) of FBME Bank’s corporate clients.
  *Deutsche Bank was repeatedly warned of AML issues linked to nonresident accounts at Danske Estonia, including those with links to Russia and to increase the risk score.

• DFS determined that Deutsche Bank’s failures were caused by inadequate AML/CTF policies and procedures for its correspondent banking accounts and failures implement the guidelines

• Key takeaways:

  • Senior management support is essential for compliance officers to effectively execute their duties.

  • Organizations that ignore red flags associated with a customer relationship can suffer significant consequences.

  • Correspondent banks should include periodic reviews of their respondent bank’s AML/CFT framework.

  • Correspondent banks need to undertake risk assessments and ensure that their policies and procedures mitigate against identified risks.

Payable-Through Accounts

• The respondent bank’s customers are permitted to conduct their own transactions through the respondent bank’s correspondent account without first clearing the transactions through the respondent bank.

• Traditional correspondent relationship vs PTAs: the order come from the respondent bank to correspondent bank
  PTAs sub-account can be virtually unlimited.

• Threats:

  • PTAs with foreign institutions licensed in offshore financial service centers with weak bank supervision and licensing laws

  • PTA arrangements in which the correspondent bank regards the respondent bank as its sole customer and fails to apply its customer due diligence procedures to the customers of the respondent bank

  • PTA arrangements in which subaccount holders have currency deposit and withdrawal privileges

  • PTAs used in conjunction with a subsidiary, representative, or other office of the respondent bank, which might enable the respondent bank to offer the same services as a branch without being subject to supervision

Use of payable-through accounts (Case example: Methods of money laundering)

• Payable-through accounts (PTA) are considered high risk because can be used to facilitate money laundering, terrorist financing, and sanctions evasion.

• Lombard Bank Ltd (Vanuatu) offered customers banking services through its PTA at American Express Bank International (AEBI) in Miami.
  customers in Central Americancountries brought cash deposits to Lombard representatives. Then the cash was transported to Lombard Credit Corporation and deposited in the PTA at AEBI.
  *AEBI offered fullbanking services, including checkbooks that allowed to deposit and withdraw funds from Lombard’s PTA
  *AEBI did not know the source of the cash being deposited by Lombard’s. Significant AML/CFT compliance concerns.

• L8r AEBI paid money multi-million-dollar fine for money laundering by a Mexican drug cartel.
  Key takeaways
  *PTAs often do not know the source of funds and customers’ identities
  PTAs can be offered to an unlimited number of subaccount holders, the exposure of correspondent banks to financial crime is very high
  when correspondent banks offer PTAs, they should set clear limits on their use, depending on internal policies and the risk profile of the respondent

Concentration Accounts

• Internal accounts established to process customer transactions within the bank on the same day by aggregating funds from several locations into one centralized account.

• Also known as special-use, omnibus, settlement, suspense, intraday, sweep, and collection accounts.

• Frequently used for private banking, trust and custody accounts, funds transfers, and international affiliates.

• Money laundering risks arise when customer information is separated from the financial transaction, losing the audit trail.

• Banks should implement policies and procedures covering operation and recordkeeping for concentration accounts, including:

  • Requiring dual signatures on general ledger tickets.

  • Prohibiting direct customer access to concentration accounts.

  • Capturing customer transactions in the customers’ account statements.

  • Prohibiting customers’ knowledge of concentration accounts.

  • Retaining appropriate transaction and customer identification information.

  • Frequently reconciling accounts by an independent individual.

  • Establishing a timely discrepancy-resolution process.

  • Identifying and monitoring recurring customer names.

Private Banking

• Provides personalized and confidential products and services to wealthy clients at feesbased on “assets under management."

• Fierce competition among private bankers puts pressure on relationship managers for bring in new clients and managing assets more efficiently.
  *Private banking is vulnerable to money laundering due to
  *Perceived high profitability and intense competition

• Powerful clientele and high level of confidentiality

• Client advocate to relationship managers
  *Use of private investment companies by clients to reduce transparency
  *Clients maintains personal and business wealth in numerous jurisdictions, including offshore
  *Clients’ ability to utilize legal entities

Private banking (Case example)

*2015, the British regulator, the Financial Conduct Authority (FCA), fined Barclays global bank for violating financial crime requirements

• the bank's transaction consisted private banking, ultra-high net-worth customers, political figures. ButEDD not required for customers with lower risk profiles
  the FCA concluded that the transaction was not linked to financial crime activity but didn't follow standard policies and procedures.
  Staff failed to establish the purpose and nature of the transaction and did not sufficiently corroborate the source of wealth and funds for the customers and transaction.
  *Key takeaways
  Business interests should never take precedence over compliance with laws and regulations.
  The close relationships established in private banking often require a higher degree of confidentiality, but this should not reduce or minimize the required compliance checks.
  Strong AML/CFT compliance programs need organizations to follow the policies and procedures that support them.
  Failure to follow a robust compliance plan can lead to fines, even if no actual financial crime event occurred.

Use of Private Investment Companies in Private Banking

• Private banking customers are often nonresidents who conduct banking in a country other than their residence. Assets may be held in the name of corporate vehicles like private investment companies (PICs) in secrecy havens.

• PICs are corporations established by individual bank customers and others in offshore jurisdictions to hold assets, maintaining confidentiality and serving various tax- and trust-related purposes.

• Secrecy laws of offshore havens conceal the true identities of customers’ beneficial owners; nominee directors may be used for an additional layer of secrecy.
  *Criminals can establish complex shell company networks in different juris

Use of PICs in private banking (Case example: Methods of money laundering)

*Bank Leumi assisted more than 1,500US taxpayers in Bank Leumi’s offshore affiliates to discuss their offshore portfolio and tax-mitigation strategies,in Luxembourg

• They did so by Bank Leumi assisted in organizing nominee corporate entities created fictitious backgrounds and employment information and