Money Laundering Basic Fundamentals /

How It Directly Impacts You

Presented by:

Paul Freeman, CPA, CAMS

About Mr Freeman• Financial Professional since 1980• Quickly entered the corporate world and was

running divisions before age 30• Spent 10+ yrs as Mgmt Consultant fixing

businesses throughout North America• 2005: Joined Key’s AML Dept• 2006: Became CAMS certified & began teaching

others• 2007: Joined ACAMS Education Task Force (still a

member); wrote for CAMS exam• 2009: Freelance AML Investigator & Educator

What is Money Laundering?

• Conversion or transfer of funds or property

• Conceal or disguise the true nature, location, disposition, movement or ownership

• Acquisition, possession or use of such property

• Knowing at receipt, it was illicit ***

“Willful Blindness”

• If a basic view of the facts / circumstances surrounding funds could lead you to believe they are illicit, then you KNEW they were illegal

• Enables LE to assert (& often prevail) that one had the equivalent of Knowledge

• Hogan’s Heroes - Sgt Schultz “I know nothing!”

3 Stages of Money Laundering

• Placement – Introduction of the ill-gotten gains to the financial system

• Layering – Moving around of the funds in order to disguise origin and ownership

• Integration – Ultimate end usage, now appearing to be “clean” funds

Structuring

• The act of breaking a deposit down into smaller ones, or otherwise altering it, to avoid currency reporting requirements.

• It is a crime in and of itself. No need for a predicate crime.

• Pulling cash back out of a deposit is a slam-dunk SAR.

• Sometimes smurfs are employed

Smurfing

• Using a series of usually unwitting accomplices to make smaller deposits into a number of accounts – each one staying under the reporting threshold.

• Name does come from the mindless little blue creatures from Saturday morning cartoons

Refining

• Exchanging smaller denomination bills into larger ones

• The $20 is the common denomination used on the street in drug dealing.

• Exchanging for $100s reduces volume by a factor of 5

How bad is the problem?

• 2007 photo showing $207 million seized in Mexico ($205.6 was in US currency)

Currency Transaction Reporting (CTR)

• Originated in 1970 with the Bank Secrecy Act

• All cash transactions, in or out, in excess of $10,000 requires a report to be filed with the government.

• This includes cash exchanges as well.

The CTR

• Name, address, identification, date and amount of transaction, accountholder and conductor (if different).

• In ’07, over 15,200,000 were filed (FIs)

• Generally, database mined only

The $10,000 Question

• By a show of hands, how many of you have, at one time or another, advised someone (client or not) to keep cash transactions under $10,000?

• Yes, my hand is up as well.• We have all then suggested someone

commit a crime.• WHY?

Suspicious Activity Report (SAR)

• Name, address, SSN, DOB, other ID (D/L, passport…), phone numbers, occupation, etc for each person, accounts and amounts involved.

• Plus a narrative. This explains entire relationship with the FI. May list ALL accounts, all other signers, when accts opened / closed.

Suspicious Activity Report (SAR)

• Explain when transaction(s) took place and why suspicious

• Does not have to PROVE anything. Only that a reasonable person would find the activity suspicious.

• In ’07, nearly 650,000 were filed (FIs)

• Virtually all of these are read

IRS Form 8300

• Filed by persons engaged in a trade or business who, in the course of that trade or business, receives more than $10,000 in cash (or equivalent) in one transaction or multiple related transactions within a twelve month period.

Equivalents

• Form 8300 is to include transactions involving cash equivalents, which encompasses:– Foreign Currency– Cashier’s Checks– Bank Drafts– Money Orders– Traveler’s Checks

Casinos & Gaming

• Buying large quantities of chips with cash, gambling very little, then requesting from the cashier a check, a wire, or the money being put on account

• Setting up private table poker games

• Sponsoring professional poker players

• Buying winning lottery tickets

Money Services Businesses

Primarily

• Check cashiers

• Sellers of Money Orders (*)

• Money exchangers

• Money remitters (*)

(*) normally have large agent networks

Trade Price Manipulation

• The most efficient and economical means to move money cross-border

• Only the import / export documentation that is filed with the government can expose the launderer to additional charges

• In normal business, pricing discrepancies need to be handled in the civil system

• As the parties on each end are complicit, there will be no civil action

Selling Something for Nothing

• US co. buys 200 Rolex watches @ $5000 ea– $1,000,000

• Sells watches to South American co. for $5 ea– $1,000

• SA co. sells watches locally for =$5000 ea

• Effectively the US co has sent $1 million to SA and the only cost to SA co is $1000 plus time and effort to sell watches

Selling Nothing for Something

• US co. buys 4000 gold pens @ $0.25 ea– $1,000

• Sells pens to South American co. for $250 ea– $1,000,000

• Who cares what the SA co. did with the pens?• Effectively the US co has received $1 million

from SA and the only cost was $1000• Again, both parties are complicit

Hawalas & Other IVTS

• Informal Value Transfer Systems• Pre-date banking by many centuries• Hawalas generally Middle Eastern / SW Asia• Other regions go by other names• Advantages over banks

– Quicker & less expensive

– No records

– Extend into regions banks are not found

Jewelry & Precious Metals

• Attractive for several reasons

• High value / little weight or size

• No ownership trail

• Can be used to facilitate cross border movement of funds

Art & Antiques

• Valuation is subjective

• Can employ like trade price manipulation– Can sell an original as a copy– Can sell garbage as high end art

• Loose ownership records

• Fairly easy cross-border tool

• With integration, hide value in plain sight

Other High End Goods

• Cars

• Boats

• Planes

• Often, the drug dealers will then use these in the transportation of drugs or cash

Down-Trade

• Drug dealer exchanges his high-end luxury car for:– Multiple low-end vehicles– Balance in a check from the dealer

• May even conspire with dealer and take balance in multiple checks (under $10k)

Black Market Peso Exchange

• Still a favorite of the cartels• Nearly impossible for financial institutions

to detect• Key: corrupt money dealer!• Unwitting accomplices include

– General Electric– Bell Helicopter– Phillip Morris

Cuckoo Smurfing

• Similar to the BMPE

• Corrupt middleman

• Recipients have no knowledge they received dirty money

Real Estate• Used in all three stages• Placement

– Purchase property for cash– All renovations paid in cash

• Layering – buying and selling in a controlled group to disguise ownership/ blur the trail

• Integration– Live in the house– Turn it into rental property– Sell it; get apparent clean funds

Insurance

• Primarily life insurance & annuities

• Up front, lump sum purchase

• Early redemption / cooling off period cancellation

Stocks & Securities• Normally only in layering & integration stages• Bearer shares – no ownership records• International nature – fast paced transactions• Competitive environment can lead to lax due

diligence• Common use of accounts in nominee form• Securities can be used in Pump-and-Dump

schemes

Money Mules• Currently one of the hottest fraud / laundering

schemes• Recruited using “work-at-home” ads or e-mails• Receive checks or deposits to own acct• Keep 10% commission – forward the balance

overseas using Western Union, Sigue, etc• Original funds often prove to be bad• Guess who is responsible for funds forwarded?• They face jail time for laundering – victim v

accomplice

Questions?

Thank you for your time.