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Part 3: Tax Evasion and Enforcement Financial Crime Investigations Fraud Compliance Programs and Controls CFCS Examination Preparation Series January 17, 2014 Presented By Charles Intriago Brian Kindle

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CFCS Prep deck for Jan. 17 session.

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Page 1: Tax evasion, fci, fraud, compliance 1 17-14

Part 3: Tax Evasion and EnforcementFinancial Crime Investigations

FraudCompliance Programs and Controls

CFCS Examination Preparation SeriesJanuary 17, 2014

Presented ByCharles Intriago

Brian Kindle

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Brian KindleEditorial and Training Advisor

Association of Certified Financial Crime SpecialistsMiami, FL

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Charles A. IntriagoPresident and Founder

Association of Certified Financial Crime SpecialistsMiami, FL

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Certification, News, Guidance, Training, Networking

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The Credential That Shows Your Knowledge and Skill Across the Financial Crime Spectrum

CFCS Certification

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About the Exam• There are 145 scenario based, four choice,

multiple choice questions• 125 scored questions and 20 unscored

questions• Four hour exam session with no breaks, at one

of over 700 testing centers or online proctored• Passing score is 63%• Results given immediately

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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 you might do

at your organization

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Tax Evasion and Enforcement

CFCS Examination Preparation SeriesJanuary 17, 2014

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9

Overview and Definition

• Conduct designed to intentionally and illicitly avoid paying tax liabilities

• Often a thin line between tax evasion and legal “tax avoidance”

• Evasion is a financial crime itself and a common element of all other financial crimes

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Convergence of Tax & Money Laundering Enforcement

• Global trend toward criminalization of tax compliance, enforcement will continue

• Convergence with other areas of law -- criminal law, money laundering, asset forfeiture, international evidence gathering

10

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Convergence of Tax & Money Laundering Enforcement

11

• In February 2012, FATF issued revised recommendations on anti-money laundering

• For first time, tax offenses expressly listed as predicate for money laundering crimes

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12

Tax Shelters

• Mechanism by which taxpayer may protect assets or income from taxation, or delay tax application

• Investments in pension plans and real estate are common examples, many shelters are completely legal

• Shelters can be deemed abusive by tax authorities when designed solely for avoiding or evading taxes

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13

Tax or Secrecy Havens

• Jurisdictions that provide secrecy or other means of protecting assets from taxation• Individuals, corporations, other entities can shift

assets to havens through physical relocation, subsidiaries, shell corporations• Havens have been subject to increasing global

pressure

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14

Characteristics of Tax or Secrecy Havens

• No or nominal taxes• Lack of effective exchange of tax information• Lack of transparency in the operation of legislative,

legal or administrative processes• Anonymous company formation• Negotiated tax rates• Inconsistent application of tax laws• Little or no regulatory oversight

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15

Characteristics of Tax or Secrecy Havens

• No requirement for physical presence, allowing for shell corporations

• Self promotion as offshore financial center

• Examples of tax or secrecy havens• Seychelles• Panama• US states of Delaware, Nevada

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16

Methods of Tax Evasion and Tax Fraud

• Income tax evasion can be straightforward as under-reporting income, overstating deductions, or not declaring offshore accounts

• Can be extraordinarily complex, involving offshore accounts and layers of corporate entities

• Tax codes of many jurisdictions are complicated, proving tax evasion requires willful intent to defraud

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17

Methods of Tax Evasion and Tax Fraud

• Smuggling and evasion of customs duties• Employment tax fraud• Falsified worker status• Pyramiding• Third-party withholding• Cash payments

• Evasion of value added tax (VAT)• “Missing trader” fraud, carousel fraud

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18

Red Flags of Tax Evasion

• Failing to follow advice of accountant, attorney or preparer

• Failing to inform a tax professional of relevant facts • Evidence from employees about irregular tax withholding,

suspicious business practices• Missing or altered books and records• Transfer of assets to an offshore location or secrecy haven• Tax and related documents appear to be backdated• Use of many tax numbers by single person or entity• Submission of suspicious wage and other statements

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• March 2010 – FATCA signed into US law• February 2012 – Temporary IRS Regulations Issued• Numerous IRS Notices Since • January 17, 2013 – Final IRS Regulations Issued• Key Effective Date – January 1,2014

FATCA

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• Essentially deputizes ‘Foreign Financial Institutions (FFIs)’ to act as extension of IRS enforcement network• Identifying US Taxpayers holding financial accounts or

investments in their institutions

• Reporting financial assets, US source income annually to IRS

• Withholding 30%, on behalf of the IRS, on certain payments coming from US for noncompliant accounts, institutions

• Reporting, withholding on accounts and payments to other FFIs that do not comply with FATCA

FATCA Overview

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21

Intergovernmental Agreements

Model I and Model II Agreements

• Model I requires FFIs to report information on US accountholders to their tax authorities, which collect and deliver it to IRS

• Model II requires FFIs to report information on US accountholders directly to the IRS.

• IGAs will require some countries to change their tax, privacy laws

• Some IGAs require reciprocal reporting – US institutions must report accountholders to tax authorities of signatory nations

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22

FATCA Gaining Momentum

• 70 countries now engaged in talks with US

Treasury

• FATCA Partners now include 7 countries (UK,

Mexico, Denmark, Ireland, Switzerland, Spain,

Switzerland, Norway)

• Tax transparency now a worldwide initiative

• Participation ‘not an option’

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23

G20 and Bank Information Exchange

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24

Key Lessons

• Understand structures used to evade taxes,

especially offshore legal entities

• Understand common types of tax fraud

schemes, including those involving VAT

• Recognize how FATCA works and how it is

laying groundwork for international tax

enforcement regime

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25

Practice Question

Your bank holds a business account for a local tax preparation service.

What would MOST likely trigger further investigation by the compliance department in the bank?

A. Numerous deposits of tax refund checks in the names of different individuals but with common addresses

B. Multiple deposits of checks in the same amount written by different tax service customers

C. Variances in the frequency of transactions depending on the calendar cycleD. A request by the customer to have payments made to the Tax Office

through a certified check process

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26

Practice Question

• Answer A is the correct answer due to the fact that this is a classic red flag for tax fraud. Multiple tax refund checks for different individuals going to the same address should set off warning alarms in nearly every jurisdiction.

• Answer B is incorrect because this perfectly fits the customer’s profile. The deposit of checks from different tax service customers is what you would expect as each customer paid their bill for the service. You would also expect many of them to be in the same amount for a typical tax preparation service since the fee for tax preparation would be the same for many customers.

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27

Practice Question

• Answer C is incorrect because, once again, this fits the customer profile. You would expect variances depending on the calendar cycle as this is largely a seasonal business based on tax reporting deadlines.

• Answer D is incorrect because there is no indication of tax fraud in this response. The customer is making payments to his jurisdiction’s tax authorities using a certified check, which is simply a check for which a bank has confirmed sufficient funds exist to cover the amount of the check. This is not a viable means to commit tax fraud, and would more likely indicate no fraud is taking place.

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Financial Crime Investigations

CFCS Examination Preparation SeriesJanuary 17, 2014

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29

Legal Underpinnings

• Common law systems• Rely on case law, precedent• Legal remedies not in statutes are available• Examples – UK, US, Canada, India, Australia

• Civil law systems• Written laws determine rights, remedies and actions• Examples – Latin America, Continental Europe, Japan

• Helps evaluate ground rules of place where investigation and possible litigation is conducted, costs, likelihood of success

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30

Public vs. Private Investigations

• Public investigation by law enforcement agency, grand jury, regulatory body• Deploys all powers, authority of government

• Private investigations by civilians without government powers• Can obtain powerful tools from courts, equitable

remedies, bankruptcy and insolvency laws

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31

Investigative Tools and Techniques

• Compulsory power to obtain documents and testimony• Telephone, electronic wire intercepts by government

agencies• Search warrants• Mutual Legal Assistance Treaties (MLATs) and less

formal mutual assistance• Undercover operations• Physical surveillance• Whistleblowers, anonymous tips, informants

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32

Open-Source Intelligence

• Publically available information, often online• Many sources, often free and easily discoverable• Online searching and web content• Media outlets and news sources• Public records• Geospatial open source• Professional conferences, live events• Observation and reporting

• Investigation should usually start with exhaustive OSINT before moving to more time-consuming methods

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33

Online Open-Source Tools

• Online information increasingly critical in financial crime investigations• Advanced web searching• Searching social networks, blogs• Utilizing free and paid online databases• “Deep web” sources• Reverse image searches• Archived web sites

• Financial criminal use online tools, investigator should take steps to remain secure and anonymous online

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34

Interviewing Techniques

• Usually best to begin interviews with persons farthest removed from suspected crime

• Differences between interrogation and interview. In interview, investigator should establish rapport with witness and seek detailed responses.

• Look for knowledge of event, persons or entities involved, physical and intangible evidence

• Plan all elements of interview: location, objectives, needs of the witness

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35

Intelligence vs. Evidence

• Intelligence furthers investigation but is not generally admissible in court

• Photos posted online• Information in a news article• Hearsay statements

• Evidence must meet legal rules of admissibility, be material and prove or disprove some relevant matter

• Commercial records obtained by subpoena• Statements made freely to law enforcement agent• Facts observed by enforcement agent conducting lawful

surveillance

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36

Investigations Across National Borders

• Many financial crime investigation require assistance from other nations and jurisdictions

• When requesting assistance from another nation for, consider:• Its legal and statutory requirements • How to assure that the information will be admissible as evidence• Will investigative subject be notified of request for assistance? Are

you legally compelled to inform the subject?• Level of probable cause needed to authorize investigative

techniques and enforce court orders

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37

Tips and Whistleblowers

• Common trigger of financial crime investigations

• Encouraged by laws authorizing rewards, protections

• Can come from any level of organization up to board of directors

• Wise to maintain skepticism in contact with whistleblowers, who may have their own profit, revenge motives

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38

Investigating Employees• Some companies have rules on employee cooperation in

internal investigations, but they must not conflict with laws

• Employee usually has no legal obligation to agree to an interview

• Employer may usually provide employee e-mail, phone logs and computer usage without employee permission, knowledge

• Investigator should consult lawyer on whether it is legal, advisable to obtain employee records without consent

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39

Court Orders

• Search warrants • Granted by judge to government agencies, • Specify time, place and items to search• Failure to follow terms may render evidence useless

• Subpoena• Compels a person or entity to produce records, items or

testimony at a place and time• Considerable variation on process among countries

• Preservation orders or litigation holds• Prevent electronic evidence from being deleted or altered

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40

Beneficial Owners

• Typically refers to person who maintains ultimate control over funds, assets, legal entities or financial accounts

• Includes individuals who own or control, directly or indirectly, greater than a certain percentage of a legal entity

• Recognizes that person in whose name an entity is formed, asset is held, or account is opened is not necessarily the person who truly controls them

• Determining beneficial owners is critical in KYC, due diligence, investigations, AML and anti-corruption, and more, as it is key to true source, origin and control of funds

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41

Corporate Registries

• Collect and store information pertaining to corporations and other legal entities created within a given jurisdiction

• Typically maintained by a government agency or department

• May be a single registry for an entire nation, or multiple registries for different states, regions or cities, depending on jurisdiction

• Serve several purposes:• Record creation or incorporation of new legal entity• Collect required information on legal entities• Make some or all collected information publicly available

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42

Corporate Registries

•The following information is usually available from corporate registries: •The name and type of the legal entity•Date of the company formation, and date when the company was dissolved

if no longer in existence•Articles of incorporation and other company formation documents•A physical address of the corporation, or address of formation agent•Name and address of a registered agent for the company

•Some jurisdictions will provide: •Names and addresses of the legal entity’s directors or officers•Names and addresses of the shareholders, members or other legal owners

of the legal entity

•Beneficial owner of legal entity is very rarely available

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43

Corporate Registries

• Many jurisdictions offer access to registries through websites. Some international bodies also maintain sites that allow direct or indirect access to registry information:

• International Association of Commercial Administrators (IACA) http://www.iaca.org/

• Corporate Registers Forum (CRF) http://www.corporateregistersforum.org • European Business Register (EBR) http://www.ebr.org/section/4/index.html • European Commerce Registers’ Forum http://www.ecrforum.org/ • Association of Registrars of Latin America and the Caribbean (ASORLAC)

http://www.asorlac.org/ingles/portal/default.aspx

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44

Types of Financial Institution Records• Critical source to “follow the money” in financial crime

investigations, often need court order to obtain

Examples

• Deposit tickets • Deposited checks• Checks drawn • Debit memos • Credit memos • Outgoing wire transfer orders • Incoming wire transfers

• Cashier’s checks sold • Foreign currency sold • Signature cards • Monthly statements • Cancelled checks• Cashier’s checks • Money orders sold

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45

Summarizing Financial Institution Records

• Investigator should prepare summaries of information in documents from an institution, including:

• Deposits and withdrawals• Checks written on the account• Wire transfers into or out of the account• Fluctuations in account balances

• Obtain all documents related to account opening and customer onboarding: application, customer ID, signature card, due diligence and Know Your Customer records

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46

What Financial Institution Records Show

• Some leads that a financial account analysis can provide: • Names of persons, entities that received funds• Names of persons, entities that deposited money • Sources, amounts of income or revenue• Cash withdrawals and purchase of cashier’s checks• Activities of previously unknown businesses and ventures• Wire transfers to, from offshore havens, accounts, nominees• Previously unknown accounts• Liabilities, which lead to other financial statements• Asset acquisition, disposition

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47

Other Financial and Commercial Records

Examples

• Commercial invoices• Cancelled checks• Receipts, related expense

documentation• Journal entries

• Statement of cash flows• Vendor and customer lists• Physical inventory• Reconciliation of

intercompany accounts

• Tax returns are also a valuable source of information if they can be obtained legally

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48

Protecting the Evidence

• All records should be treated as possible evidence • Implement chain of custody from the start• Document chronology of handling of evidence• Where it was initially located, who got it, where it was

stored, who handled it • Obtain originals where possible

• Maintain records for their integrity• Assure that electronic evidence is not altered or unintentionally

overwritten

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49

Key Lessons

• Recognize the types of documents and records that can be employed in financial crime investigations

• Understand the differences between evidence and intelligence, and the proper role of each

• Open source intelligence is highly valuable – be familiar with open sources, online and otherwise

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Review Question

50

Securities King was a stock brokerage that collapsed after it was revealed to be running a Ponzi scheme. The scheme has left behind numerous defrauded investors and the brokerage is now being liquidated in You are an investigative professional who has been asked to look into a lawyer suspected of involvement in the Ponzi scheme. The lawyer is thought to have handled funds for Securities King through his firm’s account. There has been no prior investigation of the lawyer, and you currently have little information him or his firm.

What would be the most appropriate first step to take in your investigation?

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Review Question

51

A. Request that a bankruptcy court judge name you a

receiver of Securities King

B. Contact the lawyer to schedule an interview

C. Thoroughly research the lawyer and his firm online

and in public records

D. Conduct physical surveillance of the lawyer to

understand his movements

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Fraud Detection and Prevention

CFCS Examination Preparation SeriesJanuary 17, 2014

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53

Overview and Definition

• Intentional misrepresentation, concealment or deception in pursuit of financial gain or to further a financial crime

• Recent fraud trends• Greater professionalization, smarter attacks• Increased “sharing” of fraud practices• More frauds perpetrated from offshore locations• Technical fraud or cybercrime combined with traditional skills• More collusion between merchants, fraudsters and organization

insiders

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54

Understanding and recognizing types of fraud

• Ponzi schemes• Despite recent exposure, remain widespread type of fraud

• Some red flags • Investment returns “too good to be true”• Investment statements show growth or performance

contrary to market trends• Unusual or no fee structure• Lack of information or substance behind investment

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• Securities fraud• Misrepresentation around a security, which can be

virtually any tradable asset or financial instrument• Inaccurate or misleading information to encourage

investment• Selling a security that is illegal or nonexistent• Insider trading

• Now facilitated by online communications, social networks, other tools

55

Understanding and recognizing types of fraud

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• Common types of securities fraud include– Microcap or “penny stock” frauds, like pump and dump

schemes– Insider trading– Hidden terms and agreements– Fraud tied to falsified reporting or accounting

• In US alone, securities fraud estimated to total $10 – 40 billion annually

56

Understanding and recognizing types of fraud

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• Fraud in loans and mortgages• Intentional, material misrepresentation or omission to

obtain loan or larger loan than lender typically grants• May also be perpetrated by lenders: loans with hidden or

predatory terms, unlicensed lenders

Common schemes

57

Understanding and recognizing types of fraud

• Income and employment fraud• Occupancy fraud• Appraisal fraud

• “Shot-gunning” fraud• Cash-back fraud• Foreclosure scams

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• Credit and debit card fraud• Need not involve physical fraud; increasingly common to

steal numbers, personal information online• Tampering with card readers at ATM and other point-of-

sale locations through skimmers• Online theft of numbers through compromise of online

security or data breaches• Gathering personal information by sending fake

applications for cards to targets• Physical theft of card

59

Understanding and recognizing types of fraud

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• Other types of fraud include:– Insurance– Health care– Government benefits

• Can be perpetrated by an entity against a customer or by customer against an entity

60

Understanding and recognizing types of fraud

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• Fastest growing types of consumer fraud• A leading threat to accounts at banks and other

institutions• Common ways to steal identities • Social engineering• Creating fake online identities• Technological tools – skimmers, phishing, malware• Internal fraud and data theft

61

Identity Theft and Fraud

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• Common signs indicating a stolen or compromised identity• Alerts and warnings from a credit reporting company• Suspicious documents, including forged or altered IDs• Inconsistent personal identifying information• New credit or debit card request immediately after

notification of change of address

• Identity theft furthers many other fraud schemes• Using stolen identities to obtain government benefits, tax refunds• Obtaining loans or mortgages with false identities• Opening accounts with stolen or false identities

62

Red Flags of Identity Theft

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Preventing Fraud

63

• Similar measures as other compliance programs, but training, awareness are even more important in fraud prevention

• Starts with comprehensive fraud risk assessment• Create a team with necessary expertise• Identify organization’s universe of fraud risks

• Fraudulent financial reporting• Misappropriation of assets• Expenditures, liabilities for improper purpose• Revenue and assets obtained by fraud• Costs, expenses avoided by fraud• Financial misconduct by management

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Preventing Fraud

64

• Assess likelihood of fraud schemes or scenarios• Assess materiality of risks: which schemes would

have greatest impact• Assess preexisting fraud controls, compare them

against risks• Consider how controls may be over-ridden or manipulated

by employees and others• Employee collusion is serious fraud risk

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Key Lessons

65

• Preventing fraud is heavily reliant on awareness, training, and internal controls

• Financial crime professionals should be prepared to identify many types of fraud

• Fraud schemes are frequently linked – one element feeds into larger operation

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Review Question

66

• Your institution has recently been dealing with a large number of identity theft cases, in which thieves have stolen sensitive customer data and used it to fraudulently apply for credit cards. After an initial investigation, you suspect that an employee is participating in the identity theft scheme. What would be the most effective first step you could take to prevent further theft of customer information?

A. Immediately notify customers whose data has been compromisedB. Restrict access to sensitive customer data, and monitor employee access

on an ongoing basisC. Impose strict alert thresholds in the automated monitoring system for all

credit cardsD. Conduct a mandatory ethics seminar with all institution employees

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Review Question

67

A mortgage administrator has been dealing with a buyer attempting to obtain a large mortgage on a home from your institution. According to the buyer, he is seeking to purchase the home as an investment property.

The buyer has been behaving erratically and has been difficult to contact at times. Concerned about a potential fraud, the administrator has asked you to examine the mortgage application and accompanying documents.

You note the following information. Which is the best indicator that the buyer may be committing mortgage fraud?

A. A real estate agent from a nearby city is helping to broker the saleB. The seller is not currently listed as the occupant of the propertyC. The buyer currently has a large mortgage outstanding on his own property D. The buyer has no previous history of obtaining mortgages from your institution

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Compliance Programs

CFCS Examination Preparation SeriesJanuary 17, 2014

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• Processes and controls to comply with laws, regulations, other government requirements

• Regulatory structure becoming more complex, global in scope

• Convergence trend toward unified “financial crimes risk management”

Overview of Compliance

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• Customer Due Diligence

• Analytics

• Governance

Programs within Compliance

• Investigations

• Intelligence

• Compliance Audit

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• Size, structure, complexity and risks are basis of controls

• Can be divided into “preventive” and “detective”

• Preventive controls include: • Maintaining financial crime policies• CIP and CCD programs• Appropriate training• Risk assessments, gap analysis• Providing line of business reporting, issue remediation• Senior management and board reporting• Liaison with audit, coordination of examinations

Organizational Overview of Financial Crime Controls

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• Detective controls include:

• Identifying suspicious activity through employee referrals or automated transaction monitoring, customer surveillance• Investigating identified unusual activities • Activity monitoring, predictive analytics• Monitoring employees, third parties• Screening, blocking, rejecting transactions and customers• Reporting • Exiting customer relationships • Compliance testing

Organizational overview of financial crime controls

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Risk Assessment• Assessing risks allows an understanding of vulnerability,

better allocation of resources

• Risk assessment should consider

• Types of distribution channels used by business unit• Complexity of unit’s business model• Degree of change in the business• Amount and type of growth in the business

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Risk Assessment

Key elements include• Methodology to quantify level of risk

• Methodology to quantify adequacy of controls

• Assessment of risk of each line of business

• Enterprise-wide assessment to identify systemic risk not apparent in a line of business

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75

AML CycleOrganizational Risk

Assessment Identify and rate risks across the organization and within lines of

business

Customer Identification Program

Collect and verify information on a customer to confirm their identity

and nature of relationship

Customer Profile and Risk Assessment

Establish expected activity and transactions; create an initial

customer risk rating

Automated Transaction Monitoring

Establish alert thresholds, rules and scenarios based on customer profile

and risk assessment

Customer ScreeningScreen customer against sanctions

and watch lists; establish criteria for ongoing screening of transactions

Investigation of Alerts and Incidents

Review any alerts generated on customer, file SARs or modify

customer relationship if necessary

Update and AuditCollect sampling on alert and

transaction data, reassess customer risk, renew KYC

information

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High-Risk Customers

• Risk depends on product, geographic region. Examples:• Politically Exposed Persons (PEPs)• Casinos, securities brokers, dealers in precious metals, stones• Domestic, offshore shell companies• Casas de cambio, currency exchanges, money transmitters• Private investment companies, international corporations • Deposit brokers• Cash-intensive businesses• Foreign, domestic NGOS, charities• Gatekeepers - attorneys, accountants, etc.

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High-Risk Products

• Examples:• Prepaid, payroll cards• “Payable upon proper identification” (PUPID)

transactions• Money remittances• Online banking• Private banking• Trust and asset management services• Monetary instruments

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High-Risk Products• Other examples :• Foreign correspondent accounts: bulk currency shipments,

pouch activity, and payable through accounts (PTA) • Trade finance • Services to third party payment processors or senders• Foreign exchange• Special use or concentration accounts • Loans secured by cash collateral and marketable securities • Non-deposit account services, such as non-deposit

investment products and insurance

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High-Risk Jurisdictions, Geographic Areas

• Understanding specific money laundering, terrorist financing, corruption, fraud risks of jurisdictions is essential for compliance

• Organization should establish methodology that may include

• Sanctions, terrorist financing lists – OFAC, EU, UN• Jurisdiction's overall reputation – Corruption Perceptions

Index, reports by state departments• Jurisdiction’s adoption of FATF, other international

standards• Regional risk inside a particular jurisdiction

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Customer Onboarding and Monitoring

Account opening procedures

Best practices include: • Gathering, verifying, authenticating customer ID materials

through paper documents, electronic verification• Clarifying services customer requests• Screening against sanctions lists, watch lists, PEP lists• Documenting normal, expected activity, including occupation

and business • Documenting relationship with institution or organization,

including all lines of business, subsidiaries

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Customer Identification Program (CIP)

• Usually required by jurisdiction’s laws, regulators

• ID information must be collected at account opening, verified within reasonable time after opening

• Verify identity prior to large currency transactions, purchasing certain financial instruments, or ordering wire transfers

• May require identification of beneficial owners in some jurisdictions, particularly legal entities

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Enhanced Due Diligence

• For high-risk services, customers, jurisdictions

• Examples include: • Identifying and verifying beneficial owners • Additional investigation of source of funds• Verification of customer, business information through

third-party sources • Augmented transaction monitoring• Thresholds on transactions• Senior management approval of customer relationships,

certain transactions

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Employee Onboarding and Monitoring

Best practices for effective “know your employee,” onboarding:

• Assessment begins during interview process• Background screening, especially for criminal history• References and employment history

• Gathering and verifying employee identification materials • Screening employee against sanctions, watch, PEP lists

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Employee Onboarding and Monitoring

Best practices for effective “know your employee,” onboarding:

• Providing new employees with organization's written ethics policy, code of conduct

• Appropriate training for position, including regulations and web-based or classroom training with appropriate scenarios

• “Hotline“ for anonymous reporting, direct reporting to compliance that does not go through business lines

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Employee Onboarding and Monitoring

Best practices for ongoing employee monitoring:

• Regularly scheduled background screening• Automated exception reports, review of log files• Regular reviews and updates on the company’s ethics

policies and ethical compliance culture• Regular communication reinforcing standards• Ongoing employee training • Selective review of email, electronic communications

for high-risk employees

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Transaction Monitoring

• Automated system, either proprietary application or vendor-provided, for ongoing transaction, customer and entity data

• Detection typically accomplished through implementation of financial crime scenarios in two broad categories:

• Rules-based scenarios - identify patterns of behavior related to known financial crime typologies or red flags• Statistical profiling scenarios - identify unusual activity by

modeling typical or expected activity profiles for a specific customer or type of customer and identifying outliers

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Transaction Monitoring

• More advanced systems incorporate hybrid of rules-based, statistical approaches

• Transaction monitoring can also incorporate third-party data sources

• As transaction and data volumes grow, analytics becoming increasingly important

• Automatic monitoring no substitute for experienced human supervision, direction

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Key Lessons

• Customer due diligence, profiling and risk assessment are key to effective compliance programs

• Essential to establish expected customer behavior, transactions to detect suspicious activity

• Compliance programs are cyclical and ongoing – each step feeds into the next

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Practice Question

• A small regional bank has recently started using a new transaction monitoring tool that utilizes several custom scenarios to identify specific activity which was defined by the Financial Crimes Compliance team. There are five scenarios that are live in production. The Analytics team within Financial Crimes Compliance has performed some research on the scenarios and is ready to make recommendation to management regarding possible changes to the scenarios. Which scenario(s) should the Analytics team recommend making changes to first?

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Practice Question

A. Scenario A that has generated 100 alerts in the past three months and 50% of those have been deemed suspicious and a suspicious transaction report was filed.

B. Scenario B that has generated 180 alerts with a 95% false positive rate.

C. Scenario C that has generated no alerts and there appears to be a problem with the mapping of data.

D. Scenarios D and E that were put into production in the last 30 days to address a matter requiring attention from a regulator.

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Practice Question

Answer A in incorrect as this appears to be a well performing scenario. It is generating alerts, and the percentage of those that were actually deemed suspicious is reasonable.

Answer B is incorrect because while the false positive rate is far too high, it is at least generating alerts and some are still deemed suspicious. The false positive rate is clearly an issue that will have to be addressed, but this scenario would not be the one that would need to be addressed first. There will often be scenarios on the live exam that require you to pick the best answer. In this case, this is not the best answer.

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Practice Question

Answer C is correct as this clearly is a broken scenario since not one alert has been generated. The fact that there appears to be a problem with the mapping of the data only reinforces the conclusion that this scenario must be addressed first.

Answer D is incorrect as there is no evidence that the scenarios are not performing as expected.

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Your Questions

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