ACFCS Quarterly Briefing

ACFCS Training SeriesMarch 12, 2014

Seminar LeadersCharles Intriago

Brian Kindle

Brian KindleExecutive Director

Association of Certified Financial Crime SpecialistsMiami

Charles A. IntriagoPresident and Founder

Association of Certified Financial Crime SpecialistsMiami

Certification, Training, Networking, News, Guidance

The Mark of Financial Crime Knowledge and Skill

6

Introduction and Overview

• Financial crime news in brief• Ukraine sanctions • OECD Standard for Automatic Exchange• Banking for legal marijuana industry• Virtual currencies – new cases and risks• Forex rate-rigging probes• Lessons from recent enforcement actions• JPMorgan and Madoff• Brown Brothers Harriman and FINRA

7

News in Brief

• Offshore tax evasion crackdown is back• US Senate Permanent Subcommittee on Investigations held hearing on Feb. 26

to grill Credit Suisse execs

• Also questioned Justice Department on enforcement practices

• Tax Division chief insisted they were building strong cases against 14 banks, were receiving “excellent” information from Offshore Voluntary Disclosure Program, informants

• May trigger renewed US enforcement related to offshore evasion, private

banking remains a focus

• “Era of bank secrecy not over” - Swiss still willing to fight for it

8

News in Brief

• Basel Committee issued final guidance on AML/CTF

risk management

• “Sound management of risks related to money laundering and

financing of terrorism” released January 15

• Brings previous guidance in line with FATF’s 40 Recommendations

• Primarily targeted at financial institutions, but also includes

guidance for how bank supervisors should oversee AML/CTF

compliance

• http://www.bis.org/publ/bcbs275.pdf

9

News in Brief

• Basel Committee’s AML/CTF risk management

guidance

• Details “essential elements” of sound AML/CTF programs

• Assessing and understanding risks

• Customer acceptance policies

• Customer and beneficial owner identification

• Ongoing monitoring

• Information management, record-keeping

• Reporting suspicious transactions and asset freezing

10

News in Brief

• EU’s draft 4th Money Laundering Directive and beneficial ownership• On March 11, EU Parliament voted to further draft

Directive by huge margin

• Major change is central public register in each EU nation, listing “ultimate beneficial owner” of corporations, trusts, other legal entities

• Draft still has to be enacted by next EU Parliament in May

11

News in Brief

• Final hours before FATCA implementation• 110 days until effective date of July 1

• IRS released revised final regulations, posted to Federal Register March 6

• Revisions bring existing withholding rules in line with FATCA obligations

• Also released final FATCA forms and instructions• Form 1042• Form 8966• Form W-8BEN• Form W-8ECI

12

News in Brief

• Final hours before FATCA implementation• Intergovernmental Agreements on FATCA slowly

but steadily being adopted by jurisdictions

• Pace has increased – 12 IGAs in 2014

• 20 jurisdictions have signed Model I, 4 have opted for Model II

• Finland and Chile most recent – adopted IGAs last week

Ukraine Sanctions

• Ukrainian president Victor Yanukovych fled Kiev February 22, along with most of nation’s cabinet

• Suspected of moving as much as $70 billion in corruption proceeds out of country

• Switzerland, Austria and Lichtenstein froze accounts belonging to Yanukovych and 19 others

• On March 5, Council of Europe adopted EU-wide sanctions on ex-president, 17 other former ministers and associates• Asset freezes• Travel and visa bans

• Canada imposed similar sanctions the same day• US imposed travel bans, as further sanctions debated

Ukraine Sanctions

• On March 6, US Financial Crimes Enforcement Network issued updated Advisory• “Measures being taken against former Ukrainian officials and their close

associates increase risk they will seek to move their assets in a deceptive fashion.”

• Reminds US institutions they must apply enhanced due diligence to private banking accounts for PEPS

• Monitor for transactions “that could potentially represent misappropriated state assets, proceeds of bribery, or other public corruption proceeds”

• http://www.fincen.gov/statutes_regs/guidance/pdf/FIN-2014-A002.pdf

Ukraine Sanctions

• Update or apply monitoring rules related to Ukraine, corruption in general• Even-dollar wire transfers• Funds transfers to/from known offshore financial centers• Large transactions to/from Russia

• In EU, Canada – freeze accounts and assets• In US, file SARS – may help with asset recovery initiatives

after the fact• Watch closely for further sanctions, advisories, as Russia

may be next

Key Lessons

• On February 13, Organization for Economic Cooperation and Development (OECD) issued “Standard for Automatic Exchange of Financial Account Information”

• Landmark tax compliance and financial account data sharing measure

• 44 nations and jurisdictions have already announced “early adoption” of standard, US is not one of them http://www.oecd.org/tax/transparency/Joint%20Statement.pdf

OECD Standard

• Framework for reporting on financial accounts between nations on an automatic, ongoing basis

• Financial institutions would report data to “competent authority,” usually tax agency, which would then disseminate to counterparts in other nations

• Standard shares many features with FATCA – advent of GATCA?

OECD Standard

• Financial institution is broadly defined under standard• Banks, broker-dealers, certain insurance companies, certain

“collective investment vehicles”

• Financial data, scope of accounts also broadly defined• Requires financial institutions to “look through legal entities,”

including shell companies and trusts• Requires reporting on account balances, investment income

including interest, dividends

• Institutions will be required to conduct due diligence on new, pre-existing accounts

OECD Standard

• What due diligence? It looks a lot like FATCA• Review pre-existing individual accounts for permanent

residence status by searching indicia, checking documentation

• For new accounts, collect self-certification documentation• For pre-existing and new entity accounts

• Determine if they are “reportable persons” • Identify residency of controlling persons through AML/KYC

information review or self-certification

OECD Standard

• Lots of technical details still remain to be addressed

• More clarification will come in “model agreements between competent authorities” that actually commit to firm implementation

• Does not explicitly state threshold or guidelines for determining beneficial owners of legal entities

• Aggressive timeline – OECD wants member states on board by 2015

OECD Standard

• Can’t really avoid FATCA-like system for long – even if that law doesn’t apply, this Standard might

• Need policies, procedures in place to determine residency, tax liability status of account holders at onboarding

• Training will be critical

• AML, KYC staff and data should be leveraged, if not already

OECD Standard

• 20 US states have legalized medical marijuana in some form, Colorado and Washington recreational

• Marijuana remains illegal under Controlled Substances Act of 1970

Legal Marijuana Trade

• Accepting proceeds from marijuana trade risks violating US money laundering law – Title 18, US Code Section 1956

• On Feb. 14, FinCEN issued guidance on “BSA Expectations Regarding Marijuana-Related Businesses”

• “Clarifies how financial institutions can provide services to marijuana related businesses consistent with their BSA obligations”

• Guidance points to Cole Memo, which DOJ reissued same day

• Memo lists eight “enforcement priorities,” does not include banks

Legal Marijuana Trade

• How to bank a legal marijuana business?• Verify their license with state authorities• Review documents submitted to obtain license• Request information on business from state licensing authorities• Create customer profile• Monitor for negative news• Ongoing monitoring, risk-based due diligence

• Have to juggle SAR filings – Marijuana Limited, Priority and Termination

• http://www.fincen.gov/statutes_regs/guidance/pdf/FIN-2014-G001.pdf

Legal Marijuana Trade

• While an acknowledgment it was possible to bank marijuana businesses in compliance with BSA, still does not resolve dilemma

• Banker’s associations, politicians criticized FinCEN and DOJ, but it’s really up to US Congress

• Some state-chartered banks taking the risk

• Millions of legal marijuana funds floating around, as industry grows– $2 million in tax revenues in Colorado

Legal Marijuana Trade

• Be aware of range of issues raised by marijuana trade• Rent payments from tenants in marijuana business?• Loans to homeowner whose occupation is marijuana dealer?• Funds coming from broker-dealers, investment advisor accounts

where initial funds were generated by marijuana sales?• State tax revenues generated by marijuana businesses?

• Watch for structuring if in or near legalized states

• Remember risk-based approach – illegal narcotics trade is still priority

Key Lessons

• On January 26, CEO and chief compliance officer of Bitcoin exchanger BitInstant, Charlie Shrem, arrested

• Federal prosecutors charged Shrem with money laundering conspiracy

Virtual Currencies, Crime and Compliance

• Shrem and co-defendant alleged to have converted funds into Bitcoin for users and sellers on online drug marketplace Silk Road

• In early February, several Bitcoin exchanges were victims of cyberattacks

• Mt. Gox, one of largest exchanges, closed permanently later in month, after saying it was victim of massive Bitcoin theft

Virtual Currencies, Crime and Compliance

• $450 million worth of Bitcoin either stolen or lost

• Flexcoin, another exchange, also victim of smaller theft

• Even as industry matures, it struggles with compliance

• Money laundering risks clearly still exist

• Add safety and soundness to due diligence review, along with AML/BSA compliance

• Law enforcement, regulators scrutinizing criminal use virtual currency very closely

• If considering a virtual currency business as customer, thoroughly understand business model, compliance program

Key Lessons

• January 7 – largest Ponzi scheme of all time leads to largest BSA penalty

• Southern District of NY, FinCEN, Office of the Comptroller of the Currency levy more than $2 billion in combined penalties on JPMorgan Chase

• Bank entered Deferred Prosecution Agreement, which cited systemic AML/BSA failures that allowed Madoff Ponzi scheme to continue unchecked

Madoff and JPMorgan

• JPMorgan or banks it later acquired held primary account for Madoff’s securities brokerage for more than 20 years

• No SARs filed in that time, despite high volume of funds transfers, numerous doubts by staff members• Chief Risk Officer of JPMC’s investment bank wrote 2007 emails

questioning Madoff’s reputation• Two alerts on accounts were closed after almost recorded

investigation other than visit to Madoff’s brokerage website• UK affiliate filed SAR on Madoff Securities in 2008, calling his

performance “too good to be true,” but did not share with US

Madoff and JPMorgan

• Bank issued investment products tied to Madoff’s hedge funds through “Equity Exotics” desk

• JPMC redeemed $300 million of its own invested with Madoff in 2008, ahead of Ponzi scheme’s collapse

• From 1986 to arrest in December 2008, an estimated $150 billion flowed through Madoff accounts at JPMC

Madoff and JPMorgan

• Need policies and mechanisms for reporting from other lines of business to compliance departments• Cross-border reporting of SAR filings• Clear escalation procedures

• Compliance should have complete understanding of customer’s products, services, relationship with business lines and affiliates

• Regulatory expectations have risen – compliance programs should be able to detect, prevent range of financial crimes

• Relationship managers should be trained, sensitized to fraud schemes

Key Lessons

• Brown Brothers Harriman (BBH) is large US investment bank and securities brokerage

• Financial Industry Regulatory Authority (FINRA) is private corporation that acts as independent regulator for US securities firms

• On February 5, FINRA imposed record $8 million penalty on BBH for AML program failings

• BBH’s former Global AML Officer fined $25,000, suspended for six months

BBH and FINRA

• Misconduct centered on transactions involving six billion shares of penny stocks from 2009 – 2013

• BBH executed penny stock trades for banks in “secrecy havens such as Switzerland, Jersey and Guernsey” without knowing their “underlying clients”

• 2011 BBH email states “[brokerage] service expanded once Swiss banks realized they could offer clients anonymous access to US securities markets”

BBH and FINRA

• BBH failed to conduct due diligence on at least six correspondent account holders

• BBH AML compliance department relied on manual reporting and escalation by brokerage until 2010, despite 1,5000 trades a day

• Implemented automated system in December 2010, but did not provide training, policies and procedures for its use

• AML analysts at BBH discussed increasing volumes of penny stock trades, inadequate monitoring in internal emails

BBH and FINRA

• FINRA enforcement order focuses on need for training – can’t simply implement new monitoring systems, policies; have to follow up with training and support

• Correspondent accounts remain key risk, and require extensive due diligence and ongoing review

• FINRA announced its renewed focus on AML compliance last year – apparently they’re serious

Key Lessons

• As regulators seek to hold individuals accountable, financial crime compliance officers are in crosshairs• Other self-regulatory agencies in US have fined, suspended AML

compliance officers • UK FSA (now Financial Conduct Authority) has fined, suspended

compliance officers in past year• Ben Lawsky - "If we are resolving cases without individuals held

accountable we're not really deterring much“• In US, “Holding Individuals Accountable and Deterring Money

Laundering Act” imposes civil penalties on institution’s partners, directors and officers, increases prison term to 20 years

Key Lessons

• Summer 2013 - In wake of Libor penalties, regulators in five countries, 16 of world’s largest banks realize traders may have manipulated key benchmark in global currency markets

• Fall 2013 – Regulators in Switzerland, US, UK, Hong Kong announce investigations into “Forex” manipulation – 15 regulatory and enforcement agencies currently involved

Foreign Exchange Rate Rigging Probes

• Media reports, public disclosures say investigations are focused on trader’s efforts to manipulate currency rates before “fix” is taken each day

• Would allow traders to profit off client’s trades – trillions in currency deals are executed each day based on “fix”

• Traders also may have colluded between banks to share information on client trades, drive currency prices

• Currency exchange is world’s largest financial market - $5.3 trillion in daily trades, with ripple effects on huge range of securities, financial instruments globally

Foreign Exchange Rate Rigging Probes

• To date, at least seven major banks – Merrill Lynch, BNP Paribas, Deutsche, UBS, Barclays, RBS, Citigroup – have suspended, placed on leave or fired Forex traders or managers

• Banks have reportedly spent millions already on internal reviews – enormous amount of transactional data, instant messages, chats to be compiled and analyzed

• UK’s central bank, the Bank of England, also suspended employee after its own Forex probe

• UK Parliament Committee held hearing March 11 after documents suggested Bank of England had Forex rigging concerns as early as 2006

Foreign Exchange Rate Rigging Probes

• Critical to have information barriers, both internal and external

• Trading activity of major banks will be under intensive scrutiny – what about benchmark rates in commodities, other securities?

• Regulators trying to better coordinate multi-jurisdictional investigations

• Regulators, particularly in UK, increasingly leaning on banks to conduct their own reviews

Key Lessons

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JPMorgan Chase’s Regulatory Tangle

• Becki, I’ll let you take the lead on this section. Some thoughts I had:– JPMorgan case shows real expense of compliance failings

is not penalties but remediation– Importance of immediate and ongoing cooperation with

regulators – JPMorgan was repeatedly faulted for inconsistent cooperation and foot-dragging

– New reporting structure – Chief compliance officer now reports directly to COO, but is this a good idea?

– Admission of guilt by JPMorgan – indicates SEC’s more aggressive enforcement tactics, may open bank to private suits

Questions

45

JPMorgan Chase’s Regulatory Tangle

• Becki, I’ll let you take the lead on this section. Some thoughts I had:– JPMorgan case shows real expense of compliance failings

is not penalties but remediation– Importance of immediate and ongoing cooperation with

regulators – JPMorgan was repeatedly faulted for inconsistent cooperation and foot-dragging

– New reporting structure – Chief compliance officer now reports directly to COO, but is this a good idea?

– Admission of guilt by JPMorgan – indicates SEC’s more aggressive enforcement tactics, may open bank to private suits

Thank you for Attending