PRIVATE SECTOR RESPONSE TO TRANSNATIONAL CRIME

Stephen J. Shine Prudential Financial

Anti-Money Laundering Issues in the Financial Services Industry

Definition – Money Laundering

Any movement of Funds intended to make the proceeds of specified illegal activity indistinguishable from the proceeds of legitimate activity.

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Three Step Process

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Placement - $ into System

Layering – Attempts give $ air of Legitimacy – Cashier Checks, Money Orders, Fed. Wires

Integration Bad Money = Good Money

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The Law

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Three Regulatory Schemes Bank Secrecy Act (BSA) as amended,

31 USC 5311-5330 Money Laundering Control Act (MLCA)

18USC 1956, 1957 OFAC Regulations

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Bank Secrecy Act (BSA) Civil &

Criminal Penalties

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Gather Information Keep Records Monitor Activity Make Reports

-CTR – 4789

-SAR – Suspicious Activity Report

Reporting Requirement for all Financial Institutions

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Key Provisions

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Mandatory establishment of an anti-money laundering Compliance program

Mandatory Suspicious Activity Report (“SAR”) filings

Verification of identity (Banks, Broker-Dealers)

Shell Bank prohibition Special due diligence for foreign

correspondent accounts and “private banking” (High Net Worth) clients

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Mandatory Anti-Money Laundering Compliance Program

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Internal policies, procedures and controls.

Designation of a compliance officer.

Ongoing employee training.

Independent audit to test the program.

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“Traditional” Money Laundering

Pre 9/11 Narcotics Trafficking Hundreds of Billions $ Undermine rule of Law Corrupt Financial Systems Undermine Entire Governments Post 9/11

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Terrorist Financing

Al Qaeda funded the hijackers in the United States by three primary and unexceptional means: (1) wire transfers from overseas to the United States, (2) the physical transport of cash or traveler’s checks into the United States, and (3) the accessing of funds held in foreign financial institutions by debit or credit cards. Once here, all of the hijackers used the U.S. banking system to store their funds and facilitate their transactions.

- 9/11 Commission, Terrorist Financing Staff Monograph, August 21, 2004

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Terrorist Financing

$300 Suicide Bomber, Karachi

$1500 Jakarta Marriott (12 dead)

$4200 UPS Package Bomb

$4320 Oklahoma City Bombing (168 dead)

$10,000 U.S. Cole (17 dead)

$14,000 London Bombing (42 dead)

$18,000 World Trade Center 1 (6 dead)

$22,000 Khobar Towers (19 dead)

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Money Laundering v. Terrorist Financing

Money Laundering Large amounts Illegitimate / Illegal source Goal = integration to legitimate commerce

Terrorist Financing Relatively small amounts Often legitimate source End use – bad purpose

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Money Laundering Model Financial institutions know more than government Financial institutions in best position to determine

suspicious activity, act as gate keeper Terrorist Financing

Government knows more than financial institutions Less about stopping money and more about

intelligence gathering Bits and pieces = full picture Detection requires cooperation/collaboration

between government and financial institutions

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Industry Response to Terrorist Financing

Financial Institutions want to help Systems designed to detect classic

money laundering Terrorist financing hard to find Small $ amounts fly under radar NGO’s mask true purpose Solution – Joint effort of Law

Enforcement and Financial Services Industry

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AML Programs

Sections 352 and 356 of the USA PATRIOT Act requires that AML Programs achieve three core goals:

Achieve compliance with the BSA and implementing regulations;

Detect and cause the reporting of suspicious transactions

Prevent proceeds of crime or potential terrorist funds from being laundered through the company

Financial Service Company’s AML Programs strive to achieve all three of these goals in a sustainable balance while seeking to continuously improve both effectiveness and efficiency.

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Organization

Prudential’s Anti-Money Laundering Unit (the AMLU) is responsible for ensuring that the company detects and prevents money laundering, terrorist financing or OFAC violations.

Currently deployed in two teams Team One – In-depth cases and escalated

work Team Two – First-line client screening

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AMLU Focus

Identify potential suspicious activity, sanctions related activity, or risks related to the same.

Work with the business to mitigate risks related to money laundering or sanctions.

Report suspicious activity and confirmed OFAC issues.

Act as a center of subject matter expertise for internal business partners.

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Monitoring Team

Generally responsible for monitoring transactions and known high-risk customers.

Common methodology is to review unusual events that may come to the AMLU via: Reports Referrals from outside the unit Self-generated items that come up during the

course of an existing review OFAC screening

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Due Diligence Team

Generally responsible for sanctions and risk due diligence associated with the on-boarding of new clients and the review of existing clients.

Common Methodology is to review clients that come to our attention via: OFAC screening Politically Exposed Person screening Customer Identification Program failures Enhanced Due Diligence Requests

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AMLU Activities - Regulatory

AML Risk Assessment AML audit and exam oversight and support AML Training – content creation and delivery

upon request Oversight of AML processes that take place

in business units Policy and Procedure drafting and

consultation AML process consultation and development Regulatory reporting – SARs, OFAC reports,

CTRs, IRS Form 8300s

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Not Just Narcotics and Terrorism

Money Laundering also about: Elder Abuse Stock Fraud Insider Trading Tax Fraud Bank Fraud Numerous other SUAs

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Red Flags for Money Laundering - Generally

Customer exhibits unusual concern about the company’s compliance with Government reporting requirements or its AML policies, particularly with respect to his or her identity, type of business and assets, or is reluctant or refuses to reveal information concerning business activities, or furnishes unusual or suspect identification or business documents

Customer wishes to engage in transactions that lack business sense or apparent investment purpose, or are inconsistent with stated business or investment objectives

Customer refuses to identify or fails to indicate a legitimate source of funds

Customer provides false, misleading or substantially incorrect information concerning source for funds

Customer exhibits a lack of concern regarding investment risks, commissions, surrender charges, sales charges, or other transaction costs

Customer has difficulty describing the nature of his or her business or lacks general knowledge of his or her industry; in the case of a business account

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“Red Flags”, Insurance

“Red Flags” in the Insurance IndustryFree looksSingle premium life policiesEarly surrendersLoansCash and cash-like instruments to purchase productsRapid fund flows with no clear purpose

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Recent AML Trend

We are seeing an increase in theft or forgery by family members or caregivers against policyholders.

These events result not only in an investigation, but also the filing of a suspicious activity report.

We are currently seeing these issues as a result of, internal monitoring, subpoenas and customer complaints.

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“She will never miss the money” Prudential received a law enforcement inquiry about a client

and began a review of transactions in her life insurance policy.

It appeared that several small loans had been taken against the policy, and that in each case they were requested via telephone.

Upon further review, the elder client’s nephew would have his aunt authenticate herself on the telephone under the guise that he was keeping an eye on her finances for her, and would then request loans from the policy. This happened at least three times over a two-year time period.

The negotiated loan checks appeared to contain signatures that looked nothing like the client’s signature.

A criminal investigation is in progress

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“We thought he was dead”

Prudential received a law enforcement inquiry related to the surrender of a policy that had been paid up since 1989.

Someone purporting to be the client sent in a surrender form with a request to have the check sent to a new address of record.

Upon further review, a person purporting to be the client had called in requested a surrender form and claimed that he had recently moved.

It now appears that the client’s aunt claims that the family thought that the client was dead because they had not heard from him in 15 years. The aunt and the client’s cousin appear to have worked together to impersonate the client in order to get the cash value of the policy.

Prudential worked with the client to reinstate the policy and the client has sworn out a complaint with law enforcement against his aunt and cousin.

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“Don’t mess with Exes”

A former client contacted Prudential because she believed that her ex-husband was trying to commit tax evasion and money laundering, and used her name to do so.

Upon review of various internal records, it appears that the client’s husband, a doctor, took a number of loans against his policies, stripped the cash value of the policies down to the point that the policies would lapse, and then changed the ownership of the policies through forgery to the following: His ex-wife His girlfriend/office manager at his medical practice A third woman of unknown relation

What the client did not know, is that the tax consequences will go to the owner at the time of the loan, not to the owner at the time the policies lapsed.

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Securities Industry Typologies- SAR Reporting-

Type of Suspicious Activity

Bribery/Gratuity 44

Check Fraud 1,197

Computer Intrusion 967

Credit/Debit Card Fraud 800

Embezzlement/Theft 851

Forgery 492

Futures Fraud 27

Identity Theft 1,947

Insider Trading 499

Mail Fraud 523

Market Manipulation 1,460

Money Laundering/Structuring 4,037

Other 5,288

Prearranged or Other Non-Competitive Trading 143

Securities Fraud 1,856

Significant Wire or Other Transactions Without Economic Purpose

1,813

Suspicious Documents or ID Presented 802

Terrorist Financing 32

Unknown/Blank 122

Wash or Other Fictitious Trading 181

Wire Fraud 1,831

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Red Flags – Securities Industry

Changing share\account ownership in order to transfer wealth across borders;

Redeeming a long-term investment within a short period;

Opening multiple accounts or nominee accounts; Effecting transactions involving nominees or third

parties; Engaging in market manipulation, e.g. “pump &

dump” schemes; and Numerous small incoming deposits from different

sources (boiler room operations)

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Outreach to Law Enforcement29

Post 9/11 meeting with Law enforcement and securities industry and Prudential Securities’ office in Lower Manhattan. Result was first 314(a) List.

Ongoing dialogue with Regulators and Law Enforcement at Federal and State Levels.

Participation in cross industry groups such as the Bank Secrecy Act Advisory Group (BSAAG) and Financial Action Task Force (FATF) working groups.

Ongoing training for Investigators and Prosecutors.

Compliance = Good Business

Good Corporate Citizens Do the right thing because it is the right

thing to do Financial Services Industry & Law

Enforcement = Solution

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