AntiMoney Laundering Compliance Overview

1
Anti-Money Laundering Compliance Overview

• Michael L. Burton
• James G. Tillen
• Miller Chevalier Chartered
• May 18, 2005

2
WHAT IS MONEY LAUNDERING?

• Process by which one conceals the existence,
  illegal source, or illegal application of
  incomes, and disguises that income to make it
  appear legitimate
• Money laundering represents between 2 and 5
  percent of global gross domestic product (800
  billion to 2 trillion annually)

3
THE U.S. ANTI-MONEY LAUNDERING FRAMEWORK

• Money Laundering Control Act
• Bank Secrecy Act
• USA PATRIOT Act

4
MONEY LAUNDERINGCONTROL ACT (MLCA)

• Transfers of money derived from specified
  (predicate) offenses
• Transactions with proceeds of specified offenses
• Similar to mail fraud and wire fraud

5
PREDICATE OFFENSES

• Literally hundreds of predicate offenses
• Traditional organized crime offenses murder,
  arson, robbery, extortion, drug trafficking,
  RICO, etc.
• White collar crimes fraud and other financial
  crimes
• Violations of international regulatory regimes
  FCPA, export control violations, customs
  violations, foreign law (e.g., currency controls)
  (note PATRIOT Act additions)

6
MLCA PENALTIES

• Criminal penalties imprisonment up to 20 years
  and/or fines totaling the greater of 500,000 or
  twice the value of the property involved in the
  transaction
• Civil penalties greater of 10,000 or the value
  of the property involved in the transaction

7
BANK SECRECY ACT (BSA)

• Reporting and record-keeping obligations for
  financial institutions
• Pre-PATRIOT Act generally targeted only
  activities of banks
• PATRIOT Act expanded definition of financial
  institutions
• Suspicious transaction reporting requirements for
  certain financial institutions
• Cash reporting (gt10K) for non-financial trades
  and business

8
BSA PENALTIES

• Criminal penalties up to 10 years imprisonment
  and/or 1 million fines
• Civil penalties the greater of amount involved
  in transaction (not to exceed 100,000) or
  25,000
• 500 for negligent violations (50,000 for
  pattern of negligence)
• up to 1 million in cases of international
  counter money laundering violations

9
BSA FINANCIAL INSTITUTIONS

• Financial institutions (including PATRIOT Act
  additions)
• an insured bank (as defined in the Federal
  Deposit Insurance Act)
• a commercial bank or trust company
• a private banker
• an agency or branch of a foreign bank in the U.S.
• any credit union
• a thrift institution
• an SEC-registered broker/dealer
• a securities or commodities broker/dealer
  (including introducing brokers)

10
BSA FINANCIAL INSTITUTIONS(contd)

• an investment banker or investment company
• a currency exchange
• an issuer, redeemer, or cashier of travelers
  checks, checks, money orders, or similar
  instruments
• an operator of a credit card system
• an insurance company
• a pawnbroker
• a loan or finance company
• a travel agency
• a licensed money-sender or others that engage in
  the business of transferring money

11
BSA FINANCIAL INSTITUTIONS (contd)

• a telegraph company
• a business engaged in vehicle sales
• a real estate broker
• a casino
• the U.S. Postal Service and other U.S. government
  agencies carrying out similar functions
• any futures commission merchant, commodity
  trading advisor, or commodity pool operator
  registered, or required to register under the
  Commodity Exchange Act (added by the PATRIOT Act)

12
BSA FINANCIAL INSTITUTIONS (contd)

• a dealer in precious metals, stones, or jewels
• others designated by regulation

13
RECENT U.S. ANTI-MONEY LAUNDERING DEVELOPMENTS
USA PATRIOT ACT

• Passed on October 26, 2001
• Expanded BSA requirements to many more financial
  institutions
• Expanded predicate offenses to include violations
  of international regulatory regimes

14
PATRIOT ACT AMENDMENTSTO BSA

• Prohibits and regulates certain types of accounts
  relationships with financial institutions
• Expanded suspicious activity reporting
  requirements
• Expanded requirements for anti-money laundering
  compliance programs

15
PATRIOT ACT AMENDMENTSTO BSA (contd)

• Anti-money laundering (AML) compliance program
  4 required elements
• Internal policies, procedures, and controls
• Designated compliance officer
• Ongoing training program for employees
• Independent audit function to test the program

16
PROPOSED AML COMPLIANCE PROGRAM FOR DEALERS

• On February 21, 2003, Treasury issued a notice of
  proposed rulemaking, which would require dealers
  in precious metals, stones, or jewels to
  implement an AML compliance program
• Sought public comment on rules
• No action by Treasury for past two years
• In March 2005, FinCEN issued its 2004 Annual
  Report noted that it planned to finalize rules
  this year

17
PROPOSED AML COMPLIANCE PROGRAM FOR DEALERS
(contd)

• Applies to dealers person engaged in business
  of purchasing and selling jewels, precious
  metals, or precious stones who, during the prior
  year
• Purchased more than 50,000 jewels, metals, or
  stones or
• Received more than 50,000 in gross proceeds from
  transactions in jewels, metals, or stones

18
PROPOSED AML COMPLIANCE PROGRAM FOR DEALERS
(contd)

• Exceptions to definition of dealer
• Retailer, i.e., a person engaged in sales to the
  public other than a retailer who, during the
  prior year, purchases more than 50,000 in
  jewels, metals or stones from non dealers
• Persons who engage in transactions for purposes
  of fabricating finished goods that contain minor
  amounts of jewels, metals, or stones

19
PROPOSED AML COMPLIANCE PROGRAM FOR DEALERS
(contd)

• Jewel includes organic substances that have
  market-recognized gem level of quality, beauty,
  or rarity
• Precious metal
• Gold, iridium, osmium, palladium, platinum,
  rhodium, ruthenium or silver, having a level of
  purity over 500 or more parts per thousand and
• An alloy containing 500 or more parts per
  thousand, in the aggregate, of two or more metals
  listed above
• Precious stone includes inorganic substances
  that have a market-recognized gem level of
  quality, beauty, or rarity

20
PROPOSED AML COMPLIANCE PROGRAM FOR DEALERS
(contd)

• Program requirements
• Approved by Senior Management and in writing
• Incorporate policies that address the entitys
  risk
• Incorporate policies to identify transactions
  that may involve use of the dealer to facilitate
  money laundering an terrorist financing
• Reflect BSA requirements (noted that only
  reporting of cash transactions currently apply to
  dealers)

21
KEYS TO MONEYLAUNDERING PREVENTION

• Know-your-customer (KYC) principles
• Customer and counterpart identification
• Customer and counterpart due diligence
• Screening against government lists (i.e., OFAC)
• Transactional alertness
• Screen transactions for red flags
• Payment restrictions
• Limit or prohibit cash transactions

22
KEYS TO MONEY LAUNDERING PREVENTION RED FLAGS

• Purchases or sales that are unusual for customer
  or supplier
• Unusual payment methods, such as large cash
  transactions or payments from third parties
• Attempts by customer or supplier to maintain high
  degree of secrecy
• Purchases or sales that are not in conformity
  with standard industry practice

23
RED FLAGS (contd)

• Counterpart is reluctant to provide adequate
  identification information when making a purchase
• Counterpart provides inaccurate identification
  information
• Transactions that appear to be structured to
  evade reporting requirements (e.g., a series of
  transactions under 10,000)
• Counterpart presence in NCCT or country that is
  the subject of advisories issued by FinCEN

24
COMPLIANCE BASICS

• Make the commitment
• Identify the risks
• Develop compliance systems to manage risks
• Implement compliance processes
• Designate compliance gatekeepers
• Train personnel
• Monitor compliance people, paper, process

25
CONTACT INFORMATION

• Michael L. Burton
• James G. Tillen
• Miller Chevalier Chartered
• 202-626-5800 (main)
• mburton_at_milchev.com
• jtillen_at_milchev.com