Identifying High Risk Customers Identifying High Risk Customers and Managing Their AML and Managing Their AML

Vulnerabilities Vulnerabilities

The Anti-Money The Anti-Money Laundering Laundering AssociationAssociation

Winter Park, FloridaWinter Park, FloridaJanuary 21, 2009 • 8:30 a.m. to January 21, 2009 • 8:30 a.m. to 10:30 a.m.10:30 a.m.

Peter G. Djinis • AML Compliance • Peter G. Djinis • AML Compliance • 4370 S. Tamiami Trail • Suite 320 4370 S. Tamiami Trail • Suite 320 • Sarasota, FL 34231 • 941-926-• Sarasota, FL 34231 • 941-926-2915 • 2915 • djinis@djinislaw.com

AgendaAgenda

Value of risk assessmentValue of risk assessment Need for front-end customer Need for front-end customer

evaluationevaluation How to identify high risk customersHow to identify high risk customers Measures to mitigate specific high Measures to mitigate specific high

risk customersrisk customers High risk transactionsHigh risk transactions External factors that increase riskExternal factors that increase risk What to do with customers with What to do with customers with

recurring risk activityrecurring risk activity

Identifying New AML RisksIdentifying New AML Risks

Risk Assessment is core standardRisk Assessment is core standard Also, regularly review:Also, regularly review:

New products/servicesNew products/services SARs filedSARs filed Changes in geographic vulnerabilitiesChanges in geographic vulnerabilities World eventsWorld events Regulatory enforcement actionsRegulatory enforcement actions

One ApproachOne Approach

Establish a risk rating for each Establish a risk rating for each customercustomer

Assign weights by Assign weights by combination of categoriescombination of categories NAICS code (for businesses)NAICS code (for businesses) Citizenship (for individuals)Citizenship (for individuals) Zip codeZip code Financial products usedFinancial products used Account opening questionnaireAccount opening questionnaire

Specific Customers: Specific Customers: possible measurespossible measures

Lottery Customers /ATM Lottery Customers /ATM Review Review 6 months of activity6 months of activity

LotteriesLotteries ACH debits to state lotteryACH debits to state lottery Are these commensurate with cash Are these commensurate with cash

deposits?deposits? ATMsATMs

ACH credits from known ATM ACH credits from known ATM payment processorspayment processors

E.g., RBS, Coredata, First Data, E.g., RBS, Coredata, First Data, Debits from account in form of cash Debits from account in form of cash

withdrawals or cashed checkswithdrawals or cashed checks

Specific Customers: Specific Customers: possible measurespossible measures

ATM/Lottery CustomersATM/Lottery Customers Confirm the account is business, Confirm the account is business,

not personalnot personal For ATMs, confirm with store that For ATMs, confirm with store that

cash withdrawals are in ATM cash withdrawals are in ATM standard ATM amounts, i.e., standard ATM amounts, i.e., $10s/20s$10s/20s

Document these stepsDocument these steps Repeat on annualized basis and Repeat on annualized basis and

compare with previous resultscompare with previous results

Specific Customers: Specific Customers: possible measurespossible measures

Embassy AccountsEmbassy Accounts Require approval by senior Require approval by senior

officerofficer Follow procedures used to Follow procedures used to

identify/validate PEP customersidentify/validate PEP customers Monitor at least quarterlyMonitor at least quarterly Investigate all suspicious and/or Investigate all suspicious and/or

unusual activityunusual activity Document these stepsDocument these steps

Specific Customers: Specific Customers: possible measurespossible measures

Non-Resident Alien Non-Resident Alien Process through back office, not branchProcess through back office, not branch Customer to provide Customer to provide

o Valid passportValid passporto Signed W-8 formSigned W-8 form

Assign a special code to identify accountAssign a special code to identify account Regularly determine if NRA accounts Regularly determine if NRA accounts

opened without proper documentationopened without proper documentation Non-U.S. AddressesNon-U.S. Addresses

Establish program to identify all such Establish program to identify all such accountsaccounts

Assign increased weight; i.e., make sure Assign increased weight; i.e., make sure your AML policies contain specific due your AML policies contain specific due diligence provisionsdiligence provisions

Specific Customers: Specific Customers: possible measurespossible measures

Charitable OrganizationsCharitable Organizations Identify by NAICS code (NGO)Identify by NAICS code (NGO) Use commercial database to match Use commercial database to match

customer with known charities customer with known charities (e.g., Guidestar) & confirm(e.g., Guidestar) & confirm Tax ID numbersTax ID numbers Nonprofit statusNonprofit status IRS 990 formsIRS 990 forms OfficersOfficers IncomeIncome Other key factorsOther key factors

Specific Customers: Specific Customers: possible measurespossible measures

Charitable OrganizationsCharitable Organizations Form 990 (but not required for Form 990 (but not required for

contributions under $25,000 and certain contributions under $25,000 and certain churches)churches)

IRS Publication 78 – Cumulative list of IRS Publication 78 – Cumulative list of organizationsorganizations

This may help identify improper NAICS This may help identify improper NAICS coding (e.g., homeowners associations coding (e.g., homeowners associations & sports clubs& sports clubs

Retail customersRetail customers

Work with business units to Work with business units to understand nature of account and understand nature of account and anticipated activityanticipated activity

Ask the customer!Ask the customer! Obtain evidence of businessObtain evidence of business Age of business/size and locationsAge of business/size and locations Anticipated volumeAnticipated volume Anticipated financial services neededAnticipated financial services needed If high cash activity, inquire into source of If high cash activity, inquire into source of

cash if other than retailcash if other than retail Compare to peer customersCompare to peer customers

Establish manual or automated process to Establish manual or automated process to identify and investigate inconsistenciesidentify and investigate inconsistencies

Specific Customers: Specific Customers: possible measurespossible measures

Trade Finance (International)Trade Finance (International) Risk weight each financial service Risk weight each financial service

soughtsought E.g., import or export letters of credit; E.g., import or export letters of credit;

import or export documentary collectionsimport or export documentary collections Four potential categories:Four potential categories:

ProductProduct CountryCountry Knowledge of customerKnowledge of customer Amount of transactionsAmount of transactions

Specific Customers: Specific Customers: possible measurespossible measures

PEP/Embassy CustomersPEP/Embassy Customers PEPPEP (senior foreign political (senior foreign political

figures/family/associates)figures/family/associates) PEP identified at account openingPEP identified at account opening AML compliance officer notifiedAML compliance officer notified Private bank to determine customer’s Private bank to determine customer’s

financial services and estimated activityfinancial services and estimated activity This information is reviewed quarterlyThis information is reviewed quarterly Each account is reviewed for SAR activityEach account is reviewed for SAR activity

Specific Customers: Specific Customers: possible measurespossible measures

Embassy AccountsEmbassy Accounts Require approval by senior Require approval by senior

officerofficer Follow procedures used to Follow procedures used to

identify/validate PEP customersidentify/validate PEP customers Monitor at least quarterlyMonitor at least quarterly Investigate all suspicious and/or Investigate all suspicious and/or

unusual activityunusual activity Document these stepsDocument these steps

Riskier TransactionsRiskier Transactions

Wire TransfersWire Transfers Limit to customers of bankLimit to customers of bank Limit or prohibit wires paid in cashLimit or prohibit wires paid in cash Value of automated systemsValue of automated systems::

Identify money in/money out transfersIdentify money in/money out transfers Compare current and historical activityCompare current and historical activity Look for structured wires (e.g., between Look for structured wires (e.g., between

$ 7500 and $10,000)$ 7500 and $10,000) Examine high volumes/high amounts Examine high volumes/high amounts Review transfers to and from high risk Review transfers to and from high risk

geographies at predetermined amountsgeographies at predetermined amounts

Riskier TransactionsRiskier Transactions Monetary InstrumentsMonetary Instruments

Aggregate cash purchases at some Aggregate cash purchases at some amount below $3,000amount below $3,000

Look for redemptions in similar amountsLook for redemptions in similar amounts Chief risk is structuringChief risk is structuring

Stored value or gift cardsStored value or gift cards:: Sell only to customersSell only to customers Do not exchange for cashDo not exchange for cash Consider prohibiting reloading of cardsConsider prohibiting reloading of cards Require additional approval to exceed Require additional approval to exceed

certain values (e.g., $500)certain values (e.g., $500) Restrict number of cards a customer Restrict number of cards a customer

may purchasemay purchase

High Risk Business TypeHigh Risk Business Type

Money Service Businesses (MSBs)Money Service Businesses (MSBs) Banks are not expected to be the de Banks are not expected to be the de

facto regulators of MSBsfacto regulators of MSBs Identifying MSBs at your bankIdentifying MSBs at your bank FinCEN guidanceFinCEN guidance TransparencyTransparency

Transactions will go underground if MSBs Transactions will go underground if MSBs are not bankedare not banked

MSBs, like other MSBs, like other “high risk “high risk businesses,” businesses,” do not always present do not always present the highest riskthe highest risk

MSB Due DiligenceMSB Due Diligence

Visit the MSBVisit the MSB Request/evaluate the independent Request/evaluate the independent

reviewreview ReviewReview

AML policies and proceduresAML policies and procedures Prior regulatory enforcement actions Prior regulatory enforcement actions

if anyif any License and registrationLicense and registration AML Training program and attendance AML Training program and attendance

loglog

MSB Due DiligenceMSB Due Diligence ReviewReview

Agent list, agent review process Agent list, agent review process and agent filesand agent files

Financial information, including tax Financial information, including tax returnsreturns

Account statements from other Account statements from other financial institutionsfinancial institutions

Average cash deposits and ACH Average cash deposits and ACH activityactivity

Compliance with BSA reporting and Compliance with BSA reporting and recording keeping requirementsrecording keeping requirements

MSB Due DiligenceMSB Due Diligence Meet with the President and/or CEO, compliance Meet with the President and/or CEO, compliance

officer, CFO, IT officer, AML investigation supervisorofficer, CFO, IT officer, AML investigation supervisor Determine the type MSB services – types of products Determine the type MSB services – types of products

offeredoffered Request any prior regulatory enforcement actionsRequest any prior regulatory enforcement actions Review BSA/AML softwareReview BSA/AML software

How are transactions aggregated?How are transactions aggregated? Does the MSB have an OFAC screening tool?Does the MSB have an OFAC screening tool? Number of SARs filed (MSB can not disclose the Number of SARs filed (MSB can not disclose the

SARs to their bank)SARs to their bank)

Other High Risk Business Other High Risk Business TypesTypes

Not all businesses in any high risk business Not all businesses in any high risk business type are high risktype are high risk

The business may only use a low risk The business may only use a low risk productproduct

May identify High Risk Business types with May identify High Risk Business types with NAICs/SIC codesNAICs/SIC codes

Determine methods of identifying Determine methods of identifying historical potentially high risk businesseshistorical potentially high risk businesses

Conduct due diligenceConduct due diligence Benefits of an effective due diligence Benefits of an effective due diligence

programprogram

Private BankingPrivate Banking

Implement specific AML proceduresImplement specific AML procedures Work closely with AML unit and related Work closely with AML unit and related

business unitsbusiness units Assign AML coordinatorAssign AML coordinator Develop targeted training program to Develop targeted training program to

augment corporate trainingaugment corporate training Off-site training on periodic basisOff-site training on periodic basis Staff meetings to stress AML dutiesStaff meetings to stress AML duties Track training attendance/proficiencyTrack training attendance/proficiency

Private BankingPrivate Banking

Install monitoring system to oversee new Install monitoring system to oversee new accounts and identify high-risk customersaccounts and identify high-risk customers

Enlist help of compliance to review, Enlist help of compliance to review, improve, and ensure consistency in AML improve, and ensure consistency in AML proceduresprocedures

Distribute/document internal procedures Distribute/document internal procedures as updatedas updated

For new customers:For new customers: Two types of IDTwo types of ID Pre-established customer profilesPre-established customer profiles Complete background checkComplete background check PRIME/OFAC or related checkPRIME/OFAC or related check

Customers with recurring SARsCustomers with recurring SARs

Should you close the account?Should you close the account?

Filing a SAR might not be enoughFiling a SAR might not be enough

A decision should be reached and A decision should be reached and documented whether to continue doing documented whether to continue doing business with a customer on which a business with a customer on which a suspicious activity report or multiple suspicious activity report or multiple reports have been filed, or when and reports have been filed, or when and how to terminate the relationship.how to terminate the relationship.

Account TerminationAccount Termination

Depending on the nature of the Depending on the nature of the suspicious activity, suspicious activity, • You can continue the client relationship You can continue the client relationship

• But monitor activity closely.But monitor activity closely. Systems to track and regularly review Systems to track and regularly review

any other unusual or suspicious activity.any other unusual or suspicious activity. Policies and procedures before the Policies and procedures before the

customer is notified of termination customer is notified of termination • If you know the case is under investigation – If you know the case is under investigation –

work closely with law enforcementwork closely with law enforcement

Account Termination PoliciesAccount Termination Policies

Policies and ProceduresPolicies and Procedures

The prompt referral to compliance officer or The prompt referral to compliance officer or other appropriate legal and compliance other appropriate legal and compliance personnel.personnel.

The communication of the decision to terminate The communication of the decision to terminate and the anticipated date for notifying the and the anticipated date for notifying the customer of that decision to appropriate customer of that decision to appropriate government authorities.government authorities.

Such information may be communicated in a SAR Such information may be communicated in a SAR to be filed or to augment SARs filed previously. to be filed or to augment SARs filed previously.

Certain circumstances may warrant contacting Certain circumstances may warrant contacting U.S. Attorney’s Office or other appropriate U.S. Attorney’s Office or other appropriate government authority. government authority.

Account TerminationAccount Termination

Written Requests from Law Written Requests from Law EnforcementEnforcement

Seek written request from government to Seek written request from government to keep account openkeep account open

Keep the request on fileKeep the request on file Make sure the request is from a senior officerMake sure the request is from a senior officer

• Supervisory agentSupervisory agent• Assistant U.S. AttorneyAssistant U.S. Attorney• Official with Dept. of JusticeOfficial with Dept. of Justice• Supervisor of state or local law enforcement agencySupervisor of state or local law enforcement agency• Attorney with state or local prosecutor’s officeAttorney with state or local prosecutor’s office

Requests to keep account openRequests to keep account open

Written requests should:Written requests should: • Confirm that law enforcement has Confirm that law enforcement has

requested that an account remain requested that an account remain open and state the purpose for such open and state the purpose for such request.request.

• Indicate the duration the account Indicate the duration the account should remain open, should remain open,

• Provide for written request to keep Provide for written request to keep account open after that period (e.g., account open after that period (e.g., six months).six months).

Coordination with law Coordination with law enforcementenforcement

Follow up is KeyFollow up is Key

Follow-up with appropriate law Follow-up with appropriate law enforcement agency on an ongoing enforcement agency on an ongoing basis.basis.

Document cooperation Document cooperation Continue to comply with all applicable Continue to comply with all applicable

BSA recordkeeping and reporting BSA recordkeeping and reporting requirements requirements

Continue to file SARs, if applicableContinue to file SARs, if applicable

When to Consider Retaining Outside HelpWhen to Consider Retaining Outside Help

Variety of situations: short to Variety of situations: short to long-termlong-term Independent review of your AML Independent review of your AML

policiespolicies Opinion/advice on a potentially Opinion/advice on a potentially

suspicious customer relationshipsuspicious customer relationship Cooperating with criminal Cooperating with criminal

investigatorsinvestigators Developing policies to conform to Developing policies to conform to

new regulatory requirements new regulatory requirements

When to Consider Retaining Outside HelpWhen to Consider Retaining Outside Help

Implementing significant program Implementing significant program changeschanges

Selecting external compliance tools Selecting external compliance tools (e.g., CIP or AML surveillance programs)(e.g., CIP or AML surveillance programs)

Reviewing/resolving AML issues Reviewing/resolving AML issues identified prior to examidentified prior to exam

Preparing for an AML examPreparing for an AML exam Responding to AML issues identified Responding to AML issues identified

during examduring exam Handling an AML enforcement actionHandling an AML enforcement action

When to Consider Retaining Outside When to Consider Retaining Outside HelpHelp

• Responding to congressional or Responding to congressional or similar investigationsimilar investigation

• Assistance in dealing with media or Assistance in dealing with media or public disclosures (e.g., 10-K annual public disclosures (e.g., 10-K annual report)report)

• Conducting an internal investigationConducting an internal investigation AML training for employees, officers, AML training for employees, officers,

board members, agents/vendorsboard members, agents/vendors

When to When to ConsiderConsider Retaining Outside Help Retaining Outside Help

• New financial products or servicesNew financial products or services Determining BSA implicationsDetermining BSA implications Developing and implementing new AML controlsDeveloping and implementing new AML controls Coordinating with regulators and/or law Coordinating with regulators and/or law

enforcementenforcement• Complying with specific supervisory Complying with specific supervisory

requirementsrequirements Backfiling requests (CTRs)Backfiling requests (CTRs) SAR LookbacksSAR Lookbacks Unique AML issues (Sec. 311 relationships, GTOs, Unique AML issues (Sec. 311 relationships, GTOs,

due diligence of foreign correspondent accounts) due diligence of foreign correspondent accounts)

Managing the Outside Managing the Outside RelationshipRelationship

Who decides within the bank?Who decides within the bank? Whether to bring in outside assistanceWhether to bring in outside assistance Do you have sufficient expertise in house?Do you have sufficient expertise in house? Whom to select? Whom to select? Controlling fees Controlling fees Standards for terminationStandards for termination

• Identify your project and the desired Identify your project and the desired role of the outsiderrole of the outsider

• Reviewing vs. preparing materials?Reviewing vs. preparing materials?

Managing the Outside Managing the Outside RelationshipRelationship

• Preserving confidentialityPreserving confidentiality• Identifying who’s in charge of relationshipIdentifying who’s in charge of relationship

AML Compliance OfficerAML Compliance Officer Relationship between in-house and external counselRelationship between in-house and external counsel Can external counsel deal directly with the government?Can external counsel deal directly with the government?

• Assessing the ongoing value of assistanceAssessing the ongoing value of assistance• Should you impose time and/or cost limits?Should you impose time and/or cost limits?• What do you do if they are exceeded?What do you do if they are exceeded?

Reference Material for High Reference Material for High Risk AccountsRisk Accounts

1.1. The following material offers guidance for The following material offers guidance for banks that maintain foreign correspondent banks that maintain foreign correspondent accountsaccounts

2.2. Intended to help you monitor the accountsIntended to help you monitor the accounts

3.3. Guidance also suggests ways to manage Guidance also suggests ways to manage such accountssuch accounts

4.4. This material will not be covered during the This material will not be covered during the presentation except to answer questionspresentation except to answer questions

Foreign Correspondent AccountsForeign Correspondent Accounts

General Due Diligence Policies, Procedures and General Due Diligence Policies, Procedures and Controls for Foreign Correspondent Accounts Controls for Foreign Correspondent Accounts must include each of the following:must include each of the following:

Determining whether each such foreign Determining whether each such foreign correspondent account is subject to enhanced due correspondent account is subject to enhanced due diligencediligence

Assessing the money laundering risks presented Assessing the money laundering risks presented by each such foreign correspondent account.by each such foreign correspondent account.

Apply risk-based procedures and controls to each Apply risk-based procedures and controls to each such foreign correspondent account reasonably such foreign correspondent account reasonably designed to detect and report known or suspected designed to detect and report known or suspected money laundering activity, including a periodic money laundering activity, including a periodic review of the correspondent account activity review of the correspondent account activity sufficient to determine consistency with sufficient to determine consistency with information obtained about the type, purpose, and information obtained about the type, purpose, and anticipated activity of the account.anticipated activity of the account.

A Risk Based Approach to Foreign A Risk Based Approach to Foreign Correspondent AccountsCorrespondent Accounts

Policies, procedures and processes to assess the risks posed by the FI’s foreign FI customers including, as appropriate:

Nature of the foreign FI’s business and the markets it serves

The type, purpose, and anticipated activity of the foreign correspondent account

The nature and duration of the U.S. FI’s relationship with the foreign financial institution, and if relevant, with any affiliate of the foreign FI.

A Risk-Based Approach to Foreign Financial A Risk-Based Approach to Foreign Financial Institution Correspondent AccountsInstitution Correspondent Accounts

Additional Relevant Risk Factors to Consider:Additional Relevant Risk Factors to Consider:

The AML supervisory regime of the jurisdiction that issued the The AML supervisory regime of the jurisdiction that issued the charter or license to the foreign FI, and to the extent available, charter or license to the foreign FI, and to the extent available, the jurisdiction in which any company that is an owner of the the jurisdiction in which any company that is an owner of the foreign FI is incorporated or chartered.foreign FI is incorporated or chartered.

Information known or reasonably available to the covered FI Information known or reasonably available to the covered FI about the foreign FI’s AML record, including public information in about the foreign FI’s AML record, including public information in standard industry guides, periodicals, and major publications. standard industry guides, periodicals, and major publications. Should also consider information issued by the Treasury Dept. Should also consider information issued by the Treasury Dept. about specific foreign FIs.about specific foreign FIs.

The scope and depth of a review will depend on the nature of the The scope and depth of a review will depend on the nature of the information uncovered and does not require an evaluation of all of information uncovered and does not require an evaluation of all of the above factors in every case.the above factors in every case.

An Offshore Banking License

A Banking License issued by an NCCT

A Banking License issued by a foreign country that has been designated under Sec. 311 of the Patriot Act

High Risk Banks According to Sec. 312

Risk Stratification of the Customer Base

The starting point of an effective general due diligence program should be a stratification of the money laundering risk based on a review of the relevant risk factors to determine which accounts may require increased measures:

Will have an impact on the initial account opening process

Will effect on-going periodic reviews of the client, the client’s documentation and activity Will impact monitoring of transactions and/or accounts

SHELL BANKS

OFFSHORE BANKS & NCCTs/SEC. 311/NO AML REGS

MSBS & OTHER HIGH RISK

MEDIUM RISK

LOW RISK

Establishing Levels of Risk

Stratify client base at account opening or the inception of a business relationship – collect due diligence information and prioritize accounts for ongoing monitoring based on risk level.

One example might be:

Low risk – might include entities that are “trusted” by the financial institution

Medium risk – might include entities that are publicly-traded on an exchange “recognized” by the financial institution

High risk – might include entities that are privately-held, or not publicly traded on a “recognized” exchange

Risk Scoring for Correspondent Risk Scoring for Correspondent BankingBanking  

Business Risk Factors

Specifically identified by

Regulators/Law Enforcement

Money Laundering Placement Risk; such as cash intensive businesses

Other authoritative pronounce- ment

Money Laundering Layering or Integration Risks

Product Risk Factors

Specifically identified by Regulators/Law Enforcement

Favors anonymity or involves third parties

Supports high transaction volumes

Involves cross border transactions

Involves cash, monetary or bearer instruments

Supports high speed movement of funds

Foreign Correspondent BanksForeign Correspondent Banks

Enhanced Due Diligence for Certain Enhanced Due Diligence for Certain Foreign BanksForeign Banks

Conduct enhanced scrutiny of the correspondent Conduct enhanced scrutiny of the correspondent account which requires an FI to obtain and account which requires an FI to obtain and consider information relating to the foreign consider information relating to the foreign bank’s AML program.bank’s AML program.

Under appropriate circumstances, monitor Under appropriate circumstances, monitor transactions to, from or through the transactions to, from or through the correspondent account in a manner reasonable correspondent account in a manner reasonable to detect money laundering and suspicious to detect money laundering and suspicious activityactivity

Obtain information about the identity of any Obtain information about the identity of any person with authority to direct transactions person with authority to direct transactions through any correspondent account that is a through any correspondent account that is a payable through accountpayable through account

Foreign Correspondent BanksForeign Correspondent Banks

Enhanced Due Diligence for Enhanced Due Diligence for Certain Foreign BanksCertain Foreign Banks

Determine whether the foreign bank in Determine whether the foreign bank in turn maintains correspondent accounts turn maintains correspondent accounts for other foreign banks and take for other foreign banks and take reasonable steps to obtain information reasonable steps to obtain information relevant to assess and mitigate money relevant to assess and mitigate money laundering risks, including as laundering risks, including as appropriate, the identity of those foreign appropriate, the identity of those foreign banksbanks

Foreign Correspondent BanksForeign Correspondent Banks

Enhanced Due Diligence - OwnershipEnhanced Due Diligence - Ownership

Determine, for any correspondent account Determine, for any correspondent account established or maintained for a foreign bank whose established or maintained for a foreign bank whose shares are not publicly traded, the identity or each shares are not publicly traded, the identity or each owner of the foreign bank and the nature and extent owner of the foreign bank and the nature and extent of each owner’s ownership interest.of each owner’s ownership interest.

Owner means any person who directly or indirectly Owner means any person who directly or indirectly owns, controls, or has the power to vote 10 percent owns, controls, or has the power to vote 10 percent or more of any class of securities of a foreign bank.or more of any class of securities of a foreign bank.

Special Procedures when DD or EDD Special Procedures when DD or EDD cannot be performedcannot be performed

The covered FI’s due diligence program is The covered FI’s due diligence program is required to include procedures to be followed in required to include procedures to be followed in circumstances in which a covered FI cannot circumstances in which a covered FI cannot perform appropriate due diligence or EDD with perform appropriate due diligence or EDD with respect to a correspondent account.respect to a correspondent account.

This could include procedures to refuse to open This could include procedures to refuse to open the account in the first place, suspend the account in the first place, suspend transaction activity, file a suspicious activity transaction activity, file a suspicious activity report, or close the account.report, or close the account.

Appropriate action may include a combination of Appropriate action may include a combination of the above measures.the above measures.

Foreign Correspondent BanksForeign Correspondent Banks

Risk factors in dealing with Risk factors in dealing with shell companiesshell companies Inability to determine legitimate Inability to determine legitimate

purpose of the shellpurpose of the shell Inability to determine legitimate Inability to determine legitimate

purpose of the account that is opened purpose of the account that is opened for the shellfor the shell

Use of a company formation agent or Use of a company formation agent or other intermediaryother intermediary

Involvement of a non-U.S. person or Involvement of a non-U.S. person or entityentity

Inability to easily determine beneficial Inability to easily determine beneficial ownershipownership

Foreign Correspondent BanksForeign Correspondent Banks

Key questions to ask to prevent corporate Key questions to ask to prevent corporate vehicle misuse include:vehicle misuse include:

Who are the ultimate beneficial owners of a Who are the ultimate beneficial owners of a company and who are the settlors, trustees and company and who are the settlors, trustees and beneficiaries involved with a trust?beneficiaries involved with a trust?

What is the purpose for which the corporate What is the purpose for which the corporate vehicle was formed?vehicle was formed?

Why are foreign jurisdictions being used for Why are foreign jurisdictions being used for creation/administration of the entity?creation/administration of the entity?

Why are complex structures being utilized?Why are complex structures being utilized?

Foreign Correspondent BanksForeign Correspondent Banks

Consider Frequently occurring Risk Factors Consider Frequently occurring Risk Factors associated with corporate vehicle misuse. associated with corporate vehicle misuse.

What are the corporate vehicle formation What are the corporate vehicle formation requirements in the source jurisdiction?requirements in the source jurisdiction?

Are the adequate regulatory standards or Are the adequate regulatory standards or investigative capacities in the jurisdiction investigative capacities in the jurisdiction where the corporate vehicle has been where the corporate vehicle has been incorporated/formed/ administered (e.g. incorporated/formed/ administered (e.g. particularly involvement of TSCPs).particularly involvement of TSCPs).

How might information on the beneficial How might information on the beneficial owners be made available or be obtained in owners be made available or be obtained in the jurisdiction of incorporation and/or the the jurisdiction of incorporation and/or the country in which the company and trust country in which the company and trust administration services are provided.administration services are provided.

What is known about the beneficial owner?What is known about the beneficial owner?

Foreign Correspondent BanksForeign Correspondent Banks

Consider Frequently occurring Risk Factors Consider Frequently occurring Risk Factors associated with corporate vehicle misuse associated with corporate vehicle misuse

Is the corporate vehicle a regulated or unregulated Is the corporate vehicle a regulated or unregulated entity?entity?

What is the purpose of the corporate vehicle? Does it What is the purpose of the corporate vehicle? Does it have “real activities” or is it solely involved with have “real activities” or is it solely involved with holding/administering the assets of the beneficial holding/administering the assets of the beneficial owner?owner?

Why has the corporate vehicle been established in a Why has the corporate vehicle been established in a foreign jurisdiction?foreign jurisdiction?

Can a shell or shelf company be formed in the Can a shell or shelf company be formed in the jurisdiction of incorporation?jurisdiction of incorporation?

What is known about the source of funds?What is known about the source of funds?

What is know about the scale of the business/funds?What is know about the scale of the business/funds?

Foreign Correspondent BanksForeign Correspondent Banks

Best Practices may include the Best Practices may include the following elements:following elements: Financial institutions need to apply a Financial institutions need to apply a

risk-based approach, both to CDD and risk-based approach, both to CDD and ongoing monitoringongoing monitoring

It may be impossible for a financial It may be impossible for a financial institution to dig through layers of institution to dig through layers of shell companies in every instance – shell companies in every instance – How far you peel the onion should be How far you peel the onion should be tied to the degree of risk posed by tied to the degree of risk posed by the potential or actual client.the potential or actual client.

Identifying High Risk Customers Identifying High Risk Customers and Managing Their AML and Managing Their AML

Vulnerabilities Vulnerabilities

The Anti-Money The Anti-Money Laundering Laundering AssociationAssociation

Winter Park, FloridaWinter Park, FloridaJanuary 21, 2009 • 8:30 a.m. to January 21, 2009 • 8:30 a.m. to 10:30 a.m.10:30 a.m.

Peter G. Djinis • AML Peter G. Djinis • AML Compliance • 4370 S. Tamiami Compliance • 4370 S. Tamiami Trail • Suite 320 • Sarasota, Trail • Suite 320 • Sarasota, FL 34231 • 941-926-2915 • FL 34231 • 941-926-2915 • djinis@djinislaw.com