FEDERAL RESERVE BANK OF CHICAGO

FEDERALRESERVEBANKOFCHICAGO

FEDERALRESERVEBANKOFCHICAGO

FEDERALRESERVEBANKOFCHICAGODisclaimer:The opinions expressed in this presentation are myown and do not represent those of the Federal ReserveSystem or the Federal Reserve Bank of Chicago.

FEDERALRESERVEBANKOFCHICAGOSenator Carl Levin – D- MichiganSenator Carl Levin summarizesthe record: "Estimates are that 500 billion to 1 trillion ofinternational criminal proceedsare moved internationally anddeposited into bank accountsannually. It is estimated that halfof that money comes to theUnited States".

FEDERALRESERVEBANKOFCHICAGOThe aggregate size of money laundering in theworld is somewhere between 2% and 5% of theworld’s gross domestic product.It is impossible to produce a reliable estimate of theamount of money laundered because .

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FEDERALRESERVEBANKOFCHICAGOHe owns successfulnight clubs but he reportsonly 5,000 in income.Where does all his cash go?Alphonse CaponeConvicted ofTax Invasionin 1931Desk ofElliott NessA.CaponeEliot NessHe gotCapone

FEDERALRESERVEBANKOFCHICAGO1. Placement: When the illicit funds enter the financial systemDepositing the funds into the financial system2. Layering: transactions obscuring the source of fundsFunds may be wired through a series of accounts orchanneled through various means to obscure its source.3. Integration: using the funds for legitimate purposesFunds uses to enhance the lifestyle of the criminal

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US EMBASSYKHOBARKENYA & TANZANIAFollow the moneyIt takes money to be a terrorist.if you want to catch me.ADEN PLANNERS LOCATIONSUSS COLE

BSAMANUALFEDERALRESERVEBANKOFCHICAGO Bank Secrecy ActCurrency Transaction Reports (CTRs)Suspicious Activity Reports (SARs)StructuringSection #326 of the USA PATRIOT Act

Not Just Banks!FEDERALRESERVEBANKOFCHICAGO Depository InstitutionsCasinosMoney Service BusinessesInsurance IndustrySecurities and Futures MarketsPrecious Metals/ Jewelry Industry

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FEDERALRESERVEBANKOFCHICAGOEach person who physically transports,mails, or ships, or causes to be physicallytransported, mailed, or shipped currencyor other monetary instruments in anaggregate amount exceeding 10,000 atone time from the United States to anyplace outside the United States or into theUnited States from any place outside theUnited States, andEach person who receives in the UnitedStates currency or other monetaryinstruments In an aggregate amountexceeding 10,000 at one time whichhave been transported, mailed, or shippedto the person from any place outside theUnited States.

Form 104Currency TransactionReportFEDERALRESERVEBANKOFCHICAGO Currency Transactions for more than 10,000 Multiple currency transactions totaling more than 10,000 Different CTR forms for different businesses Creates a paper trail

SUSPICIOUS ACTIVITY REPORTSOMETHIN’ AIN’T RIGHTFEDERALRESERVEBANKOFCHICAGO50% of SAR are filed for BSA/Structuring/Money Laundering

FEDERALRESERVEBANKOFCHICAGOThe New York Times reported in its March 13, 2008 articleentitled “Spitzer Fall Began with Bank Reports” that EliotSpitzer’s recent resignation originated with a pair of SuspiciousActivity Reports (“SARs”) filed by North Fork Bank andHSBC Bank. As reported by the New York Times, “both theNorth Fork Bank and HSBC had faced inquiries into theirlending practices led by Mr. Spitzer when he was New Yorkattorney general.” Were the banks’ SAR filings business asusual or retaliation?

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FEDERALRESERVEBANKOFCHICAGOStructuring is when a person conducts or attempts to conductone or more transactions in currency in any manner for thepurpose of evading the CTR filing requirement20 yearsin PrisonAll attempts to evade the BSA CTR filingrequirements for cash transactions that exceed 10,000 are criminal and civil violationsIs structuring a crime?Cause or attempts to cause a financial institution to fail to filea CTR as required under the BSA 500,000or moreCause or attempts to cause a financial institution to filea CTR that contains a material omission or misstatement of fact.Structure or an attempt to structure any transaction with oneor more financial institutions

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FEDERALRESERVEBANKOFCHICAGO Law Enforcement - To initiate & supportmoney laundering, terrorist financing, &other criminal investigations– Federal law enforcement – DOJ, FBI, DEA, DHS,ICE, USSS, IRS, USPS– State law enforcement– Local law enforcement Analysts –to identify trends & patterns- FinCEN- Joint agency financial task forces- Law enforcement agencies- OFAC

FEDERALRESERVEBANKOFCHICAGOFeds: Car dealerships laundered drug money

Feds: Car dealerships laundered drug moneyFEDERALRESERVEBANKOFCHICAGOA steady stream of those drug dealers and gang-bangersbought big-ticket cars -- from Jaguars to Cadillacs – whilethe dealership operators let them pay huge sums of cashwithout disclosing the transactions as they're required to doin cash sales greater than 10,000,Sometimes purchasers paid tens of thousands in stacksOf 20, 50 and 100 bills, according to a federal criminalcomplaint unsealed Tuesday. The dealer owners andmanagers deposited cash, also in amounts under 10,000to avoid tracing the transactions, it said.Feds: Drug cash stashed overseasMillions of dollars -- some of it drug money paid bygang-bangers for fancy new cars -- was stashed inbank accounts from United Arab Emirates to Hong Kongto Iran in an international drug trafficking network thatrevolved around crooked West Side auto dealers, U.S.prosecutors alleged Friday.

Records On File With Detroit Computing CenterCurrency and Banking Retrieval System (CBRS)Document TypeFEDERALRESERVEBANKOFCHICAGO # on CBRS as of January 3, 2006CTR (FinCEN Form 104)ExciseCMIR (FinCEN Form 105)Casino CTR (FinCEN Form 103)Financial (Depository Institution) SAR (TDF 90-22.47) 2,427,341FBAR (TDF 90-22.1)2,305,895Form 8300 (FinCEN/IRS Form)Federal Contracts FormCasino CTR –NVMSB SAR (TDF 90-22.56)Designation Of Exempt Person (FinCEN Form 110)RMSB (FinCEN Form 107)Casino SAR (FinCEN Form 102)Securities and Futures SAR (FinCEN Form 101)Total Documents on 49170,100,317

Bank Secrecy Act Filing TrendsFinancial Crimes Enforcement NetworkViolations reported on Depository Institution Suspicious Activity ReportsFor the period April 1, 1996 through July 1, 2006All Othe r Violations308,62111%BSA/Structuring/M one y Launde ring1,348,01249%Che ck Fraud299,97911%All Other ViolationsTerrorist FinancingBribery/GratuityOthe r239,2349%De falcation/Embe zzle me nt59,6732%Blank/Unknown60,7012%Counte rfe it Che ck136,1185%Counterfeit Credit/Debit CardComputer IntrusionCounterfeit Instrument (Other)Commercial Loan FraudDebit Card FraudCre dit Card Fraud136,0965%Mysterious DisappearanceW ire Transfer FraudMisuse of Position or Self DealingChe ck Kiting90,1453%M ortgage Loan Fraud93,0683%Consumer Loan FraudIdentitity TheftFalse Statement010,000 20,000 30,000 40,000 50,000 60,000

2,7463,7654,8804,758

What difference doesit make if I file a SAR?FEDERALRESERVEBANKOFCHICAGOBank BSAR filed because of multiplefunds transfers to accountJoe Lee – SSN 999-99-9999DOB 4/12/78Authorized signer onExpress OrientBank ASAR filed -Cash deposits notconsistent with nature of businessOrient ExpressAuthorized singer Joe ChanSSN 999-99-9999DOB 4/12/78Joe Chan LeeWithoutyourSSN 999-99-9999DOB 4/12/78piecethe puzzleOpened acct at Big BankWiresfundsto solved.My Drugswon’tbeat Central Bank of AsiaBank CSAR filed -Jan Lee makesmultiple deposits in amountsjust under 10,000 and says shemakes money at Casinos.Frequently wires funds to BankC into account of Chan Leewho she says is her brother whoresides in San Francisco.Bank DSAR filed- M/O & wiresjust under report thresholdsfrom Bank A,B & C intoaccount of Chan LeeSSN 999-99-999DOB 4/12/78Wires funds to Big Bank monthly

Report of InternationalTransportation of Currencyor Monetary Instruments(CMIR)Currency TransactionReport (CTR)

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FEDERALRESERVEBANKOFCHICAGOMoney Laundering Risks

FEDERALRESERVEBANKOFCHICAGOFinCEN Enforcement Actions

FEDERALRESERVEBANKOFCHICAGOA transaction thatdoesn’t make sense,transactions with no logicaleconomic purposeor that are inconsistent withthe nature of a customer’sbusiness may be suspicious.

FEDERALRESERVEBANKOFCHICAGOWhat do you thinkis suspicious?

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FEDERALRESERVEBANKOFCHICAGO1. Select sample2. Review statements over 2-3 month period for suspicious activityA. Structured TransactionsB. Large amounts just under the thresholdC. Transactions in round numbersD. Transactions inconsistent w/ nature of business3. Request copies of transactionsA. Do transactions represent cash?B. Are checks payable to cash?C. Are checks payable to a business cashed?D. Are checks payable to business owner cashed?

FEDERALRESERVEBANKOFCHICAGOIdentification & Documentation ofSuspicious Activity Is potential suspicious activity identified? If it is identified, is it documented? Are “No SAR” decisions appropriately documented?

Repeat SAR Filings The bank should develop policies,procedures, and processes indicatingwhen to escalate issues or problemsidentified as the result of repeat SARfilings on accounts.FEDERALRESERVEBANKOFCHICAGO Procedures should include:- Review by senior managementand/or legal staff- Criteria for when the customerrelationship should be terminated- Documentation explaining why therelationship was not terminatedShould wejust keepfiling SARs?

FEDERALRESERVEBANKOFCHICAGONon-compliance

FEDERALRESERVEBANKOFCHICAGOFinancial institutions should conduct periodic (annual) audits ofeach department’s compliance with the company’s AML policyMust use independent internal auditors or outside consultantsHigh- risk accounts are monitored with appropriate frequency,and suspicious activity reports are reviewed for timeliness,whether there is a process to detect suspicious activity.Include review of account opening procedures to ensurecompliance with Section 326 provisions of USA PATRIOT Act

FEDERALRESERVEBANKOFCHICAGOPerform transaction testing to ensure compliancePerform testing of employees to assess level ofknowledge of regulations and proceduresReview written procedures and training programs forcompleteness and accuracyEnsure activities such as wire transfers are monitoredusing aggregation analysis

FEDERALRESERVEBANKOFCHICAGOReport all findings to board and senior managementWhat are the qualifications of the person(s) conducting theindependent audit?Is there a follow-up process that includes a validationby internal audit to determine the successful completionof corrective action items by business lines or products?

FEDERALRESERVEBANKOFCHICAGOBSA/AML risk assessment(products, service, customers, and geographic locations).BSA/AML compliance programBSA reporting and recordkeeping requirementsCustomer Identification Program (CIP) implementationAdequacy of CDD policies, procedures, and processes;

FEDERALRESERVEBANKOFCHICAGOAdherence to BSA/AML policies, procedures/processesTransaction testing, emphasis on high-risk operationsTraining - comprehensiveness, accuracy of materials,training schedule, and attendance tracking

FEDERALRESERVEBANKOFCHICAGOReview of suspicious activity monitoring systems abilityto identify unusual activity including evaluation of:Policies, procedures, and processesSystem’s methodology for establishing/applyingexpected activitySystem’s ability to generate monitoring reportsDetermines whether the system filtering criteria are reasonable