Red-Flags-Training

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Red Flags
Introduction
• Purpose:
– To show visually what bankers may see in
transactional activity that may uncover certain
financial crimes.
• The red flags are reviewed from the FFIEC BSA
/ AML Manual as well as FATF reports on
criminal activity
Introduction
– Red Flags Noticed
– Questions to ask from line staff
– Due Diligence to perform (if not already
documented)
– Other items that can be researched / investigated
Red Flags
• Red Flag Examples Part 1 Money Laundering
• The following examples are meant for bankers to visually
note transactional activity they may notice in review of
their everyday reports. These are only of few examples of
many and will hopefully help to develop a reporting
structure to make a more efficient and well documented
AML Program. These examples are simple and brief, good
launderers may have very complex and intricate laundering
schemes
• It’s important for bankers to stay up to date on all current
information provided by law enforcement, FinCEN and your
regulator.
Red Flag Review and Examples:
Stages of Money Laundering
Money Laundering
• Money Laundering
– is the criminal practice of processing ill-gotten
gains, or “dirty” money, through a series of
transactions; in this way the funds are “cleaned”
so that they appear to be proceeds from legal
activities. Money laundering generally does not
involve currency at every stage of the laundering
process. Although money laundering is a diverse
and often complex process, it basically involves
three independent steps that can occur
simultaneously:
Placement
• Placement: The first and most vulnerable
stage of laundering money is placement. The
goal is to introduce the unlawful proceeds into
the financial system without attracting the
attention of financial institutions or law
enforcement. Placement techniques include
structuring currency deposits in amounts to
evade reporting requirements or commingling
currency deposits of legal and illegal
enterprises.
What to look for Red Flags
• Exact dollar amounts (not all the time)
• Business customer that does not usually have
large amounts of cash ins.
• Cash intensive businesses that split their deposits
to avoid reporting requirements
• None of the cash ins are over $10,000.00
• Cash ins in some cases are performed on the
same business day, however, different branches
are used.
• Not all placement transactions are cash look at
online transactions for possible placement of
illicit funds.
What to look for
Backroom Reports Review
• Transactions with large frequent cash ins
• Online payment transactions that have little
information provided and are unusual for the
type of business and / or account holder
• Any linkage between customers that may be
noted in CIP / CDD information (i.e. occupation
type of business, expected activity etc)
• Look destination of funds where and who the
funds go to and how they got there.
Front Line staff: Key Points
• Exact amount cash in
• Any comments the customer makes
concerning the transactions or their business
• Any mention of the reporting thresholds when
deposits made.
Documentation recommended
• Any notes from the front line on comments
the customer may have made
• The source and destination of funds
• All web searches for information on the
customer and customer’s business
• Obtain and document beneficial ownership of
any business the customer may open or be
associated with
Example 1
• Smart 1 is a real estate business in reviewing
cash reports it is noticed numerous high dollar
cash ins, the cash ins are exact amounts and
are all under the reporting threshold. The
cash ins are made at different branches on the
same business day in some cases.
Example 1
In the report below see the exact
dollar amounts of cash in structured
over multiple days, as well as some
deposits made on the same day
different branches.
Note the business type and research
to see why a Real Estate business may
have large cash ins (document any
findings)
Different
branches used
on the same
day
Exact Dollar
Amounts
Cash in
Summary
Example 2
• Customer makes large cash deposit containing
many larger denomination bills, such as the 500
euro note or US$100 bills
• Customer frequently deposits large sums of cash
wrapped in currency straps stamped by other
banks or currency wrapped in rubber bands that
is disorganized and does not balance when
counted.
• Denise Menace is a Construction worker; Mr.
Menace makes frequent cash deposits into his
personal account.
If known look at the occupation of the
customer does the cash in “fit” the type
of business or occupation?
Example 2
Note from the transactional activity
the exact amount of cash in under the
reporting threshold ($10,000.00) on
consecutive days.
Document any information from the
teller as to how the cash is deposited
(i.e. denominations, strapped or
unstrapped etc)
Notice large
exact amount
of cash ins into
personal
account
Summary
Example 3 Smurfing
• Joe Smith is noticed purchasing several
cashier’s checks for cash in amounts that
would not be recorded.
Notice exact amount cash in for
the checks or possible a deposit
of cash then purchase of a
check
Example 3 Smurfing
Cash in for cashier’s check purchases
under the $3,000.00 amount (some
people see the $3,000.00 in for
cashier’s checks as a reporting
threshold)
Look at the payees on the checks note
if they are the same or different, to a
business or person and what the
relationship may be.
Review the payees of the checks
purchased, are there any known
links between the purchaser and
Payee
Summary
Example 4 Prepaid Cards
• Joe Smith is noticed depositing cash his
personal account, then purchases prepaid
cards for the amount of cash deposited.
Example 4 Prepaid Cards
From the report sample you can see
exact amount of funds in from cash in
or cash purchases prepaid cards. Be
sure to adjust your thresholds and look
periodically at all transactions in and
not to see if there are holes in the
report that need to be fixed and
thresholds need to be updated.
Depending on your bank’s risk, you
may need to assess the thresholds at
least quarterly
Look at the velocity of funds in and
funds out and source and destination
of funds, document any findings
Review your prepaid card procedures:
Do you have limits on amount or
number of cards sold?
Can the prepaid cards be used at ATMs
to withdraw cash?
Can the prepaid cards be reloaded?
Look at the velocity of funds
in and out how fast is the
turnaround
Summary
Layering
Layering
• Layering. The second stage of the money
laundering process is layering, which involves
moving funds around the financial system, often
in a complex series of transactions to create
confusion and complicate the paper trail.
• Examples of layering include exchanging
monetary instruments for larger or smaller
amounts, or wiring or transferring funds to and
through numerous accounts in one or more
financial institutions.
What to look for Red Flags
• Transactions with exact dollar amounts (not all
the time)
• Velocity of funds into and out of accounts
• Internal transfers between accounts
• High Volume of Wires and ACH transactions in
and out
– Especially to high risk locations
What to look for
Backroom Reports Review
• Transactions with exact dollar amounts (not all the time)
• Look destination of funds where and who the funds go to
and how they got there.
– Are the funds going to places associated with your customer
• Online payment transactions that have little information
provided and are unusual for the type of business and / or
account holder
• Any linkage between customers that may be noted in CIP /
CDD information (i.e. occupation type of business,
expected activity etc)
• Funds Transferred to high risk locations (i.e. off shore tax
haven accounts)
Front Line staff: Key Points
• Transactions with exact dollar amounts
• Any comments the customer makes
concerning the transactions or their business
• Any mention of the reporting thresholds when
deposits made (not only for cash but for other
transactions as well)
Documentation needed
• Notes from the front line on comments the
customer may have made
• Source and destination of funds
• Who the funds go to or come from and any
linkages found in the review
• All web searches for information on the customer
and customer’s business
• Obtain and document beneficial ownership of
any business the customer may open or be
associated with
Layering 1
• Customer withdraws cash, in $100 bills, in
amounts under the reporting threshold, from
accounts where funds derived from fraud
schemes were deposited
Notice the large ACH in from
online payment processors
Layering 1
From the report sample below you can
see exact amount of funds in from
online payment systems also look for
other money transfer vendors.
Look at the velocity of funds in and
funds out and source and destination
of funds, document any findings
Note the exact amount cash
outs following one or two large
ACH transactions in
Summary
Layering 2
• Customer has numerous ACH / Fund Transfers
in and out that are exact dollar.
Notice the large ACH in from
online payment processors
Think about the type
of business, do the
transactions fit the
normal activity
Layering 2
From the report sample you can see
exact amount of funds in from Pay-Me
also look for other money transfer
vendors.
Look at the velocity of funds in and
funds out and source and destination
of funds, document any findings
Note the exact amount out
following one or two large ACH
transactions in
Summary
Integration
Integration
• The ultimate goal of the money laundering
process is integration. Once the funds are in the
financial system and insulated through the
layering stage, the integration stage is used to
create the appearance of legality through
additional transactions. These transactions
further shield the criminal from a recorded
connection to the funds by providing a plausible
explanation for the source of the funds.
• Examples include the purchase and resale of real
estate, investment securities, foreign trusts, or
other assets.
What to look for Red Flags
• Transactions with exact dollar amounts (not all
the time)
• Velocity of funds into and out of accounts
• High Volume of Wires and ACH transactions in
and out
– Especially to high risk locations
• Look for large dollar purchases that are
unexplainable
• Review large payments off to loans or credit cards
• Numerous exact dollar transactions with possible
investment firms
What to look for
Backroom Reports Review
• Transactions with exact dollar amounts (not all the time)
• Look destination of funds where and who the funds go to
and how they got there.
– Are the funds going to places associated with your customer
• Online payment transactions that have little information
provided and are unusual for the type of business and / or
account holder
• Any linkage between customers that may be noted in CIP /
CDD information (i.e. occupation type of business,
expected activity etc)
• Funds Transferred to high risk locations (i.e. off shore tax
haven accounts)
Front Line staff: Key Points
• Transactions with exact dollar amounts
• Any comments the customer makes
concerning the transactions or their business
• Any mention of the reporting thresholds when
performing transactions (not just cash).
Documentation needed
• Any notes from the front line on comments the
customer may have made
• The source and destination of funds
• All web searches for information on the customer
and customer’s business
• Use Pivot tables and other analytical programs to
summarize and analyze the data
• Obtain and document beneficial ownership of
any business the customer may open or be
associated with
Integration Example 1
• Purchase and resale of real estate
• Customer makes frequent loan payments for
large exact amounts, you may notice a short
time period in the loan give and the payoff of
the loan
Integration 1
From the report sample you can see
exact amount of funds going to make
loan payments either directly to the
loan or from a checking account the
funds went into. Be sure to adjust
your thresholds and look periodically
at all transactions in and not to see if
there are holes in the report that need
to be fixed and thresholds need to be
updated. Depending on your bank’s
risk, you may need to assess the
thresholds at least quarterly
Look at the velocity of funds in and
funds out and source and destination
of funds, document any findings
Summary
Integration 2
• Investment securities, foreign trusts, or other
assets
• Customer has large deposits either from wire,
check or cash then transfers the funds to
investment accounts in his their
Integration 2
From the report sample you can see
exact amount of funds in and out and
the type of transaction being utilized.
Review the destination of the funds
and the names of the investment
companies; it may be possible to do a
314 (b) request to find more
information on where the funds went
and if they stayed in the account.
Be sure to adjust your thresholds and
look periodically at all transactions in
and not to see if there are holes in the
report that need to be fixed and
thresholds need to be updated.
Depending on your bank’s risk, you
may need to assess the thresholds at
least quarterly.
Look at the velocity of funds in and
funds out and source and destination
of funds, document any findings
Summary
Putting it all together
• Review Reports and Monitoring
– When you see something unusual document what
you have done to explain the transactions, if you
perform a search and find nothing document the
search performed and state you had no results.
– For customers that seem to have complex and
unusual activity other tools may be needed to
help to paint a picture of what is occurring and to
help explain the activity.
Putting it all together
• Obtain and document beneficial ownership of
any business the customer may open or be
associated with
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