The USA PATRIOT Act and the U'S' AntiMoney Laundering Regime: What U'A'E' Institutions Need to Know

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The USA PATRIOT Act and the U.S. Anti-Money
Laundering Regime What U.A.E. Institutions Need
to Know

• Stephen J. McHale
• 10 May 2006

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Overview

• U.S. anti-money laundering (AML) laws and
  regulations
• Global AML standards
• Common elements of all AML schemes
• Some U.S. enforcement actions and policies
• Application to U.A.E. institutions
• Future trends

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U.S. AML/CFT Law
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Bank Secrecy Act (BSA)

• Basic U.S. anti-money laundering law
• Enacted in 1970 to combat movement of proceeds of
  illegal activity, principally drug trafficking.
• Early enforcement weak
• Increased enforcement after the enactment of the
  the Money Laundering and Financial Crimes
  Strategy Act of 1998, but focus still on criminal
  proceeds

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The USA PATRIOT Act

• After the September 11 attacks
• U.S. government and financial institutions were
  furious that the terrorists had used the U.S.
  banking system to bring money in to pay for the
  attack
• The banks feared future liability if their
  systems were ever again so abused
• USA PATRIOT Act enacted barely 6 weeks after the
  attacks
• U.S. bank regulators increased vigilance

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The USA PATRIOT Act

• BUT, hasty action meant few new ideas in the Act
• Most of the tools were designed to detect large
  sums of criminal or dirty money moving through
  the financial system to be cleansed
• Terrorist financing often consists of small sums
  of clean money being moving through the system
  to fund illegal activity
• The telescope is reversed the challenge is
  much harder

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The USA PATRIOT Act Renewed

• Renewed March 9, 2006
• Strengthened U.S. law to permit easier seizure
  and forfeiture of illegal funds
• No changes made in the AML/CFT provisions
• Viewed as Congressional endorsement of U.S.
  AML/CFT policies

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What is a Financial Institution?

• Very broad definition under the BSA. Includes
• Banks, credit unions and savings banks
• Agencies or branches of foreign banks in the
  United States
• Brokers or dealers in securities or commodities
• Investment bankers or companies
• Currency exchanges
• Issuers, redeemers, or cashiers of travelers'
  checks, checks, money orders, or similar
  instruments

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What is a Financial Institution?(continued)

• Operators of credit card systems
• Insurance companies
• Dealers in precious metals, stones or jewels
• Pawnbroker
• Loan or finance companies
• Travel agencies

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What is a Financial Institution?(continued)

• Money transmitters, including businesses or
  networks engaged in informal money transfer
  systems outside of the conventional financial
  institutions system
• Businesses engaged in vehicle sales, including
  automobile, airplane, and boat sales
• Persons involved in real estate closings and
  settlements
• Casinos
• Any other businesses designated by Treasury that
  engages in similar activity or cash transactions
  having a high degree of usefulness in criminal or
  tax matters

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Hawala

• SEC. 405. MONEY LAUNDERING THROUGH HAWALAS.
  Section 1956(a)(1) of title 18, United States
  Code, is amended by adding at the end the
  following For purposes of this paragraph, a
  financial transaction shall be considered to be
  one involving the proceeds of specified unlawful
  activity if it is part of a set of parallel or
  dependent transactions, any one of which involves
  the proceeds of specified unlawful activity, and
  all of which are part of a single plan or
  arrangement.''

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Specified Unlawful Activities (SUAs)

• U.S. AML does not apply to proceeds of all crime,
  only specified crimes
• BUT, there are more than 200 SUAs nearly every
  imaginable illegal financial transaction
• With the USA PATRIOT Act amendments SUAs include
• Terrorism and terrorist financing
• Bribery Violations of the Foreign Corrupt
• Espionage Practices Act
• Kidnapping Smuggling

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Extraterritorial Reach

• U.S.can assert jurisdiction over any financial
  transaction that occurs in whole or part in the
  U.S. even if the funds involved were derived from
  purely foreign crimes that include, among others
• Terrorism or terrorist financing
• bribery or corruption
• embezzlement of public funds
• drug trafficking
• fraud against a foreign bank
• destruction of property by explosion or fire
• kidnapping or extortion

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Regulatory Implementation

• Financial Crimes Enforcement Network (FinCEN) is
  part of U.S. Treasury Department.
• Issues regulations implementing U.S. AML/CFT laws
• Works with other U.S. financial industry
  regulators
• Serves as U.S. Financial Intelligence Unit (FIU)

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Regulatory Implementation

• Regulations require an AML program to
• Establish risk based policies, procedures, and
  controls, including
• KYC/CIP
• Due diligence
• Monitoring
• Designate a compliance officer
• Provide ongoing employee training programs
• Provide for independent audit functions to test
  programs
• Suspicious activity reporting (with exceptions)

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Regulatory Implementation

• Flurry of activity after 9/11, then paused
• Interim rules for money services businesses,
  casino and credit card issuers and commodity
  dealers
• Proposed rules for other types of financial
  institutions

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Regulatory Implementation

• Picking up speed in the last year
• Final rules for precious metal, stone and gem
  dealers
• Final rules for insurance companies
• Final rules on private banking and correspondent
  accounts
• Proposed rules for casinos
• Look for more rules this year

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Regulators Cookbook

• U.S. Federal Bank Regulators Joint BSA/AML
  Examination Handbook
• Great resource
• Explains in detail what U.S. bank examiners will
  look for when reviewing an institutions AML/CTF
  program
• Publicly available

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Global AML Standards
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Global AML Standards

• Financial Action Task Force (FATF) Promulgated
  40 anti-money laundering recommendations and
  eight special recommendations to combat terrorist
  financing.
• Basel Committee Essentially endorsed and gave
  even greater weight to the FATF recommendations
• Wolfsberg Principles Intended to prevent
  private and correspondent banking channels from
  being used for money laundering or terrorist
  financing

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Common Elements for a Compliance Program

• Customer identification/Know your customer
  program
• Due diligence
• Monitoring
• Reporting
• Training
• Management controls
• Cooperation with banking authorities

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U.S. Enforcement Actions
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Enforcement in the U.S.

• Numerous criminal and regulatory enforcement
  actions, including
• AmSouth 60 million in penalties and costs (Nov.
  2004)
• ABN-Amro 80 million in penalties (Dec 2005)
• Riggs Over 75 million in penalties and costs,
  criminal prosecution of bank and officers,
  institution destroyed (2003-2004)

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Enforcement in the U.S.

• Arab Bank Jordan-based bank paid 24 million in
  penalties and forced to close NY branch, only
  limited banking activities permitted
• Enforcement moving beyond banks
• Since December 2005, FinCEN has taken significant
  actions against a securities broker, a casino and
  an individual

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U.S. Actions Against Non-U.S. Institutions

• Designation of non-U.S. institutions as
  institutions of primary money laundering/terroris
  t financing concern
• Institutions designated or proposed in Syria,
  Burma, Northern Cyprus, Belarus, Macau and Latvia
• Proposed designation can make it almost
  impossible to access the U.S. financial sector
• Institutional designations also used to send a
  message to licensing jurisdiction

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U.S. Actions Against Jurisdictions

• Designation of countries as being of primary
  money laundering terrorist financing concern
• Nauru
• Ukraine
• Burma
• Belarus next?

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FATF Typologies

• Annual publication of case studies involving
  specific types of money laundering schemes
• Indicates focus of AML regulators

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FATF Typologies

• 2005 report focused on alternative remittance
  systems (ARS), money laundering in the insurance
  sector, and proceeds from trafficking in humans
• ARS broadly defined as money/value transfer
  systems . . . that operate completely or partly
  outside conventional banking channels, both
  legally and illegally

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FATF Typologies

• Focus on remittance corridors, most of which
  from Europe and US to the Middle East, South Asia
  and East Africa pass through UAE or other Gulf
  states
• Some cause for concern that at least 8 of the 14
  case studies of use of ARS for money laundering
  implicate these remittance corridors and 3
  studies specifically refer to the use of unnamed
  institutions in the U.A.E.

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FATF Typologies

• In this region, most involve
• Remittance systems
• Misuse of correspondence accounts
• diamonds
• Newer trends
• Use of securities
• Pre-paid cards

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What Does All This Mean For UAE Institutions?

• U.A.E.s AML regime fully complies with global
  standards for banks and other MSBs
• U.S. and other AML authorities increasingly
  looking at enforcement record
• FATF likely to look more intensely at remittance
  networks
• Need to remain flexible and vigilant to new money
  laundering avenues and schemes

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Working with U.S. Institutions

• Major U.S. international banks are
  well-represented in U.A.E. and understand the
  local financial sector
• Other U.S. banks and most bank examiners have
  less international experience will be wary
• Recent U.S. enforcement actions have made U.S.
  institutions wary and more risk averse
• Having a strong, knowledgeable U.S. partner that
  can vouch of the effectiveness of an
  institutions AML program is increasingly
  important

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Avoiding Problems with FinCEN and Other AML
Authorities

• Maintain strong AML program on paper and in fact
• Respond quickly to any ML issues, and be seen to
  do so
• Cooperate with FIU and be known for reporting
  suspicious activity
• Engage quickly and positively at first sign of
  problems with regulators

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Future Trends

• Greater focus on remittance networks
• U.S. interest in remittances to Somalia
• Increased focus on diamond trading, pre-paid
  calling and debit cards, etc.
• Look for more institutions to be singled out as a
  way of sending a broader message

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Questions?