QUESTION
We are a mid-sized mortgage broker transitioning in January to a full lender. I handle compliance, and also I’m the AML officer.
Up until now, we have gotten by, but we did not do a test last year, and the banking department now may hold up our lender license because we didn’t do it. I need to get the test done as soon as possible and have already contacted your firm to do the AML test.
But my main issue now is updating the written AML Program. We got it from a company that supposedly specializes in mortgage manuals, but the banking department rejected it. There are glaring policy defects they noted.
A big issue was that the policy did not define money laundering, believe it or not. Or, it wasn't the definition they wanted. So, I want a good definition to put into our AML Program.
What is a brief definition of money laundering?
ANSWER
Money laundering is
the financial
side of virtually all crimes for profit. To enjoy the illicit reaping of their crime, whether drug dealing, extortion, fraud, arms trafficking,
terrorism, or public corruption, criminals must find a way to insert the
proceeds into the stream of legitimate commerce.
I’m glad you’re retaining us to do the Anti-Money Laundering Program test, but, as you know, you should be doing the AML test every year. It is a statutory requirement! Get onto our schedule to do it each year.
For those who have not done the AML test, contact me HERE for information about testing, training, program, and risk assessment.
Money laundering has dual importance.
First, it provides the fuel that allows criminals and criminal organizations to conduct their ongoing affairs. It may seem like an easy crime to pull off – for instance, wire transfers at the touch of a computer button, the clever unbundling of large amounts of cash into bite-size chunks, the intricate movement of funds through a series of offshore shell companies. But make no mistake, it is the companion of brutality, deceit, and corruption.
Secondly, money laundering is pernicious in its own right. It taints our financial institutions, and, where allowed to thrive, it erodes public trust in their integrity. Indeed, in an age of rapidly advancing technology and globalization, money laundering can affect trade flows and ultimately disturb financial stability. Inevitably, like the crime and corruption of which it is a necessary part, money laundering is an issue of national security.
Thus, the pursuit of money laundering is critical because following the money is often an essential tool in investigating the underlying crimes. We have a vital interest in maintaining the integrity of our financial system.
Here are just a few threats posed by money laundering:
· Fraud
· Drug trafficking
· Terrorist financing
· WMD proliferation financing
· Organized crime
· Human trafficking
· Corruption
Numerous vulnerabilities are exploited by money laundering. Sometimes it seems that when one crook is caught, others pop right up with new money laundering schemes. Firms like ours track these schemes, but it is often very difficult and complicated for an individual financial institution to stay current on all the attacks on their vulnerabilities. Some clients ask us to conduct an AML test quarterly or semi-annually to ensure their AML program stays current.
I would say that the following are the salient vulnerabilities that are exploited by money laundering.
· Beneficial Ownership information: The lack of a requirement to collect beneficial ownership information at the time of company formation and after changes in ownership;[i]
· Real Estate: The lack of comprehensive AML requirements on key gatekeeper professions (i.e., lawyers) and anonymous purchases of real estate;
· Correspondent banking: The significant volume of foreign funds and number of transactions intermediated through U.S. correspondent banks, potentially from locations lacking ML regulation;[ii]
· Uneven AML obligations: The lack of comprehensive AML requirements on some financial institutions (i.e., state-chartered banks that lack a Federal functional regulator);
· Cash: The ubiquitous and anonymous use of U.S. currency domestically and internationally;
· Complicit professionals: Complicit actors in financial institutions and other businesses;
· Compliance weaknesses; and
· Digital
Assets: The growing misuse of digital assets, which includes the failure of
foreign jurisdictions to supervise digital asset activity effectively.
The Financial Crimes Enforcement Network (FinCEN) defines money laundering as follows:
“Money laundering is the process of making illegally-gained proceeds (i.e., 'dirty money') appear legal (i.e., 'clean'). Typically, it involves three steps: placement, layering, and integration.
First, the illegitimate funds are furtively introduced into the legitimate financial system.
Then, the money is moved around to create confusion, sometimes by wiring or transferring through numerous accounts.
Finally, it is integrated into the financial system through additional transactions until the 'dirty money' appears 'clean.'
Money laundering can facilitate crimes such as drug trafficking and terrorism, and can adversely impact the global economy.”[iii] [Emphasis added.]
For a brief definition, you can't go wrong in using FinCEN's definition.
FinCEN is the Financial Intelligence Unit (FIU) of the United States and works with law enforcement and the FIUs of other countries participating in AML to curtail money laundering globally.
Each financial institution must implement the Anti-Money Laundering Program required by the Bank Secrecy Act (BSA), including AML Risk Assessments approved by the Board of Directors, and a written Customer Identification Program (CIP) appropriate for its size and type of business that meets specified minimum requirements. The adequacy of an institution’s compliance with AML requirements is assessed by its regulatory agency.
I urge you to contact me HERE to get more information about our AML compliance support.
Jonathan Foxx, Ph.D., MBAChairman& Managing Director
Lenders Compliance Group
[i] 31 CFR 1010.230 states beneficial ownership as an individual who has a level of control over, or entitlement to, the funds or assets in the account that enables the individual, directly or indirectly, to control, manage or direct the account.
[ii] 31 CFR §1010.605, Correspondent account, states an account established for a foreign financial institution to receive deposits from, or to make payments or other disbursements on behalf of, the foreign financial institution, or to handle other financial transactions related to such foreign financial institution.
[iii] https://www.fincen.gov/history-anti-money-laundering-laws
