Anti-Money Laundering: Systems, Training & Testing Can Reduce Look Backs, Cease & Desist Orders, Non-Prosecution Agreements

Sunday, June 1, 2008 - 00:00

Editor: Tell us about your professional backgrounds.

Rivera: I served for 28 years as a criminal investigator with the Internal Revenue Service, where during the last twelve years of my career I served as a manager and then as a senior manager. I have worked in Colombia with the U.S. Embassy combating anti-money laundering (AML). I left IRS-CI to work with Rachlin LLP in the forensic accounting, anti-money laundering, and due diligence areas.

Wise: My background is very similar to that of Luis. I worked more than 32 years on IRS Criminal Investigations. I wound up my career at the IRS national office managing all ten of the fraud detection centers. I also managed an AML function known as the High Intensity Drug Trafficking Area. There I evaluated suspicious activity reports (SARs) as well as currency transaction reports (CTRs). As a principal at Rachlin LLP, I do criminal and civil tax work as well as AML and forensic accounting.

Goecks: I joined Eisner LLP earlier this year as the practice leader for Bank Secrecy Act (BSA) and AML compliance. My experience includes a career as a Federal Law Enforcement officer handling IRS criminal investigations, where I investigated, supervised, and later oversaw investigations of money laundering. I served more than eight years in New York City as a successful AML officer for two different financial institutions. The first was a U.S. investment banking firm that was totally owned by a foreign bank. The other was as the AML compliance officer for a well known wealth management and private banking firm.

Editor: What statutes triggered current AML efforts and what industries are affected?

Goecks: The Bank Secrecy Act (BSA) originated in 1970 and primarily related to reporting requirements for Currency Transaction Reports. Since that time there have been a number of amendments to the BSA. The most significant amendments were included in the USA PATRIOT Act, which has ramped up the AML requirements for financial institutions.

Wise: The industries covered by AML requirements include not only banks and insurance companies, but also a broad spectrum of industries, such as car dealerships, boat dealerships, airplane brokers, stockbrokers, casinos, etc.

Editor: Are effective compliance tools available?

Wise: The second generation of AML monitoring systems is very effective. Their capabilities include client risk assessment, transaction risk measurement, behavior detection technology and workflow and reporting tools. They can learn and adapt and thus cope with new AML schemes. Our firm and Eisner have set up AML programs for businesses, selected anti-money laundering systems, conducted training for the employees, reviewed existing programs and made suggestions on how to bring the programs into compliance with the law.

Editor: In 2007 a KPMG survey found that spending to combat money-laundering activities rose by 71% in North America over the previous three years. What are the reasons for this drastic increase?

Goecks: The investment in a second generation electronic system is significant. However, over time it can provide a meaningful return on investment. The private bank which I served was the beta site for one of the leading providers of electronic monitoring systems. Its system enabled us to continuously revise our scenarios and tailor the management of our alerts via a risk-based approach. As a result, we did not have to add to our monitoring staff after the firm acquired a significant book of business from another financial institution.

The second cost driver is negotiating the terms of cease and desist orders and deferred prosecution agreements, ongoing compliance with their terms, and fines and penalties associated with violations of such orders and agreements. Too often, boards of directors and senior management fail to call upon expert help to assure compliance before they receive such orders and agreements.

Rivera: I have seen banks immensely increase the size of their staff to meet the AML requirements. One bank went from a staff of ten to a staff of forty-six. The installation of a second generation electronic monitoring system can reduce staffing requirements. When AML programs and electronic systems are inadequate and violations occur, you are exposed not only to significant fines and penalties but also to damage to the institution's reputation.

Editor: How can your organizations help financial institutions control these costs?

Goecks: The best approach is for covered financial institutions to call us in before any formal action is taken against them. This gives us the opportunity to help them upgrade or replace their current processes and technologies to avoid costly violations.

Wise: Great expense is involved when banks fail to maintain required records and must do what we call a "look back." Within a short time frame they are required to look at every financial transaction over as much as a threeyear period and prepare SARs as appropriate. This process is extremely expensive, particularly if they do not have adequate systems in place to gather the necessary information.

Some of the things that can trigger a look back include not reporting suspicious activities, failure to file SARs or filing inaccurate SARs, an inadequate electronic monitoring system and failures to properly investigate activities that should have been investigated.

Rivera: Financial institutions that have to go back and look at up to three years of transactions end up paying a substantial amount to hire contractors to go through every single transaction in that period of time. Organizations like ours with an independent perspective can sometimes convince regulators to tailor the scope of the inquiry to six months, which can save a substantial amount of money. If a bank is threatened with a cease and desist order or a deferred prosecution agreement, we can in many cases help the bank to soften the language. We know which aspects are negotiable on the basis of our experience in law enforcement.

Editor: Let me ask you about your organizations' roles in training employees.

Rivera: Because of the justified public concern about money laundering in connection with terrorist activities, prosecutors and regulators promptly take action against any covered institution that is thought to have failed to comply with AML requirements. Covered institutions have an obligation under the AML statutes to keep their personnel up to date on the latest developments, so ongoing training is required. Rachlin and Eisner provide such training.

Goecks: It is important to understand that the AML requirements, unlike the Securities Acts, are not focused on protecting the rights and privileges of investors; they serve exclusively as prosecutorial tools. The two overarching rules or obligations under the AML laws are the record-keeping and reporting requirements. Without effective AML training programs, covered institutions are not able to demonstrate that they had a reasonable basis to rely on their employees to meet the record-keeping and reporting requirements. Evolving business plans, employee turnover, changes in the law and changes in money-laundering schemes collectively drive the need for continuous AML training.

Editor: What are some of the red flags that employees should watch for?

Wise: Some of the more obvious ones would be bank accounts that seem to be nothing but conduits of funds. A pattern of excessive transactions involving currencies or money orders or official bank checks is another. Another would be if a business that routinely brings in ten thousand dollars a week suddenly receives a wire transfer of a half million dollars. The list is endless.

Editor: What is the most effective way to test anti-money laundering detection systems?

Rivera: For institutions that have BSA requirements, independent accounting firms such as ours play an essential role in the testing of AML systems. We are in a unique position to be able to look at a particular set of transactions with the eyes of not only an independent third party but also of former law enforcement officers who can identify suspicious activity that perhaps someone without that training may not necessarily detect. Our expertise adds a level of credibility to the entire process.

Editor: How does operating on a global level complicate AML compliance?

Goecks: Financial institutions must abide by the laws of the legal jurisdictions in which they operate. Therefore it is necessary for financial institutions that operate in other countries to know the AML laws of those countries and abide by them. Financial institutions that operate globally must have effective legal counsel for each jurisdiction in which they conduct business.

Editor: If you have clients that need help with compliance with foreign AML laws, how can you help them?

Goecks: Most law firms and accounting firms today belong to worldwide networks that are capable of serving their clients globally. Eisner and Rachlin are part of the Baker Tilly International network, a membership organization made up of 138 independently owned and operated regional accounting firms in 104 countries, with combined global revenues of $2.5 billion and 24,000 staff members worldwide. When a client needs assistance on an AML issue outside the U.S., Eisner or Rachlin will refer the client to the appropriate independent member firm within the Baker Tilly International network.

Editor: Does the rise in SARs across the globe mean that companies are getting better at spotting money laundering?

Goecks: Those financial institutions that are currently covered by AML requirements are implementing better electronic monitoring systems which are contributing to an increase in SAR filings. Also, there are at this time still a number of industries that will come under the BSA but are currently exempt. There is a large number of investment advisors that, when they come off the exempt list, will have some form of AML program requirement. When that happens, an obvious consequence will be more SAR filings. Anti-money laundering is a global phenomenon. The third European directive on money laundering became effective on December 15, 2007. Consequently, there will be an increase in SARs filed abroad.

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