International Seminar on Anti-Money Laundering Anti-Money Laundering Compliance Program - Banking March 30, 2005 Money Laundering is one of the most serious and difficult issues facing senior management of all financial institutions. During this course, you will obtain an understanding of the background nature of money laundering; how money laundering is accomplished; the U.S and international regulatory context in which it operates; measures that financial institutions can take to protect themselves: and anti-money laundering training resources available at Citigroup.; Prepared and presented by: Lauren L. Pickett Director of Global AML Training Citigroup Global Anti-Money Laundering Citigroup 425 Park Avenue, 4th Floor, Zone 5 New York, NY 10022 Tel: 212-559-2440 / e-mail: pickettl@citigroup.com ©2005 Citigroup, Inc. External

Anti-Money Laundering Goal Effective, comprehensive anti-money laundering program that is tailored to the business and responsive to the external environment Citigroup has a presence in over 100 countries. The products and services offered in each country are different as well as the external environment in which we operate. For example, the risk posed to our franchise in Nigeria are significantly different from those in Sweden. Therefore, it is important that the anti-money laundering programs reflect these risks. The Citigroup Anti-Money Laundering Policy (“Citigroup Policy”) directs that in developing their anti-money laundering programs, businesses shall assess the money laundering risks they face taking into consideration the following factors: the different categories of customers , including whether the customers conduct financial transactions for their own customers; the nature of the Citigroup products and services that are provided; the customers’ expected use of the product and services:; and, the loacalitites of the Cititgroup businesses and customers

What are the Overall Anti-Money Laundering Risks? Reputation Negative Press Reports Legal Criminal/Civil Fines Restriction and/or revocation of authority to do business Forfeitures of money/property Seizure of Customer Assets Imprisonment of Individual Employees Supervisory Enforcement Actions Civil Money Penalties

Financial Institutions Fined for Violations of U. S Financial Institutions Fined for Violations of U.S. Anti-Money Laundering Regulations AmSouth Bank $10,000,000 $40,000,000 AML Compliance Program Deficient Suspicious Activity Reports (SARs) – Fail to File 10-12-2004 RIGGS Bank $25.0 Million $16.0 Million SARs – Fail to File Currency Transaction Reports (CTRs) – Fail to File 5-13-2004 1-27-2005 Korea Exchange Bank $1.1 Million SARs – Fail to File 39 SARs ($32 Million – in transactions) 5-24-2003 Western Union Financial Services, Inc. $11.0 Million SARs – Fail to File SARs – Incomplete SARs CTRs – Fail to File 3-6-2003 Banco Popular de Puerto Rico $20.0 Million 1-6-2003 Sovereign Bank $700,000 4-8-2002 U.S. Trust Company $10,000,000 7-11-2001 (Forfeiture of assets) The tone set by top management -- the corporate environment or culture within which the institutions operates - is the most important factor contributing to the integrity of the financial institution. Notwithstanding an impressive set of rules and procedures, if the tone set by senior management is “lax”, they will not be effectively implemented. At Citigroup, there is outstanding senior level support at the Corporate level for anti-money laundering initiatives. In addition, the Audit Committee of the Board of Directors, periodically review the institution’s anti-money laundering program and management’s response to any significant risks. Individuals at all levels in our institution - business management, lawyers, Compliance Officers, financial managers, internal auditors-all have a role to play in the process, but top level management must supervise the process.

Managing Money Laundering Risks Accountability Senior level support Culture of integrity and compliance Designated oversight responsibility (with proper authority) Individual employee responsibility The tone set by top management -- the corporate environment or culture within which the institutions operates - is the most important factor contributing to the integrity of the financial institution. Notwithstanding an impressive set of rules and procedures, if the tone set by senior management is “lax”, they will not be effectively implemented. At Citigroup, there is outstanding senior level support at the Corporate level for anti-money laundering initiatives. In addition, the Audit Committee of the Board of Directors, periodically review the institution’s anti-money laundering program and management’s response to any significant risks. Individuals at all levels in our institution - business management, lawyers, Compliance Officers, financial managers, internal auditors-all have a role to play in the process, but top level management must supervise the process.

Managing Money Laundering Risks Training Directors and senior management All staff Conduct regularly Document Although money laundering risks cannot be eliminated they can and must be effectively managed. In regard to this, “Training” is a key element to managing this risk. It is important that all personnel, from senior management to the individual teller, receive anti-money laundering training targeted for his/her business responsibilities. Remember, it only takes one errant individual to cause an entire institution to be tainted. Conversely, one individual can help protect an institution. We have had instances where an alert teller has identified unusual activity that has been determined to be suspicious activity related to possible money laundering. The frequency with which the training must be conduced should be commensurate with the risk assessment as well as with degree of change to the anti-money laundering regulatory environment. Under Citigroup Policy, records are required to be kept of all formal training conducted. These records should include the names and business of attendees and dates and locations of the training.

What Is Money Laundering ? Money Laundering is the Process of Integrating the Proceeds of Crime into the Legitimate Stream of Financial Commerce by Masking its Origin A process to make Illegitimate Funds Appear Legitimate Most crime is committed for money or some type of financial gain. Therefore, individuals committing crime need to engage in transactions with these funds to “disguise” the fact that the funds are derived from illegal activity. The funds must be laundered if they are to be secured and enjoyed. The underlying criminal (predicate) offense generates illegal proceeds. If there are any transactions with these proceeds, this constitutes “money Laundering” The Money Laundering Control Act first criminalized money laundering in the United States in 1986. The Three Stages of the Money Laundering Process: Placement - is the first stage, involves the physical introduction of bulk cash into the financial system. Typically accomplished through cash deposits and purchases of cash equivalent monetary instruments. At the placement stage, the funds are usually laundered relatively close to the under-lying activity, often, but not in every case, in the country where the funds originate. The major exception to this would be bulk currency smuggling which entails moving the physical cash proceeds to another country for placement. Layering - is phase 2. Layering involves separating the proceeds of criminal activity from their source through complex layers of transactions. The launderer seeks to separate the proceeds from the source through various complex layers of transactions. Typically involves more than one financial institution, and even better for obscuring the audit trail if more than one jurisdiction/country is involved. At this phase the launderer may choose an offshore financial center, a large regional business center, or a world banking center - any location that provides an adequate financial or business infrastructure. At this stage, the laundered funds may also only transit bank accounts at various locations where this can be done without leaving traces of their source or ultimate destination. Integration - the final stage, involved placing the laundered proceeds back into the economy in such a way that they re-enter the financial system as apparently legitimate funds. We will explore some products/services that are utilized at each stage of the process later in the presentation.

What Is Money Laundering ? Concealing the existence or source of income from a crime Disguising income from a crime so that it appears legitimate Knowingly assisting a criminal in moving money or other property that constitutes the proceeds of criminal activity In the U.S. Money Laundering is the Proceeds Related to Many Illicit Activities, Not Just Drug Trafficking Most crime is committed for money or some type of financial gain. Therefore, individuals committing crime need to engage in transactions with these funds to “disguise” the fact that the funds are derived from illegal activity. The funds must be laundered if they are to be secured and enjoyed. The underlying criminal (predicate) offense generates illegal proceeds. If there are any transactions with these proceeds, this constitutes “money Laundering” The Money Laundering Control Act first criminalized money laundering in the United States in 1986. The Three Stages of the Money Laundering Process: Placement - is the first stage, involves the physical introduction of bulk cash into the financial system. Typically accomplished through cash deposits and purchases of cash equivalent monetary instruments. At the placement stage, the funds are usually laundered relatively close to the under-lying activity, often, but not in every case, in the country where the funds originate. The major exception to this would be bulk currency smuggling which entails moving the physical cash proceeds to another country for placement. Layering - is phase 2. Layering involves separating the proceeds of criminal activity from their source through complex layers of transactions. The launderer seeks to separate the proceeds from the source through various complex layers of transactions. Typically involves more than one financial institution, and even better for obscuring the audit trail if more than one jurisdiction/country is involved. At this phase the launderer may choose an offshore financial center, a large regional business center, or a world banking center - any location that provides an adequate financial or business infrastructure. At this stage, the laundered funds may also only transit bank accounts at various locations where this can be done without leaving traces of their source or ultimate destination. Integration - the final stage, involved placing the laundered proceeds back into the economy in such a way that they re-enter the financial system as apparently legitimate funds. We will explore some products/services that are utilized at each stage of the process later in the presentation.

Some Examples of Proceeds of Activities Which Constitute Money Laundering in the U.S. are: Drug Trafficking Foreign Official Corruption Embezzlement Securities, Wire and Mail Fraud Bribery Terrorist Financing Trafficking in Human Cargo Illegal Gambling Racketeering Arson Certain Foreign Smuggling & Export Control Violations Money Derived From Nearly 200 Predicate Crimes Money Laundering is separate from the charges of the underlying crime(s) In the U.S. there are now nearly 200 predicate crimes that constitute money laundering. Some of the illicit activities which are identified as predicate crimes under the Money Laundering Control Act can occur outside the U.S. The underlying criminal (predicate) offense generates illegal proceeds. If there are transactions with these proceeds, this constitutes money laundering. Criminal organizations commingle proceeds from many crimes; and Criminals act as brokers for funds unrelated to their own criminal activities. These trends make it more difficult to differentiate between drug-related money laundering and other forms of illegal money movements. Drug-related money laundering often supplies the “working capital” for other types of illicit activities, including a source of financing to terrorist groups (e.g., heroin trade in Afghanistan). Patriot Act Section 315 added foreign official corruption and certain foreign smuggling and export control violations to the U.S. list of predicate crimes. Tax offenses do not generally constitute a predicate offense for money laundering in most countries, with Mexico, however, a notable exception. Many people often confuse money laundering with fraud so you may want to highlight the differences. Fraud is carrying out a scheme to obtain money or any form of property by means of false pretenses. When a financial institution experiences a fraud it will incur a loss or disappearance of assets. When a financial institution is used to launder money it will not experience a loss unless funds are seized or frozen by the government. Money Laundering usually results in large quantities of illicit proceeds that need to be distanced from thsir source as quickly as possible in an undetected manner.

U.S. Requirement for Identifying Suspicious Activity Transaction conducted or attempted by, at, or through a business and the business Knows, Suspects or has Reason to Suspect the Transaction: involves funds from illegal activities hides or disguises funds or assets from illegal activities; is designed to evade a money laundering recordkeeping or reporting requirement; or has no business or apparent lawful purpose is not the sort in which the particular customer would normally be expected to engage In the U.S. there are now nearly 200 predicate crimes that constitute money laundering. Some of the illicit activities which are identified as predicate crimes under the Money Laundering Control Act can occur outside the U.S. The underlying criminal (predicate) offense generates illegal proceeds. If there are transactions with these proceeds, this constitutes money laundering. Criminal organizations commingle proceeds from many crimes; and Criminals act as brokers for funds unrelated to their own criminal activities. These trends make it more difficult to differentiate between drug-related money laundering and other forms of illegal money movements. Drug-related money laundering often supplies the “working capital” for other types of illicit activities, including a source of financing to terrorist groups (e.g., heroin trade in Afghanistan). Patriot Act Section 315 added foreign official corruption and certain foreign smuggling and export control violations to the U.S. list of predicate crimes. Tax offenses do not generally constitute a predicate offense for money laundering in most countries, with Mexico, however, a notable exception. Many people often confuse money laundering with fraud so you may want to highlight the differences. Fraud is carrying out a scheme to obtain money or any form of property by means of false pretenses. When a financial institution experiences a fraud it will incur a loss or disappearance of assets. When a financial institution is used to launder money it will not experience a loss unless funds are seized or frozen by the government. Money Laundering usually results in large quantities of illicit proceeds that need to be distanced from thsir source as quickly as possible in an undetected manner.

Definition of “Knowing” Under U.S. Law Actual Knowledge Willful Blindness – “Deliberate Indifference,” “Conscious Avoidance” Collective Knowledge of Information Regarding the Source and Nature of Proceeds Knowledge is a Key Element of an Offense under U.S. Money Laundering Criminal Statutes A Bank officer who conducts a financial transaction without knowing that the proceeds involved are the revenues from drugs sales can still be guilty of money laundering if it can be proven that he/she knew the money was derived some some type of criminal activity. Similarly, an employee who engages in a financial transaction of more than $10,000 with a customer knowing that the funds involved come from drug sales commits the crime of money laundering. In both cases, the employee, the bank and the customers conducting the transactions could face felony money laundering charges and substantial fines. Purposeful Indifference or Deliberate Ignorance: Under this doctrine, bankers must be proactive in identifying suspicious activities. For example, it is not enough that a customer tells the banker that a business or transactions is legitimate. The banker has the obligation to conduct further due diligence. Willful Blindness - Under this doctrine, if a person deliberately avoids or ignore information which could have led to the discovery of unlawful activity because he/she wants to remain ignorant of the true nature of the activity, he/she could be held responsible for whatever knowledge an investigation would have revealed. A court would find that a defendant had criminal knowledge if the defendant is found to have consciously and/or deliberately avoided knowledge of facts which would have disclosed criminal activity. Collective Knowledge - Under this doctrine, a bank is treated as if it possesses all the knowledge of all individuals (directors, officers and employees). The government may be able to prove a business entity’s knowledge by offering evidence of the aggregate knowledge of the corporation’s individual employees. This makes it crucial for banks to communicate effectively, both across and within functional areas. The Leading Collective Knowledge case involved the former Bank of New England. The bank was convicted of failing to file CTRs based on the aggregate knowledge of its employees (i.e., certain employees knew that cash transactions exceeded $10,000, while others knew of the CTR filing requirements) and finally the bank’s flagrant indifference to the reporting requirements. This led to the bank being convicted of criminal BSA violations while individual employees were acquitted.

Anti-Money Laundering Compliance Program

Financial Institutions Can Protect Themselves By Establishing an Anti-Money Laundering Program At Citigroup each business shall be covered by a written Anti-Money Laundering Program that includes: Designation of an Anti-Money Laundering Compliance Officer responsible for coordinating and monitoring compliance Verification of the identity of each customer that opens an account Evaluation of potential risks associated with the customers’ and their transactions Business/Entity Country Product Performance of appropriate due diligence at account opening and monitoring of transactions based upon the assessments of risk Procedures to detect and report suspicious transactions to government authorities and in accordance wit the Global Anti-Money Laundering Policy Development of a training plan that sets for the the frequency of training and personnel to be trained Assessments by the business of its adherence to its Anti-Money Laundering procedures Punitive fines may significantly decrease under Federal Sentencing Guidelines if the organization has taken steps prior to the offense to prevent and detect criminal conduct and to cooperate with the government. If the bank has additionally detected and reported the criminal violation, it can reduce exposure to $500,000. The Patriot Act Regulations that are Pending from the Treasury Department are Likely to Impose new Regulatory Requirements for Customer Identification, and for KYC/EDD for certain categories of Customers that are High Risk such as Correspondent Banking or Private Banking Clients, or Other Entities/Jurisdictions of Primary Money Laundering Concern (Patriot Act. Sec. 311 Designation) Sec. 352 of the Patriot Act also Imposes the requirement that Financial Institutions as defined under the Bank Secrecy Act, must Implement compliance Programs. Securities Broker Dealers, Mutual Funds, Money Service Businesses, Credit Card Systems Operators are now covered. Other FIs, as defined in the BSA, must be covered by regulations by Oct. 24, 2002.

The Anti-Money Laundering Program should be Based Upon a Risk-Based Approach Key Factors to be considered in assessing and developing appropriate controls to manage Money Laundering Risk: Different categories of customers Localities of the businesses and customers Nature of the products and services provided Expected use by customers of products and services Determines where enhanced due diligence measures should be taken in obtaining customer information and in monitoring suspicious activity Punitive fines may significantly decrease under Federal Sentencing Guidelines if the organization has taken steps prior to the offense to prevent and detect criminal conduct and to cooperate with the government. If the bank has additionally detected and reported the criminal violation, it can reduce exposure to $500,000. The Patriot Act Regulations that are Pending from the Treasury Department are Likely to Impose new Regulatory Requirements for Customer Identification, and for KYC/EDD for certain categories of Customers that are High Risk such as Correspondent Banking or Private Banking Clients, or Other Entities/Jurisdictions of Primary Money Laundering Concern (Patriot Act. Sec. 311 Designation) Sec. 352 of the Patriot Act also Imposes the requirement that Financial Institutions as defined under the Bank Secrecy Act, must Implement compliance Programs. Securities Broker Dealers, Mutual Funds, Money Service Businesses, Credit Card Systems Operators are now covered. Other FIs, as defined in the BSA, must be covered by regulations by Oct. 24, 2002.

The Enhanced Due Diligence Program Criteria for determining product lines and customers that pose a “heightened risk or concern,” for example, but not all inclusive: Private banking Onshore vs. Offshore client Correspondent banking (foreign vs. domestic) Foreign political figures/foreign corrupt officials Accounts with frequent or excessive use of funds transfers (in and out or frequent purchase of bank drafts under reporting limits) Punitive fines may significantly decrease under Federal Sentencing Guidelines if the organization has taken steps prior to the offense to prevent and detect criminal conduct and to cooperate with the government. If the bank has additionally detected and reported the criminal violation, it can reduce exposure to $500,000. The Patriot Act Regulations that are Pending from the Treasury Department are Likely to Impose new Regulatory Requirements for Customer Identification, and for KYC/EDD for certain categories of Customers that are High Risk such as Correspondent Banking or Private Banking Clients, or Other Entities/Jurisdictions of Primary Money Laundering Concern (Patriot Act. Sec. 311 Designation) Sec. 352 of the Patriot Act also Imposes the requirement that Financial Institutions as defined under the Bank Secrecy Act, must Implement compliance Programs. Securities Broker Dealers, Mutual Funds, Money Service Businesses, Credit Card Systems Operators are now covered. Other FIs, as defined in the BSA, must be covered by regulations by Oct. 24, 2002.

Citigroup Risk Based Approach to Money Laundering And Terror Financing Risk 

Risk Based Approach To Money Laundering And Terror Financing Risk Identify as early as possible suspicious activity that may represent money laundering and terror financing risk Prioritize customer and transaction for review and investigation based upon risk; Ensure that resources are deployed commensurate with perceived risks, and to Establish a corporate baseline to ensure that money laundering and terror financing risk are given appropriate weight and addressed in a consistent and quality manner across Citigroup globally.

Risk Based Approach To Money Laundering And Terror Financing Risk Key considerations in the development of the model: objective verifiable previously published material where possible, international sources

Citigroup Risk Models Risk Models for Three Principal Money Laundering/Terror Financing Factors Geography and Country Risk – 244 Countries Under Development Business and Entity Risk – 2,500 Types Product and Transaction Risk – 130 Types All of the above Services have been Identified by U.S. Regulators and other government sources as high risk. These will be contemplated in our product risk model.

Risk Model Convergence Country Risk Product Risk H M L Business & Entity Risk

Geography and Country Risk Principal factors are those that in and of themselves are so significant that they will result in a high risk score; Scoring factors, that can increase or decrease a risk score on the margin – Scoring factors are not prime determinants of the risk score. All of the above Services have been Identified by U.S. Regulators and other government sources as high risk. These will be contemplated in our product risk model.

Geography and Country Risk Principal Factors Financial Action Task Force (FATF) Non-cooperative Countries and USA Patriot Act Section 311 Designated Countries Perceived Terrorist Finance Risk Country Drug Source or Transit Country – International Narcotics Control Strategy Report (“INCSR”) Tax Problem Country - Organization of Economic Cooperation and Development (OECD) Offshore Banking Location - INCSR Citigroup’s Global Market Risk Management Rating

Geography and Country Risk Scoring Factors INCSR Primary Money Laundering Concern INCSR Money Laundering Concern INCSR Precursor Chemical Transparency International: Corruption Index INCSR: Money Laundering Crime Laws/Drug Crime Laws Heritage Foundation: Economic Freedom Index Member of FATF

Geography and Countries Risk Distributions H-M-L

Business and Entity Risk Model Uses North American Industry Classification System (“NAICS”) as source of identifying 2,500 Business and Entities Permits a high level of specificity in describing businesses - activities All of the above Services have been Identified by U.S. Regulators and other government sources as high risk. These will be contemplated in our product risk model.

Business and Entity Risk Model Categorize Business or Entity as either High or Low risk based on U.S. and International Regulatory Sources U.S. Comptroller’s Handbook Bank Secrecy Exam Handbook FATF Money Laundering Typologies EU Directive Egmont Group Wolfsberg Principles All of the above Services have been Identified by U.S. Regulators and other government sources as high risk. These will be contemplated in our product risk model.

Business and Entity Risk Scoring Chart All of the above Services have been Identified by U.S. Regulators and other government sources as high risk. These will be contemplated in our product risk model. Citigroup Draft

Citigroup Draft

Risk Businesses and Entities Approximately 130 Businesses and Entities have been identified as High Risk Retail Stores Wholesale Stores Electronics High Value / Luxury Goods Communication Transportation Services Financial Institutions Entertainment All of the above Services have been Identified by U.S. Regulators and other government sources as high risk. These will be contemplated in our product risk model.

High Risk Businesses and Entities Retail Stores Citigroup Draft

High Risk Businesses and Entities Wholesale Stores Citigroup Draft

High Risk Businesses and Entities Electronics Citigroup Draft

High Risk Businesses and Entities High Value Luxury Goods Citigroup Draft

High Risk Businesses and Entities Communications Citigroup Draft

High Risk Businesses and Entities Transportation Citigroup Draft

High Risk Businesses and Entities Services Citigroup Draft

High Risk Businesses and Entities Services Citigroup Draft

High Risk Businesses and Entities Services Citigroup Draft

High Risk Businesses and Entities Services Citigroup Draft

High Risk Businesses and Entities Financial Institutions Citigroup Draft

High Risk Businesses and Entities Financial Institutions Citigroup Draft

High Risk Businesses and Entities Entertainment Citigroup Draft

Product Risk Model Evaluate 130 types of products as high, medium, or low risk based upon the following scoring factors Offering targeted as high risk by regulators or evaluated as high risk by business unit Favors anonymity and/or involves 3rd parties Involves cash and/or cash-based instruments Involves cross-border transactions that may involve high risk geographies Funds in – i.e. customer's money May support high speed of funds movement May support high volume Citigroup Draft

Product Risk Scoring Model Citigroup Draft

Product Risk Citigroup Draft

High Risk Products Citigroup Draft

Medium Risk Products Citigroup Draft

Low Risk Product Citigroup Draft

Risk Model Convergence Country Risk Product Risk H M L Business & Entity Risk

How to Use the Rating Models Assists in amount of KYC due diligence at account opening and for ongoing updates Assists in decision on monitoring efforts to identify suspicious activity Escalates the account opening approval process