1. 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
Tel: /
©2005 Citigroup, Inc.
External

2. 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

3. 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

4. Financial Institutions Fined for Violations of U. S
Financial Institutions Fined for Violations of U.S. Anti-Money Laundering Regulations
AmSouth Bank
$10,000, $40,000,000
AML Compliance Program Deficient
Suspicious Activity Reports (SARs) – Fail to File
RIGGS Bank
$25.0 Million $16.0 Million
SARs – Fail to File Currency Transaction Reports (CTRs) – Fail to File
Korea Exchange Bank
$1.1 Million
SARs – Fail to File 39 SARs ($32 Million – in transactions)
Western Union Financial Services, Inc.
$11.0 Million
SARs – Fail to File
SARs – Incomplete SARs
CTRs – Fail to File
Banco Popular de Puerto Rico
$20.0 Million
Sovereign Bank
$700,000
U.S. Trust Company
$10,000,000
(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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.

10. 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.

11. 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.

12. Anti-Money Laundering Compliance Program

13. 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.

14. 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.

15. 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.

16. Citigroup Risk Based Approach to Money Laundering And Terror Financing Risk 

17. 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.

18. 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

19. 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.

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

21. 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.

22. 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

23. 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

24. Geography and Countries Risk Distributions H-M-L

25. 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.

26. 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.

27. 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

28. Citigroup Draft

29. 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.

30. High Risk Businesses and Entities Retail Stores
Citigroup Draft

31. High Risk Businesses and Entities Wholesale Stores
Citigroup Draft

32. High Risk Businesses and Entities Electronics
Citigroup Draft

33. High Risk Businesses and Entities High Value Luxury Goods
Citigroup Draft

34. High Risk Businesses and Entities Communications
Citigroup Draft

35. High Risk Businesses and Entities Transportation
Citigroup Draft

36. High Risk Businesses and Entities Services
Citigroup Draft

37. High Risk Businesses and Entities Services
Citigroup Draft

38. High Risk Businesses and Entities Services
Citigroup Draft

39. High Risk Businesses and Entities Services
Citigroup Draft

40. High Risk Businesses and Entities Financial Institutions
Citigroup Draft

41. High Risk Businesses and Entities Financial Institutions
Citigroup Draft

42. High Risk Businesses and Entities Entertainment
Citigroup Draft

43. 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

44. Product Risk Scoring Model
Citigroup Draft

45. Product Risk
Citigroup Draft

46. High Risk Products
Citigroup Draft

47. Medium Risk Products
Citigroup Draft

48. Low Risk Product
Citigroup Draft

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

50. 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