Author Archives: Reid Wegley

Know Your Customer policies (KYC) are a key aspect of any financial institution’s overall anti-money laundering (AML) compliance program. At its most fundamental level, KYC processes ensure that an organization knows who it is doing business with, whether it’s an individual or a business, and prevents the bank from inadvertently facilitating money laundering.

It sounds like common sense, but the US Patriot Act made due diligence of paramount importance within the financial industry, and federal regulators today hold organizations accountable for being able to verify the identities of their customers. In some cases where banks have inadvertently participated in funding terrorist activities, their abilities to prove that ongoing KYC due diligence has been the norm can mitigate the level and severity of punitive actions and fines.

Today, financial institutions collect and store all types of personal data on their customers as part of their KYC policies. But that also adds a level of risk to the bank. Take Barclays—it recently had a data security breach of disastrous proportions. More than 27,000 individuals had their information stolen, and the data went far beyond their financial accounts. Their profiles included medical conditions, passport numbers and more—all kept by Barclays through its KYC policy procedures. This data is currently being sold in the black market.

So today, we face an interesting dilemma: verify customers through more diligent profiling and store that data, or risk even more damage when that data is misused.

The answer is not to abandon KYC, which has proven more successful than not. And the answer is not strictly limited to more data security. Any process is only as strong as its weakest link—and with KYC policies, the weak link usually involves human resources. Financial institutions need to ensure the following:

• all personnel are well-trained in KYC and follow the processes to the letter, especially customer service and sales personnel that may face the pressure of sales quotas
• have adequate personnel available to conduct KYC implementation (this can be achieved through additional hires or by streamlining existing processes so that existing personnel have more time available)
• ensure the complete integration of processes (KYC and AML)

And, of course, financial organizations should regularly troubleshoot their data security systems.

By Richard Paxton

Want to learn more? Alacer’s AML experts will be attending the 19^th Annual AML & Financial Crimes Conference, being held March 16-19 at the Westin Diplomat in Hollywood, FL. Send an email to me at Richard@alacergroup.com to arrange a chat.

Where did the time go? This year, anti-money laundering (AML) regulations will celebrate their 44^th birthday and yet most of us think of AML as coming of age as a result of 9/11. In truth, AML regulations had their birth as part of the Currency and Foreign Transactions Recording Act (more commonly known as the Bank Secrecy Act), which Congress passed in 1970 to track the millions of dollars being laundered through U.S. banks.

Specifically, it required financial institutions to keep records of any cash transactions exceeding $10,000 and to report suspicious financial activities.

It’s unclear who coined the phrase, “anti-money laundering,” but it was sometime after the passage of the Bank Secrecy Act. It was accepted financial industry jargon by the time the USA Patriot Act was enacted in 2001, a law that expanded the power of the Secretary of the Treasury to monitor financial transactions, especially money laundering.

U.S. money laundering itself dates back to the early 1920s, when organized crime was common place and the gangs were earning huge sums of cash from illegal gambling, bootleg liquor and other underground activities. They needed a way to legitimately explain these funds, and came up with the brilliant idea of purchasing laundromats. Laundromats were a cash-only business—but over time, even the laundromats couldn’t explain just how they were as profitable as they had become.

Meyer Lansky, one of Al Capone’s contemporaries, ultimately became the Father of Money Laundering. He was determined to avoid Capone’s fate (a conviction in 1931 for tax evasion) and was the one responsible for figuring out how to use the Swiss banking system to hide his growing cash reserves. He developed the first real laundering technique, which placed illegally-received money into the Swiss bank and then loaned it back to other foreign banks, thus making it legitimate.

But the term “money laundering” really didn’t appear until 1973, when reporters began using it to reference the Watergate scandal. And oddly, it didn’t appear in a judicial or legal context until 1982 even though it was recognized as an illegal activity by the Bank Secrecy Act.

by Richard Paxton

Want to learn more? Alacer’s AML experts will be attending the 19^th Annual AML & Financial Crimes Conference, being held March 16-19 at the Westin Diplomat in Hollywood, FL. Send an email to me at Richard@alacergroup.com to arrange a chat.

When it comes to monitoring anti-money laundering (AML) compliance, the Office of the Comptroller of the Currency (OCC) can strike fear into the hearts of U.S. financial institutions–and does so on a regular basis with massive fines and sanctions. As it turns out, the OCC wields considerable power with foreign banks as well, and not just those in countries where U.S. citizens like to offshore assets.

Take Rabobank, a well-known Dutch financial institution, and a global leader in underwriting food and agricultural businesses. It’s one of the 30 largest financial institutions in the world, with 682 locations outside of its home country, including several branches in California. In 2013, it received a $1 billion fine from the OCC for manipulating interest rates; Chief Executive Piet Moerland resigned immediately in the wake of that scandal, and three former traders were criminally charged.

You’d think that a $1 billion fine would be a big wake-up call that the OCC is closely watching the bank’s operations… but apparently not. Just last month, the OCC ordered Rabobank to fix problems with its AML programs, requiring the bank to appoint a compliance committee and to conduct an assessment of locations and products that pose significant risk to the bank. Although no new fines were levied, the message is clear: AML programs are continuing to be at the top of the OCC’s priority list for close scrutiny.

by Richard Paxton

Want to learn more? Alacer’s AML experts will be attending the 19^th Annual AML & Financial Crimes Conference, being held March 16-19 at the Westin Diplomat in Hollywood, FL. Send an email to me at Richard@alacergroup.com to arrange a chat.

As the U.S. continues to hold its financial institutions to tight anti-money laundering (AML) regulations, other countries around the world are following suit…and having some success.

In January, Australia’s biggest AML investigation, dubbed Project Eligo, discovered 40 separate operations moving millions of dollars of illegal drug money offshore. One operation directly funded Hezbollah, a Lebanese military group dubbed terroristic by many countries.

With assistance from the U.S. Drug Enforcement Agency, Project Eligo seized $26 million in cash, $30 million in property such as “exchange houses,” or places where money was being laundered, and intercepted drug shipments totaling more than $530 million.

Australia has always been at the forefront of tracking down and freezing money in overseas accounts, but has struggled to find a way to have the same success within its borders.  Project Eligo is considered a prelude to Australia’s effort to revamp its regulations regarding unidentified wealth.

by Richard Paxton

(Want to learn more?  Alacer’s AML experts will be attending the 19^th Annual AML & Financial Crimes Conference, being held March 16-19 at the Westin Diplomat in Hollywood, FL.  Send an email to me at Richard@alacergroup.com to arrange a chat.)

Our last blog post introduced cryptocurrency and how U.S. anti-money laundering (AML) regulations were being applied to digital cash in an effort to control its illegal use.  But the problem extends far beyond our borders.

Earlier this month, China’s largest e-commerce group, Alibaba, banned the use and sale of Bitcoins on its site.  While Bitcoins were not accepted as a form of payment by the marketplace itself, several Chinese merchants operating within the site accepted Bitcoins as part of sales transactions.  But no longer.

Despite the rising popularity of Bitcoins in China, country officials decided that the population did not sufficiently understand how Bitcoins work, and that the acceptance of digital currency opened the door for international fraud.  Spurred on by the same fears as American banking regulators, the People’s Bank of China and four other ministries now restrict institutions like Alibaba from using Bitcoins, primarily to protect the status of the country’s currency (renminbi) and to restrict opportunities for money laundering.

Last summer in Europe, the interest in Bitcoins rose dramatically as the financial crisis intensified in Cyprus.  For Europeans and particularly Cypriots, decentralized digital currency seemed an attractive alternative to just removing money from shaky Euro banks.

In December 2013, the Bank of France joined the growing number of international banking institutions voicing concerns about the increasing use of cryptocurrency.  It conceded that the anonymity Bitcoin offers its users raises the risk of money laundering and the financing of terrorist activities.

It will be interesting to see what happens next.  According to J. J. Zhang at Marketwatch, “…with constant news of more Bitcoin regulation and bans, the 2014 outlook for the ambitious digital currency is decidedly less rosy.”

by Richard Paxton

(Want to learn more?  Alacer’s AML experts will be attending the 19th Annual AML & Financial Crimes Conference, being held March 16-19 at the Westin Diplomat in Hollywood, FL.  Send an email to me at Richard@alacergroup.com to arrange a chat.)