Implementation of BSA Programs: Integration of ... - Events - sifma

Implementation of BSA Programs:
Integration of Fraud & AML, Tax & AML, Banks & B/D'S
James James Heinzman Heinzman
Alison Alison Morpurgo--Cotter
Morpurgo Cotter
Actimize Actimize
UBS UBS Wealth Wealth Management
Management
Michelle Michelle Neufeld Neufeld
Arlene Arlene Semaya Semaya
Bank Bank of of America America
JP JP Morgan Morgan Chase Chase & & Co. Co.
Robert Robert Skrzypczak Skrzypczak
Credit Credit Suisse Suisse Securities Securities (USA), (USA), LLC LLC

Implementation of BSA Programs:
Integration of Fraud & AML, Tax & AML, Banks & B/D'S
Enterprise Program
Challenges/opportunities from a global/legal
entity perspective
Firms/financial holding companies may endeavor to
manage AML risk (and other kinds of risk too actually)
of the enterprise as a whole rather than each entity or
component separately.
Can mean sharing CIP, customer due diligence
information, SARs and other risk relevant information
upwards with a parent.
Can mean that the AML Group or the AMLCO or analytics
group ultimately covers multiple entities, not just the bd.
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Implementation of BSA Programs:
Integration of Fraud & AML, Tax & AML, Banks & B/D'S
. Enterprise Program
Challenges/opportunities from a global/legal
entity perspective
Managing regulatory relationships
Typically managed by businesses as opposed to legal
entity
Consistency in message, training
More efficient AML program because more tailored to
the identified risks of the Firm
Can leverage resources
Get a better sense of true risk of the whole enterprise
because risk in one area can readily impact risks in
other areas or across the company
Facilitates enterprise-wide enterprise wide risk reporting and risk
management – the enterprise-wide enterprise wide risk assessment
drives other aspects of the AML program
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Implementation of BSA Programs:
Integration of Fraud & AML, Tax & AML, Banks & B/D'S
Evolution from AML to Financial Crimes
Evidenced by change of department
names – even SIFMA CMTE changed its
name a few years ago in a nod to the
maturing view of financial crimes
Maturing programs have allowed us to
evolve
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Implementation of BSA Programs:
Integration of Fraud & AML, Tax & AML, Banks & B/D'S
Monitoring Tools
Traditional AML Tools
AML Transaction Monitoring
CIP/KYC On-boarding On boarding and Periodic
Firm Escalation Policy
AML Training
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Implementation of BSA Programs:
Integration of Fraud & AML, Tax & AML, Banks & B/D'S
Non-Traditional Non Traditional Tools That Can Be Leveraged for AML
Purposes
Trade Surveillance
Team Approach includes AML training for red flags, regular
interaction with surveillance team, feedback on matters
escalated
Include Control Room, Conflicts, Employee Trading
Credit Review
Team Approach includes AML training for red flags, regular
interaction with credit, feedback on matters escalated
Legal Department
Litigation and Regulatory Review
Corporate Security
Human Intelligence
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Implementation of BSA Programs:
Integration of Fraud & AML, Tax & AML, Banks & B/D'S
Sources of Fraud Referrals/Investigations:
Monitor current news stories;
Subpoena Reviews;
Loan Service Repots;
Integrity hotline;
Regular and Open Communication between AML and other
Coverage areas, including:
Employment Law;
Investment Counterparty Due Diligence Teams;
Operational Risk;
IT Security; and
Front Office Supervisors/COOs/Administrative Officers.
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Implementation of BSA Programs:
Integration of Fraud & AML, Tax & AML, Banks & B/D'S
Fraud: What TYPE should you be looking out for?
Wire/funds transfer fraud;
Structured Deposits/Withdrawals;
Bribery/FCPA;
TARP Fraud;
Market Manipulation;
Insider Trading;
Penny Stock/Low-Priced Stock/Low Priced Securities;
Identity Theft/Account Takeovers;
Mortgage Fraud;
Computer Intrusions;
Employee Fraud; and
Tax Evasion
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Implementation of BSA Programs:
Integration of Fraud & AML, Tax & AML, Banks & B/D'S
Combating Offshore Tax Evasion
Congress has made numerous attempts to pass legislation to
combat offshore tax evasion over the last two years.
Notably the Stop Tax Haven Abuse Act (co-sponsored (co sponsored by
then Senator Obama and Senator Levin) which is
predecessor of the current bill, the Foreign Account Tax
Compliance Act (FATCA).
Two significant differences from the Stop Tax Haven Abuse
Act:
FATCA contains no blacklist of countries
FATCA does not seek to treat foreign domiciliary companies
as US for income tax purposes based on US management
Introduced with bipartisan support initially, FATCA was
passed in the Senate last week and is expected to pass in
the House imminently.
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Implementation of BSA Programs:
Integration of Fraud & AML, Tax & AML, Banks & B/D'S
While still subject to modification, the Foreign
Account Tax Compliance Act would require:
Withholding Tax and Information Reporting for
Certain Payments to Foreign Financial
Institutions (FFI's)
encourage disclosure of US-person US person accounts through
Information Reporting Agreement which will include kyc
requirements for identifying US person
30% withholding on U.S. source income and
proceed payments to FFIs that do not enter into
such agreements (effective 2013)
alternatively FFI can elect to report as a US FI (i.e. 1099
reporting) but this requires extensive technology for
FFIs
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Implementation of BSA Programs:
Integration of Fraud & AML, Tax & AML, Banks & B/D'S
While still subject to modification, the Foreign Account Tax
Compliance Act would require:
New withholding on some dividend equivalent payments to
non-U.S. non U.S. clients
New limits on issuance of bearer bonds to foreign investors
"Material" Advisors to Disclose Client's
Acquisition/Formation of Foreign Entity
Increased reporting on Passive Foreign Investment
Company interest by US person
Increased reporting and increased penalties for failure to
report foreign trusts and presumption rules
Increased reporting and penalties for U.S. persons who do
not disclose foreign accounts
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Implementation of BSA Programs:
Integration of Fraud & AML, Tax & AML, Banks & B/D'S
Transformation of AML Programs
3rd wave of AML program focus is coming
Drug trafficking and terrorist financing have been drivers
Programs expanding to see detect linkages between fraud
schemes and money laundering scenarios
Many institutions are forming Financial Crimes Units
Responsible for Fraud and AML - detection and prevention
“FINANCIAL FINANCIAL INVESTIGATION UNIT MANAGER “
AML Fraud
Financial Crime
ID
Theft
Market
Abuse
Enterprise Risk Framework
Compliance
Marketing
Risk Financial Profitability
Mgmnt Transparency Analysis
CRM
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Implementation of BSA Programs:
Integration of Fraud & AML, Tax & AML, Banks & B/D'S
Solution Approach
Who are my customers?
Comprehensive customer classification process
Across all business units, geographies, and products
How are they related?
Link analysis
What are they doing?
Behavior and peer profiling
Anticipatory behavior analysis
Rules and events
Is it suspicious?
Multidimensional correlation of factors
Specific data requirements (business, geography, product)
Specific business logic and profiles (business, geography,
product)
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Implementation of BSA Programs:
Integration of Fraud & AML, Tax & AML, Banks & B/D'S
Different Rules for Different Business
Non-Custodial
Non Custodial - Execution only
Custodial
Retail and Private Client Services
Full-Service Full Service or Self Directed Brokerage
Asset Management
Prime Brokerage / Derivatives Clearing
Investment Banking & Financing / Origination
Corporate Finance & Advisory
Equity & Equity-Linked Equity Linked Origination
Debt Origination
Leveraged Finance / Syndicated Loans
Private Equity
Investment Banking & Financing / Origination
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Implementation of BSA Programs:
Integration of Fraud & AML, Tax & AML, Banks & B/D'S
Dynamic Anomaly Detection
Leverages profiles to create dynamic view for multiple entities
Learns automatically what is normal, based on actual behavior
Adapts to changes in account and customer behavior
Discovers unusual activity that may not be a known risk
SAM Profile Description
Historical Behavior Profiling Learns activity patterns of each account
and maintains customer activity profile
Peer Group Behavior Profiling Learns activity pattern of entity segments
and maintains customer activity profiles
Anticipatory Behavior Profiling Stores anticipatory behavior declared by
the customer, for actual event comparison
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Time Check….
Check
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Implementation of BSA Programs:
Integration of Fraud & AML, Tax & AML, Banks & B/D'S
Case 1 – Sample Real-life Real life Scenario
A start up hedge fund establishes a prime broker relationship with with
a large wholesale
brokerage firm
The hedge fund is being funded and grows
The fund has its high net worth clients open retail brokerage accounts accounts
in the same firm and
transfer low liquidity assets into it
The fund is trading the same assets and inflates their prices
A number of customers are making large PIKs using the transferred assets as investments in
the fund
After a month the customers liquidate their position in the hedge hedge
fund and wire funds to a
known tax haven
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Implementation of BSA Programs:
Integration of Fraud & AML, Tax & AML, Banks & B/D'S
Case 1 – Applying AML Detection
A start up hedge fund establishes a prime broker relationship with with
a large wholesale brokerage firm
The new account is classified as high risk and is being closely monitored
The hedge fund is being funded and grows
Deviation from peer group behavior is identified
The fund has its high net worth clients open retail brokerage accounts accounts
in the same firm and transfer low
liquidity assets into it
Link analysis connects a logical entity of accounts
Accounts are profiled on the logical entity level and activity is is
being aggregated
The fund is trading the same assets and inflates their prices
Alert “Excessive Excessive assets transfer” transfer is triggered
Alert “Wash Wash Transactions” Transactions
A number of customers are making large PIKs using the transferred assets as investments in the fund
Alert “Excessive Excessive assets transfer” transfer is triggered.
After a month the customers liquidate their position in the hedge hedge
fund and wire funds to a known tax
haven
Alert “short short term investment in a long term product” product is triggered.
Alert “Transfers Transfers to/from High-Risk High Risk Destinations “is is triggered
Alert “Excessive Excessive Fund Transfers “ is triggered
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