Emerging

Anti-Money Laundering
Risks to Financial
Institutions
EMERGING ANTI-MONEY LAUNDERING RISKS

TO

FINANCIAL INSTITUTIONS

1
 Every financial institution is charged with the responsibility of developing policies and
procedures to combat money laundering, which includes the duty to be aware of trends
and adaptations in the methods by which money laundering is carried out. The most
difficult aspect of this responsibility is a financial organization’s ability to anticipate new
criminal behavior and to proactively implement protocols before the criminal behavior
occurs. It’s like trying to guess what previously unknown disease will be the greatest
threat to life next week or next year. In truth, much as the emergence of a new disease
frequently determines the direction of medical science, it is often the money launderer
who determines the course the industry takes to restrict criminal money laundering
activity.
With this in mind, this white paper will briefly describe the principal organizations
involved in determining money laundering policy and procedures and will focus on
emerging money laundering risks facing the financial services industry.

Policy Making Organizations

There are a variety of industry and/or regulatory organizations which keep an
unwavering eye on money laundering processes on national, international, and global
scales. These organizations assist financial institutions by tracking developments in
money laundering and reacting with recommendations and regulations to limit the
capacity in which criminals may operate. Much of the below discussion is the result of
their findings and conclusions. They include:

U.S. Departments of Treasury, Justice, and Homeland Security. The 2007

National Money Laundering Strategy, released May 3rd, 2007, specifies the channels
of greatest risk for money laundering. They include traditional financial institutions such
as banks, as well as money services businesses, online payment systems, informal
value transfer systems, commercial enterprises, insurance companies, and casinos.
Other means of money laundering with increasing risks include shell companies and
trusts and bulk cash smuggling.1

1
2007 National Money Laundering Strategy, Appendix A, Money Laundering Threat Assessment.

2

Financial Crimes Enforcement Network (FinCEN) This bureau within the U.S.
Department of Treasury, and the administrator of the Federal Bank Secrecy Act,
expresses its mission, in part, as safeguarding the financial system from the abuses of
financial crime, including terrorist financing, money laundering, and other illicit activity.
One way in which it attempts to achieve this is by enhancing communications between
the government and the financial industry to facilitate prompt notification to law
enforcement of possible terrorist or other illegal activity.2 Since 1998, FinCEN has
published the SAR Activity Review to provide information to the industry relating to SAR
(Suspicious Activity Report) filings that may alert the industry to trends in money
laundering methods and other criminal activity.

Financial Action Task Force (FATF). A multi-national body created in response to
growing concern over international money laundering activities, FATF has grown to
include 33 member countries and a number of associate members and observer bodies.
It has issued Forty Recommendations addressing money laundering; updated with 9
Special Recommendations on Terrorist Financing.3

Federal Financial Institutions Examination Council (FFIEC). This formal
interagency body is comprised of the highest officials of each of the Federal Regulatory
Organizations (FROs), including the Federal Reserve, the OTS, the OCC, the NCUA,
and the FDIC. It has the authority to create uniform principles, standards, and report
forms for the federal examination of financial institutions by the FROs and make
recommendations for standardizing the supervision of financial institutions.4 The FFIEC
is responsible for the development of the Bank Secrecy Act/Anti-Money Laundering
(BSA/AML) examination manual utilized by the FROs to audit the effectiveness of
financial institutions in limiting money laundering activity.

Emerging Anti-Money Laundering Risks

The financial industry’s responsibility to identify and stop money laundering affects
its entire business process and failure to do so is loaded with risk. Such risks include

2
FinCEN Strategic Plan, FY 2006-2008, Safeguarding the Financial System from the Abuse of Financial Crime,
February, 2005.
3
MANDATE FOR THE FUTURE OF THE FATF, September, 2004 – December, 2012.
4
Authorized under title X of the Financial Institutions Regulatory and Interest Rate Control Act of 1978 (FIRA),
Public Law 95-630, March 10, 1979.

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operational, reputational, and financial risks as a result of regulatory penalties, forced
operational and policy changes, lost revenue streams or frozen assets, and lost
customer base because of negative publicity. A financial institution need only look to its
FROs enforcement actions5 to understand its degree of risk, but money laundering in
the post-9/11 world also makes big headlines outside of the industry. The risks we see
emerging today are identified by bodies such as FATF and FFIEC, as well as the
industry’s observations, self-reported in SARs and Currency Transaction Reports
(CTRs) and compiled through the efforts of FinCEN. The most significant emerging
money laundering risks are identified in funds transfers, including stored value cards,
mobile payments and internet payments. Other money laundering risks are identified in
shell corporations, and contractual transactions including real estate, exchange trades
and insurance transactions.

Funds Transfers

Stored Value Cards
Stored value cards, also known as prepaid cards, come in many forms and are
available for various uses. They may be in the form of gift certificate alternatives for
retail use in one store or multiple stores. They may be offered for specific purchases
such as gasoline or auto services, phone services, or mass transit. Inasmuch as their
use is widely diverse, stored value cards are typically categorized as either “open
system” or “closed system” cards.
Open system stored value cards are connected to the global funds networks such as
Cirrus or Plus. They allow for access to worldwide ATM funds and purchases with
nearly any merchant. They are often co-branded by financial institutions and may carry
the VISA or MasterCard logo with their associated benefits. They may be
geographically restricted, but are frequently available for use internationally and are
marketed as a safer alternative to carrying cash. They may be used by anyone,
including a non-purchaser and are typically reloadable6 with varying restrictions. The

5
http://www.ffiec.gov/enforcement.htm
6
A reloadable card allows the purchaser to add value at a later date and reuse the card many times, whereas a non-
reloadable card may be used only for the initial value at the time of issuance, after which it is discarded or

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usual means of obtaining such a card begins with an individual registering for,
prepaying funds into, and receiving a card. This part of the process may occur at a
financial institution, a retailer, the postal service, money service business, or similar
companies. They may also be obtained over the Internet.
Closed system cards are limited by the issuer and usually only available to purchase
goods or services from the issuer. Their use may be as limited as to a single merchant,
or as broad as to a family of businesses under the umbrella of a parent company, and
they also may be reloadable, but usually only up to a certain dollar amount.
Stored value cards are vulnerable to money laundering for a number of reasons.
Unlike debit cards, stored value cards may be issued without the obligation of a
depository account. Because the issuers and sellers of stored value cards are defined
within the regulations under money services businesses, they currently are not required
to register with FinCEN or to file Suspicious Activity Reports.7 Frequently, a financial
institution will have little direct contact with a purchaser and is not required to perform
customer identification procedures on individual purchasers when a pooled account is
utilized to process payments on the cards. There also appears to be some ambiguity of
where the responsibility lies for AML and Customer Identification Program (CIP)
provisions between banks, processors, and other entities involved in the issuance and
redemption process. Moreover, although cards issued within the United States are
subject to the Bank Secrecy Act, this is not true for cards issued outside the U.S.,
although they may still be used within its borders. For example transferring value
across borders, as in a case where two $5,000 prepaid cards are used within the U.S.
does not trigger the related currency reporting requirements.

Mobile Payments
The cellular phone industry is developing new technologies to facilitate funds
transfers such as bill pay, cross border money transfers, and point-of-sale (POS)
payments and is partnering with other service providers to achieve this in the U.S.
Mobile payments are already widespread in many European and Asian countries. If not

relinquished to the issuer. Common examples of either are a Starbucks™ card and a Borders™ Books store gift
card.
7
31 C.F.R. 103.11(uu); 31 C.F.R. 103.20(a)(5); 31 C.F.R. 103.41(a)(1).

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performed through a financial institution with an underlying account through an ACH
debit or credit card transaction, payments are conducted with the wireless company
acting as a financial intermediary that makes the payments and charges the user’s
service account (Bill to Phone). Such transactions may be made by charging a
transaction to the account or by prepaying an account for future services or purchases.
Money transmission may be made to or received from any mobile phone number or
bank account. Purchases can include travel tickets, and depending on the service
provider, cash may be obtained at ATMs or over the counter at participating businesses.
Mobile payments, or m-commerce, is not yet recognized as a potential money
laundering threat by most Federal regulatory and oversight bodies. The 2007 National
Money Laundering Strategy and Threat Assessment makes no mention of m-
commerce. The FATF Report on New Payment Methods discusses mobile payments
as mostly relying on the banking industry to facilitate transactions, but neglects to
discuss money laundering risks associated with the growth of transactions that do not
rely on financial institutions8.
This field of commerce is largely unregulated directly and it is uncertain whether or
how the regulations which apply to the financial institutions that facilitate these
transactions would also affect mobile payments. Meanwhile, at least the same level of
risk, and perhaps even greater risk, associated with transfer methods such as stored
value cards, for example, would be found with m-commerce. This is in part, due to the
fact that many emerging service providers do not fall within the definitions of institutions
subject to the Bank Secrecy Act or USA PATRIOT Act.

Internet Payments
The rapidly growing number and variety of services and goods available through the
Internet has created a proportional demand for methods of financing their purchase.
Vendors and merchants are interested in payment methods that do not carry the same
fee burdens as credit cards. Consumers, still wary of using credit cards over the Internet

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Such transactions may be facilitated through the use of RFID chips or phone SIM cards (electronic wallets) that act
much like a stored value card or debit card and may be reloaded throughout the life of the device. Other transaction
types include “callback” payments or text message payments. Speech: Towards a European Payment and
Information Space: m-Payments, Viviane Reding, Before the Roundtable Conference on m-Payments, Brussels,
June 29, 2006.

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in spite of assurances of digital encryption security, or who do not have credit cards,
prefer payment methods that do not require their use. In response, numerous service
providers, such as well known PayPal, offer individuals the ability to make online
purchases, funding accounts with wire transfers, money orders, and even cash. These
providers have tapped into a huge, still unsaturated market for Internet financial
services. In 2004 Paypal did 339.9 million transactions totaling $18.9 billion dollars.9 In
the last quarter of 2005 alone, it conducted 129.7 million transactions for a total of $8.1
billion dollars.10
In most cases, the provider of this service will not have a face-to-face relationship
with its customers and may even allow anonymous accounts. The ability to engage in
transactions across international borders enhances the potential for money laundering
as payments may be directed to off-shore Internet payment service providers that
thereafter facilitate transactions unregulated by anti-money laundering laws of the
United States. The potential for maneuvering around OFAC restrictions is also
enhanced using similar means.11

Business Entities

Shell Corporations
Shell corporations are legal entities that are not publicly traded and have no assets,
no employees, no operations, and no physical address. They are frequently created for
the legitimate purposes of easing corporate mergers and the transfer of currency and
assets between companies as well as to hold the stock or tangible assets of other
businesses. They have also been used for less than legitimate purposes such as tax
evasion and, more recently, money laundering. Because they are not publicly traded,
they are not subject to many of the ownership disclosure requirements of other
companies listed on the stock exchanges. Additionally, many states’ incorporation laws
do not require owners to be named at all and will allow other companies to own shell
corporations, further clouding the ability to trace accountable parties. The formation of

9
Statement of Kevin Delli-Colli, Deputy Assistant Director, Financial & Trade Investigations Division, Office of
Investigations, U.S. Immigration and Customs Enforcement, Department of Homeland Security, Before the
Committee on Banking, Housing, and Urban Affairs, United States Senate, April 4, 2006, Washington, D.C.
10
F.N. 1, at 43.
11
Report on New Payment Methods, Financial Action Task Force, October 13, 2006.

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shell companies within the U.S. is often promoted abroad for the privacy protections
they offer.
Shell companies create a risk for money laundering because they allow for access to
the nation’s financial institutions without the transparency required of the AML
regulations.12 FinCEN notes there are 47 state jurisdictions within the U.S. that do not
require the reporting of owners of an LLC.13 Aside from foreign shell banks, a subset of
shell corporations, they are not defined within the Bank Secrecy Act so as to fall within
the regulatory reporting provisions, and may be subject to the BSA’s catch-all
definitions14 only under certain conditions. Nevertheless, transactions with shell
companies pose such a growing concern that, despite the need for substantially more
rigorous due diligence to expose potential money laundering activity, it is well within a
financial institution’s best interests to develop policies and procedures to identify owners
and monitor their business activities.

Contracts

Real Estate
In November and December, 2006, FinCEN released two important assessments of
the money laundering risks associated with real estate transactions, both commercial
and consumer.15, 16 In the 10 years through August 2006, of nearly 10,000 SARs filed
involving commercial real estate transactions, more than 96 percent were filed by banks
and other depository institutions.17 Of a sample analysis, 66 percent involved
suspected money laundering, structuring, and related activities.18 These activities

12
Company Formations: Minimal Ownership Information is Collected and Available, Testimony Before the
Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs, U.S.
Senate, Yvonne D. Jones, Director, Financial Markets and Community Investment, November 14, 2006.
13
FinCEN Advises Financial Industry on Potential Risks of Shell Companies, Press Release, November 9, 2006.
14
“[A]ny business or agency which engages in any activity which the Secretary of the Treasury determines, by
regulation, to be an activity which is similar to, related to, or a substitute for any activity in which any business
described in this paragraph is authorized to engage: or any other business designated by the Secretary whose cash
transactions have a high degree of usefulness in criminal, tax, or regulatory matters.” 31 USCS § 5312(a)(2)(y) and
(z).
15
Mortgage Loan Fraud: An Industry Assessment based upon Suspicious Activity Report Analysis, FinCEN,
November, 2006.
16
Money Laundering In The Commercial Real Estate Industry: An Assessment based upon Suspicious Activity
Report Analysis, FinCEN, December, 2006.
17
Id. at 3.
18
Id. at 4.

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included frequent transfers of funds between accounts for no apparent business
purpose, multiple cash deposits and wire transfers, deposits of large numbers of
traveler’s checks, and withdrawals of cash to purchase monetary instruments that are
later re-deposited.
By contrast, whereas suspicious activity reporting of mortgage loan fraud has nearly
quadrupled since 2002, the percentage of reports that also indicated structuring or
money laundering activity was less than one percent of the total.19 Nevertheless, the
numbers represent a significant increase in such activity, roughly coinciding with the
boom in the housing market. Mortgage lending activities that have been identified as
increasing risk include automated loan processing and the use of document couriers
and mortgage brokers. Automated loan processing, via the telephone or the Internet,
as well as the use of couriers, diminish the ability of financial institutions to obtain
positive, verifiable identification of the parties to a transaction. Mortgage brokers are
still largely unregulated in the current AML environment,20 face disparate licensing
requirements state to state, and are frequently not subject to background checks.
“Persons Involved in Real Estate Closings and Settlements” are not required to have an
AML program, file SARs or CTRs, or to have a CIP program in place.

Trade Based Money Laundering

Trade based money laundering is not the newest means of hiding the illicit sources
of money. The Black Market Peso Exchange, recognized in the period surrounding the
terrorist attacks of 2001, is one example of this method of laundering money. Additional
means of trade based laundering are becoming more common, as terrorist financiers
and launderers seek less obvious ways of infiltrating the financial industry. These
methods frequently include the exchange of legitimate goods and even services. The
difference between trade based money laundering and legal business transactions,
however, is in the price obtained or paid. An over-valuation of merchandise results in
an importer paying a higher-than-market price which facilitates the transfer of additional
funds offshore. An under-valuation results in the opposite with funds moving into the

19
F.N. 14, at 8.
20
Although an Advance Notice of Proposed Rulemaking for Persons Involved in Real Estate Closings and
Settlements was issued in April, 2003, no rules have yet been made.

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country. Other methods of conducting trade based money laundering include double
invoicing, misrepresenting the quantity of goods shipped, and misclassifying shipped
merchandise as different products of higher or lower value.21
Trade based money laundering is often the most difficult to detect because of the
potential complexity of the transactions and the number of individuals or merchants
involved. The financial services industry has little regulation when it comes to trade-
based money laundering, but it should be noted that it is very involved in providing
information to financial intelligence units. This is likely because financial institutions
often already have in place the means by which they can evaluate the business
practices and inventory of their customers. They may increase their ability to spot
potential money launderers with the use of red flag indicators available through FATF.22

Insurance
Insurance companies have gained the attention of money laundering observers as a
result of the availability of certain products that lend themselves to greater risks.23 The
penetration of traditional financial institutions into the insurance market makes it
particularly important that these risks be understood. Financial institutions must be
aware that the risks are apparent at every stage in the insurance cycle, from
underwriting to termination and redemption. Scenarios include third-party payment of
premiums with illicitly obtained funds, borrowing against policies purchased with illegal
money, one-off payments for policies that are subsequently terminated within the
contract cancellation period, and fraudulent loss claims involving high value goods
purchased with illegal funds.24
One difficulty in tracking illegal activity through the insurance industry is the lack of
anti-money laundering program and suspicious activity reporting requirements for one of
the largest segments of the industry, agents and brokers. These obligations are left to
the insurance companies and made more difficult to enforce in a competitive market
when the agents and brokers are not their official employees.

21
U.S. Money Laundering Threat Assessment, December, 2005.
22
Trade Based Money Laundering, Financial Action Task Force, June 23, 2006.
23
Permanent life insurance products besides group life, annuity contracts, except for group contracts, and any other
insurance product with cash value or investment features. 31 C.F.R. 103.137.
24
Money Laundering and Terrorist Financing Typologies 2004-2005, Financial Action Task Force, June 10, 2005.

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Action Steps and Best Practices

Review Policies and Procedures –

o Determine whether your policies address emerging forms of payment
methods, higher risk commercial transactions, and new lines of
business or products.
o Determine whether your current or projected product lines warrant
implementation of new policies.

Compare and Strengthen
o Reinforce your current policies using directives and guidances by your
Federal Regulatory Organization to fill in the gaps or shore up weak
spots.
o Review new AML examination procedures to determine deficits within
your own policies.

Determine Breadth
o Assess your current CIP procedures to verify its application across the
spectrum of your product lines.
o Understand that new product lines, while not yet formally or fully
regulated, may still fall within catch-all provisions of the regulations.

Monitor
o Continually review processes such as Internet identity verification to
assure that non-traditional application procedures meet minimum
requirements.
o Review the actions of unofficial employees, such as agents that may
carry the burden of implementing policy without the risk of failure to
implement.

Document and Retain
o Maintain records of executive and procedural decisions determining
risk and applicability of program implementation, particularly when a

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 decision to not implement new policies or change existing procedures
is made.

Conclusion
The risks associated with emerging trends are not all new to financial institutions,
some resulting from previously known activities, but growing in frequency and scope.
Whether new or increasing, these risks require financial institutions to adapt and adopt
new policies and procedures to mitigate their effects on their business and the financial
industry, as a whole.
The most obvious means of combating these trends relies heavily on already
implemented procedures, particularly customer identification and effectively managing
high-risk customers. This may be difficult when dealing with customers who present
with minimal information, as with shell corporations. Due diligence procedures should
be well crafted and applied in all cases unless their relaxation is justifiable and
documented. Policies should be put in place to restrict account opening in situations
where the risk to the institution outweighs the benefits of doing business. In all
situations, reputational and operational risk should weigh heavily in the minds of policy
makers and institutions.
The best sources of policy making guidelines and information come from the
advisory groups and governmental bodies noted above, as well as a financial
institution’s Federal Regulatory Organization. Time and again, they have proven in
audits and disciplinary actions that one of the best mitigating factors for isolated
mistakes is communication. Communication is key, not only to compiling the data used
to analyze the effectiveness of policy, but also to determining the best approaches to
the emerging trends in money laundering.
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Information Analytics Group Inc. All rights reserved.

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 ELECTRONIC BIBLIOGRAPHY AND ADDITIONAL REFERENCES

DEPARTMENTS OF TREASURY, JUSTICE, AND HOMELAND SECURITY

2007 National Money Laundering Strategy
- http://www.treas.gov/press/releases/docs/nmls.pdf
U.S. Money Laundering Threat Assessment, December, 2005
- http://www.treas.gov/offices/enforcement/pdf/mlta.pdf

FFIEC - http://www.ffiec.gov/
Bank Secrecy Act Anti-Money Laundering Examination Manual
- http://www.ffiec.gov/bsa_aml_infobase/pages_manual/manual_online.htm

FinCEN – http://www.fincen.gov
Strategic Plan, FY 2006-2008, Safeguarding the Financial System from the Abuse of Financial
Crime, February, 2005
- http://www.fincen.gov/strategicplan2006_2008.pdf
Potential Risks of Shell Companies
- http://www.fincen.gov/AdvisoryOnShells_FINAL.pdf
The Role of Domestic Shell Companies in Financial Crime and Money Laundering:
Limited Liability Companies
- http://www.fincen.gov/LLCAssessment_FINAL.pdf
Mortgage Loan Fraud: An Industry Assessment based upon Suspicious Activity Report Analysis
- http://www.fincen.gov/strategicplan2006_2008.pdf
Money Laundering In The Commercial Real Estate Industry: An Assessment based upon
Suspicious Activity Report Analysis
- http://www.fincen.gov/commercial_real_estate_assessment_final.pdf

STATUTES AND REGULATIONS

Financial Institutions Regulatory and Interest Rate Control Act of 1978, P. L. 95-630
- http://www.access.gpo.gov/uscode/title12/chapter34_.html
31 C.F.R. 103
- http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&tpl=/ecfrbrowse/Title31/31cfr103_main_02.tpl
31 USCS § 5312
- http://www.law.cornell.edu/uscode/html/uscode31/usc_sec_31_00005312----000-.html

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SPEECHES AND TESTIMONY
Speech: Towards a European Payment and Information Space: m-Payments, Viviane Reding
- http://ec.europa.eu/commission_barroso/reding/docs/speeches/m-payments_20060629.pdf

Statement of Kevin Delli-Colli, U.S. Immigration and Customs Enforcement, Before the
Committee on Banking, Housing and Urban Affairs
- http://banking.senate.gov/_files/dellicolli.pdf
Testimony of Yvonne D. Jones Before the Permanent Subcommittee on Investigations,
Committee on Homeland Security and Governmental Affairs, U.S. Senate,
- http://www.gao.gov/new.items/d07196t.pdf

FINANCIAL ACTION TASK FORCE - http://www.fatf-gafi.org

MANDATE FOR THE FUTURE OF THE FATF
- http://www.fatf-gafi.org/document/49/0,2340,en_32250379_32236836_36309041_1_1_1_1,00.html
Trade Based Money Laundering
- http://www.fatf-gafi.org/dataoecd/60/25/37038272.pdf
Money Laundering and Terrorist Financing Typologies 2004-2005
- http://www.fatf-gafi.org/dataoecd/16/8/35003256.pdf
Report on New Payment Methods
- http://www.fatf-gafi.org/dataoecd/30/47/37627240.pdf

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 Actionable intelligence to help make critical
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companies. ©2007 LexisNexis Risk & Information Analytics Group Inc. All rights reserved.