A new money laundering world was born on September 11, 2001. In response to the terrorist attacks on that day, the United States and other nation’s enacted laws and initiated regulatory controls that drastically changed the money laundering landscape on which every financial institution and most non-financial businesses must operate.
On the international front, the announcement by the Financial Action Task Force on May 31, 2002, that it is revising its 13-year-old 40 Money Laundering Recommendations has tremendous consequences for the entire world. That is because the FATF recommendations have become the world blueprint for effective money laundering countermeasures by the public and private sectors everywhere. The newly revised recommendations are likely to lead to new laws and recommendations in many countries that will affect financial institutions and businesses in most of the world.
The United States, United Kingdom and Australia have had strong anti-money laundering laws applicable to certain financial institutions, including banks, securities firms, broker-dealers and investment companies for several years. The U.S. laws have been recently strengthened and expanded to other financial industries including mutual funds, stand-alone futures commission merchants and Introducing Brokers. Among other things, the USA PATRIOT ACT of 2001 requires financial institutions to establish anti-money laundering programs which include the following minimum elements:
- Written policies, procedures and controls to comply with applicable laws and regulations and detect and prevent money laundering.
- Designated compliance officer, one who is specifically tasked with the responsibility for implementing and maintaining the AML program
- Independent examination of the company’s AML program
- Ongoing training of key personnel
Additional new requirements include enhanced “know your customer” obligations particularly related to verification of the identity of the customer, monitoring and reporting suspicious activity, special due diligence checks for certain customers (i.e. elected public officials, their families and close associates) and full compliance with the requirements of the Office of Foreign Assets Control (OFAC).
This policy establishes governing principles and standards to protect Tower Trust and its business from being used by money launderers or in any other way being involved in conducting transactions with the proceeds of criminal activity. All Tower Trust employees must be vigilant in the fight against money laundering and must not allow Tower Trust to be used or perceived to be used for illegal activity.
It is the policy of Tower Trust to support and comply with all international standards to combat illegal money laundering.
Tower Trust has developed an internal anti-money laundering program to include operating policies and procedures under the direction of a designated compliance officer.
Tower Trust will not approve a new account application for any person refusing to comply with the company’s account opening procedures.
Tower Trust will ensure that all account holders are thoroughly identified in the account opening procedures. We will require all funds transferred to Tower Trust for investment purposes to be made through a non-shell bank or financial institution in U.S. dollars. Tower Trust will not accept funds remitted from questionable and unexplained sources.
Tower Trust will close any account where unusual financial activity cannot be adequately explained by the investor.
Tower Trust will immediately terminate any account relationship if the account holder or the source of the funds is suspected of being involved in illegal activity.
What is money laundering?
Money laundering is not just the attempt to conceal, disguise or process the proceeds of drug trafficking. Rather, money laundering is conducting or attempting to conduct any financial transaction with the proceeds of criminal activity for a wide variety of reasons and purposes.
Tower Trust must be sensitive to not only the US definition of money laundering but also that of each of those countries where our customer base reside. These include, but are not limited to, Canada, Australia, and the United Kingdom. We provide investment services and opportunities to clients from other countries around the world, but these three represent our primary client base. Each of these countries has anti-money laundering laws, rules and regulations in place providing for criminal and civil legal actions for all parties involved in the money laundering process.
Money laundering, on an international level, is generally defined as conducting any form of financial transaction with the proceeds of crime with the intent to hide the source and origin or conceal the ownership of the transaction, or to use the transaction to promote or further illegal activity.
On an international level, the crimes that generate money laundering violations differ from one country to another, but in general terms these crimes always include drug trafficking, political corruption, terrorism, illegal arms dealing, kidnapping, extortion and financial fraud.
Generally speaking, money laundering involves three stages:
Physically disposing of cash or non-cash assets derived directly from illegal activity. One way to accomplish this is by placing criminal proceeds into traditional financial institutions or non-traditional financial institutions (i.e. casinos, currency exchange companies, money remittance companies or check cashing companies). Another method is converting cash proceeds to monetary instruments such as money orders, cashiers checks and bank drafts.
Separating the proceeds of criminal activity from their original illicit source through the use of layers of financial transactions, institutions, and jurisdictions. These layers are designed to hamper the audit or investigative trail, disguise the origin of funds, be an early warning system for investigative inquiries and provide anonymity. Some examples or red flags to services that may be used during this phase include the early surrender of an annuity without regard to penalties, the illicit use of bearer shares to create layers of anonymity for the ultimate beneficiary, providing false identifying information or refusal to provide verifiable identification of account or transaction ownership.
Placing the laundered proceeds back into the economy in such a way that they re-enter the financial system as apparently legitimate funds.
The degree of sophistication and complexity in a money laundering scheme is virtually infinite, limited only by the creativity of the criminals and/or their financial advisors.
It is the policy of Tower Trust to accept only U.S. dollars for deposit to accounts, settlement of all trades and related transactions.
It is the policy of Tower Trust to not accept currency, money orders or third party checks for deposit to accounts, settlement of trades and related transactions.
It is the policy of Tower Trust to accept transfers from banks in U.S. dollars by order of the account holder and for credit to the account holder’s account, for deposit to accounts, settlement of trades and related transactions.
Acceptance of any payment instrument other than a transfer from a known bank must be approved by the compliance officer or other officer of Tower Trust with appropriate documentation of that approval.
The purpose of the policy to reject cash and other unconventional payment instruments is to reduce the exposure of Tower Trust taking in funds that could be involved in money laundering or other criminal activity.
Know Your Customer (KYC)
Presently, industry regulations in the U.S. require firms to undertake reasonable efforts to obtain and maintain valid identification and essential facts relative to each customer and each account opened. Similar laws, rules and regulations are in effect in Canada, the UK, Australia and other countries.
There are pending regulations and existing guidance for banks, non-bank financials institutions and securities brokers in the U.S. on minimum account opening identification requirements. Following September 11, 2001 new account identification standards have been proposed and implemented world-wide.
The present account opening documentation required by Tower Trust meets all existing standards. The account opening documentation must be completed accurately and entirely.
The account opening procedures for Tower Trust now requires identification verification. This verification is achieved with the client providing via mail, fax or email, a copy of an official government issued identification document. This may be a passport, national identification card such as a Cedula, or a provincial driver’s license. The account opening procedure will reconcile the identification document information with the information provided on the account opening form and resolve any discrepancies.
Any account executive having concerns over the validity of the identification information provided by a client is required by Tower Trust corporate policy to bring this matter to the attention of the Tower Trust compliance officer immediately.
Special Due Diligence for Shell Banks and Foreign Bank Accounts
The USA Patriot Act of 2001 and resulting U.S. Bank Secrecy Act Regulations place complex duties and requirements on U.S. banks doing business with foreign financial institutions.
All U.S. banks are required to certify to the U.S. Treasury Department that they are not doing business in a correspondent relationship with a “shell” bank. A “shell bank” is defined as one with no physical presence and no identifiable employees. Additionally, all foreign banks doing business in the U.S. as a respondent for a U.S. bank or in any other capacity must have a designated person in the U.S. who can legally accept service of documents such as subpoenas and court orders on behalf of the foreign entity.
Banks in the U.S. must also take aggressive measures to ensure their foreign correspondent banks are not housing or “nesting” shell banks or shell financial companies in their banks.
Due to the above regulations, the U.S. banks, as part of their enhanced due diligence, are placing demands on their foreign correspondents to ensure they (the foreign correspondent) are not housing unsafe or illegal (under U.S. law) bank accounts. This pressure has generated increased scrutiny by foreign banks of the financial activities of their financially based accounts, such as those of Tower Trust.
For the above reasons, Tower Trust must be prepared to satisfy all inquiries of our banking partners and demonstrate that we are a sound company and in compliance with the national anti-money laundering protocols of the U.S. and other countries. Tower Trust maintains sensitive banking relationships with non-U.S. banks that have correspondent relationships with U.S. banks.
Laws and regulations in many other countries do have suspicious transaction reporting requirements of one form or another.
Although Tower Trust may be under no legal requirement to report suspicious financial activity, an integral part of Tower Trust’s anti-money laundering program and risk management is to monitor unusual account activity on an ongoing basis, and if any unusual activity is found, Tower Trust would cooperate, report and/or refer any such activity to the appropriate authorities of any country involved.
Financial activity associated with any account that is inconsistent with the known background, trading history, or customer activity must be brought to the attention of the compliance officer. If, after reviewing and examining all of the facts, the transactions do not make sense for the particular account, and no reasonable explanation is provided by the account holder, the account will be closed and the matter referred to Tower Trust’s counsel to evaluate the risk to Tower Trust and to make a determination if any further action is appropriate.
Extraterritorial Reach of the U.S. Laws
The U.S. money laundering laws carry substantial civil and criminal fines and penalties. The U.S. money laundering laws also have an extraterritorial reach to any foreign person, including a foreign corporation, if the transaction is conducted in whole or in part, in the U.S.
The courts have ruled that the clearing of U.S. dollar transactions to and through the U.S. financial system, constitutes conduct “…in the United States” for money laundering law purposes.
The above means that by taking in U.S. dollars from Tower Trust customers and managing these assets though U.S. dollar accounts, either directly in U.S. banks or indirectly through non-U.S. banks who maintain correspondent relationships with U.S. banks, Tower Trust can be held accountable under the U.S. money laundering laws for transactions conducted by our clients.
The U.S. Patriot Act of 2001 also expanded the financial seizure and forfeiture laws of the U.S. authorities. U.S. investigative agencies can now execute a warrant called an “arrest in rem” on a bank account of a non-U.S. bank maintained at a U.S. bank for identified criminally derived proceeds in the account of the non-U.S. bank. In this manner, U.S. authorities can seize funds from a foreign investor of Tower Trust that were deposited to the foreign investor’s account at Tower Trust by executing this legal action on Tower Trust’s bank that maintains an account in the U.S.
For these reasons, it is imperative that Tower Trust maintain a strong anti-money laundering program consistent with U.S. and international standards.
AML Policies and Procedures
Tower Trust will review its existing policies and procedures and update accordingly on an annual basis or earlier if circumstances warrant action. The update process should follow or be associated with the annual independent review of the anti-money laundering program.
Records Retention Policy
Tower Trust will retain copies of all files and documents for a period of five years.
Red Flags at the Account Opening Stage
- A customer exhibits unusual concern regarding Tower Trust’s compliance program, particularly with respect to his/her identity, occupation and assets.
- A customer refuses to provide a copy of an identification document.
- A customer, or a person associated with a particular customer, has a questionable background or is the subject of news reports indicating possible criminal activity.
- A customer appears to be acting as an agent or nominee for another person who wishes to remain anonymous.
- A customer cannot readily identify the source (i.e. bank or country) of the funds that will be used to initiate the account.
Red Flags related to Account Activity
- A customer engages in multiple transfers of funds to or from countries other than his own with no explanation.
- A customer engages in transfers to or from bank accounts located in countries identified by the European Financial Action Task Force (FATF) as “uncooperative countries” that are a high risk for money laundering activity.
- A customer makes funds transfers, conducts limited or no investment, followed by funds transfers of those proceeds to different bank accounts in different countries.
- A customer makes a funds transfer immediately followed by a request to send those proceeds to a third party person or business.