It’s that time of year again when Firms start putting together the “year end list” of things to do. One of the major items that is overlooked are the Firm’s Anti Money Laundering Procedures, (AMLs) as well as the annual review by an independent outside auditor.
A lot of compliance and operations personnel don’t fully appreciate the serious nature of preventing money laundering. A common misconception is “how is a client laundering money by risking it in the stock market” or “we got all of the paperwork.” This attitude leads to an environment where supervisors are not even paying attention to simple “patterns” that would indicate a potential violation.
Patterns are in random order.
Customer calls the Firm (without solicitation) and says they are in possession of a “bond” that they acquired as follows a) they found it while cleaning out their parents house after they passed away b) it was issued in a foreign country c) it is some sort of bearer bond d) it is a bond issued by ________ (fill in the blank) Government through a “special” program and now it has matured.
Usually this story is followed by “the bond has a face value of a Billion Dollars” now this might sound like some sort of a prank but I can assure you that Broker Dealers get these calls on a regular basis. Now, I’m not saying that a legitimate bond doesn’t exist with these characteristics, but virtually ALL of the time this will be a serious RED FLAG for which the compliance department and AML officer should contact the proper authorities.
This pattern might be from an existing “qualified” investor who has some fancy bond that he wants to deposit into his account. Even if the bond looks like it is a very standard transaction, one must be cautious as to where the client obtained the bond and where, when and to whom the proceeds go out.
A client opens an account and transfers $100,000 (The amount is not as relevant as the pattern and people may launder small amounts to avoid suspicion). They place a trade where they buy and sell a well known security then they request that the money be wired back to them.
Potential issues to watch for are as follows:
1) Check where the money came in from and where the wire request to send the money are from the same account as the account name is set up with.
What happens is that a client may send in the money from a business account and then wire it out to his personnel account. This could be a sign of money laundering.
Client opens an account and claims to be “heavily” involved in penny stocks and then starts sending in stock certificates from multiple companies under various corporate names that he claims he received as “payment” for services to these companies.
There are several issues that arise out of this type of transaction a) trading in penny stocks is not a crime. B) Trading in several penny stocks is not a crime nor is being “heavily” involved in penny stocks illegal either. However, the compliance officer and the AML officer must carefully monitor these transactions and watch the patterns that might develop as to the volume in the stocks traded, and how quickly the client trades out of the security, and how, where, how often and how much of the proceeds travel out of the clients accounts.
Other Red Flags include:
- The client says they are acting on behalf of another person or entity and that other person or entity has privacy concerns.
- The client asks a lot of questions relating to the Firm’s policies and procedures relating to money laundering.
- The account has frequent activity relating to transfers in and out of the account (regardless of the dollar amount).
- Any large deposit that is immediately withdrawn.
- The customer’s account information shows that they earn $100,000 a year and they deposit multiple amounts in excess of their yearly earnings. (This being a statistical improbability)
- Wire transfers come into or out of the client’s account from unrelated third parties (even related parties are a red flag).
- The client maintains multiple accounts for no apparent purpose.
- The customer is from a banned country or does business in banned countries or countries that are on government watch lists.
- The client does not appear to have any legitimate source of income. (Claims he is “retired” at 40 years of age and gives vague references to his business that he sold during the tech boom.)
- Client shows up on a FINCEN or OFAC list.
- When the client is told they are on a list they say things like “that’s my father. He is John Smith Sr. I am John Smith Jr. Happens all the time. Don’t worry about it.” (My personal favorite)
There are numerous other Red Flags and scenarios that happen every day. It is the firm’s obligation to be extra cautious in today’s environment.
Some common things that are said are:
“I know him, he’s a good guy.”
“I was at his kid’s wedding.”
“His paperwork checked out.”
Or simply believing the story told in any of the above scenarios and not taking action.