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Fraud looms large on BSA menu (December 2009)

Anecdotes from an ABA conference illustrate the overlap of anti-fraud and anti-money laundering efforts, and the potential for improving the effectiveness of each.

By Steve Cocheo, executive editor. This is the third in a series of articles that began with October’s “Get the best out of BSA technology, and which continued with November’s “BSA merges with anti-fraud.”

Experts offer suggestions on how to make better use of the overlap between the two disciplines

Somewhere between the moo goo gai pan and the General Tso’s chicken, dirty business was going on behind the scenes at a string of Chinese food buffets in the New York metro area.

The story behind that discovery is one of four vignettes drawn from the 2009 Money Laundering Enforcement Conference, held in mid October, sponsored by ABA and the American Bar Association. What they share: The increasing confluence of money laundering and fraud activity.

Chinese, with a side of Mexican
Bank Secrecy Act compliance once revolved around the effort to fight narcotics trafficking, but there’s a host of other illicit activities generating funds that have to be laundered. The buffet case is one example.

“Money is coming from a diverse range of crimes,” federal agent Marcy Forman told bankers. Forman, director of intellectual property at ICE (U.S. Immigration Customs Enforcement, Department of Homeland Security), and formerly director of ICE’s Office of Investigations, told bankers the story of Operation Goldenwire.

Forman said a pair of owner/operators of a string of Chinese buffet restaurants were engaged in human trafficking. Alien laborers from China and Mexico were smuggled into the country to work at below-minimum-wage jobs in the restaurants. Their lodgings, livelihoods, transportation, and daily movement were all controlled and/or owned by those who had brought them into the country illegally.

“The buffets are a big cash business,” Forman said, which gave the owners the opportunity to set up nominee accounts for the workers and other mechanisms to hide their gains from the human trafficking activities. In the end, the pair were brought to justice. They received 18-month prison sentences.

At bottom, this case is one where money laundering was performed to cover up fraudulent acts.

From Africa, with deceit
What banker hasn’t heard of the longstanding, “Nigerian” scam? This scam typically takes the form of an e-mail, these days, sent on behalf of an alleged party with money who, for a variety of reasons, can’t get it out of the country he or she is in without an outsider’s help.

There is a play for sympathy, with the promise that if the recipient will help, they will not only be doing a good deed, but be awarded a significant amount of money. Along the way, the fraudsters wind up asking for cash, account numbers, or other information that enables them to fleece the victim.

Douglas Leff, unit chief at the Financial Crimes Section of the FBI Asset Forfeiture and Money Laundering Unit, noted that bankers have wondered how a scam that’s been publicly punctured and exposed over and over in the media can still keep working.

“Yet people still believe it,” said Leff, “and they fall for it every day.”

Leff was involved in the successful solution to one such case where a ring operating out of Nigeria had hit many victims, including an elderly missionary. They had varied the story for her sake, writing of an elderly missionary of their invention who had become too ill to continue, who wanted another missionary to continue his work with his huge endowment, albeit in the United States.

The U.S. missionary fell for the scam, hook, line, and sinker. Along the way, the fraudsters requested a meeting with her in Canada. She traveled to the meeting spot, where she was shown a bag full of currency. But it was discolored and damaged. They told her that the charity working with the ailing missionary needed to pay a chemist to undo the damage with a special process. Could the American missionary please put up the necessary funds for the cleaning, temporarily?

The woman readily agreed, and dug into savings. Not surprisingly, she was later told that the $500,000 she had put up had been used for a treatment—an unsuccessful treatment.

Sensing a live one, the fraudsters told her that the chemist felt badly that his process hadn’t worked, and was willing to try again, for only half his price. The gullible missionary put up $250,000 more. This went on, incredibly, until she told the fraudsters that she was at the end of her life savings.

The fraudsters asked if she could possibly borrow more.

The missionary tried, and, having approached her family for funds, was told she had been scammed.

Leff said the ensuing investigation had an adequate paper trail to lead investigators to other victims, and, in time, to the fraudsters. He painted a vivid picture of the scene in Lagos, Nigeria, where that country’s national police agency, at the Bureau’s request, found and arrested the fraudsters. Much of the city, said Leff, has deteriorated, and many buildings lack water and electricity. Among those that still do are internet cafes, where fraudsters spend their day, sending out e-mail after e-mail.

The good news in this case, said Leff, was that the authorities recovered 75 cents on the dollar for the victims.

Dirty tricksters and their helpers
Bernie Madoff’s massive Ponzi scheme (when will we change the usage to “Madoff scheme”?) was only one of the many such frauds to come to light when the financial crisis hit and the music stopped playing.

“It was like the lights came on and all the cockroaches had to run,” said speaker Teresa Pesce, principal, forensic services, and leader, AML Services Group, at KPMG, LLP, New York.

Pesce and others spoke of cases where Ponzi frauds like Madoff’s and the many others that have come to light left their tracks. Peter Djinis, with the Law Offices of Peter G. Djinis, Sarasota, Fla., spoke of red flags that should be watched for, and used actual cases, without identification, to illustrate them. The following comes from his presentation—more will be presented online.

Djinis, a former government official, has worked as an expert witness for both banks and other parties in cases involving “viatical trusts,” which purchase pools of life insurance policies. Ten years ago this area was rife with fraud, and it appears to be coming back, with banks exposed to suits for alleged failure to monitor potentially fraudulent activity, he said.

Warning signs include:
• Questionable funds transfers from the trust to commercial and personal accounts under the investment manager’s control.

• No funds from the trust’s account used to purchase insurance policies—the stated purpose of the trust.

• Substantial withdrawals—$100,000 amounts—from investment or related accounts at the bank—some of them redeemed remotely at Nevada casinos.

In investment advisor frauds, Djinis said that a clear warning sign is “a daily money race,” where the customer is constantly shifting funds among accounts to cover checks.

“Indications are that there is some kind of untoward activity that may indicate some kind of fraud,” he said.

“I rob you (or cheat you) in the name of my cause!”
Increasingly, the lines between different illicit activities and motives have been blurring. In a conference speech, David Cohen, Assistant Secretary Of The Treasury For Terrorist Financing, noted that terrorist organizations, including elements of al Qaida, have been turning to conventional criminal activities to generate funds for their activities. Among the crimes: cigarette smuggling; piracy of films, music, and software; street crime; drug trafficking; and bank fraud, the latter including online credit card fraud.

Fraud and BSA converge
In a number of reports and other activities, notably studies of mortgage-related fraud, the Financial Crime Enforcement Network has developed the concept that money laundering and fraud can be interrelated. FinCEN Director James Freis spoke to this in a conference presentation.

“While fraud and money laundering are often viewed as separate criminal enterprises, acts of fraud and acts of money laundering are often quite interconnected,” said Freis. “The financial gain of the fraudulent activity ultimately needs to be integrated into the financial system, so money laundering is often a product of fraud.”

Freis, referring to a round of visits he had made to certain large banks and money-service businesses, stated that “it was of interest to FinCEN that many banks’ AML programs are run entirely separately from their fraud detection programs. Several banks noted the challenge that with pure money laundering, there typically is not a loss for the bank, meaning there are no funds to recoup.”

Freis appeared to consider this as “silo” thinking. “From a due diligence perspective,” he said, “information financial institutions have available and collect to comply with their anti-money-laundering program requirements in many ways mirrors the information that they would already be gathering for anti-fraud purposes; customer and transactional information used for AML purposes is often the same customer and transactional information needed for fraud investigations. As a result, the resources being spent on fraud detection and prevention within financial institutions may well support the AML program, and vice-versa.”

Piggybacking on the rise
Freis went further into the findings of the agency’s large institution outreach project. He said that several of the banks visited commented that they have been seeing a rise in filing of fraud-based SARs. Specifically, he said, they had seen increases in mortgage loan fraud, home equity loan fraud, credit card fraud, and account misrepresentations and false statements in general.

Indeed, earlier in the conference, Michael Deluca, senior advisor in FinCEN’s Office of Regulatory Analysis, Regulatory Policy, and Programs Division, briefed bankers on the trends the agency sees in SAR filings. Last year marked an enormous surge, he said, in the filing of SARs based on fraud. He added that in some states, rising fraud reports, rather than money-laundering reports, accounted for increases year over year in overall SAR filing. He added that statistics show growth in a pattern he calls “piggybacking,” where frauds of various types are reported in SARs that combine reporting of money-laundering activity as well as fraud. There are other combinations, as well. He noted, for instance, that check fraud has been flagged not only by itself, but in association with such activities as check counterfeiting, giving false statements, and commercial loan fraud.

“Smash them together”?
As noted in the second installment in this series of articles, “BSA merges with anti-fraud,” (November, p.30) some bankers have already recognized this convergence of fraud and Bank Secrecy Act/Anti-Money Laundering/Counter-Terrorist Financing. However, debate remains about the appropriate organizational response.

Indeed, one voice arguing for some caution in this regard was that of conference speaker William Fox. He is currently Bank of America’s senior vice-president and corporate compliance executive for Global AML/OFAC Compliance Administration. Earlier in his career Fox was FinCEN director.

“Fraud and AML are each one side of the same coin, in many respects,” acknowledged Fox. He is no fan, however, of simply “smashing together” anti-fraud and anti-money laundering organizations within banks, in spite of supposed synergies.

Fox worried that pushing the two functions under a single department may run the risk of de-emphasizing anti-money-laundering functions. Fox believes bottom-line issues—as stated by Freis—could lead to a bias.

On the other hand, Fox explained that, with the two functions existing separately, but sharing information, there was a benefit, in his mind. “This is much more of an intelligence problem than an organizational problem,” said Fox.

Agreeing with Fox was co-panelist William Langford, Jr., senior vice-president and director of global anti-money laundering at JPMorgan Chase. Fraud is always a bottom line matter, but focusing solely on fraud can lead to missing things, said Langford, who previously served as associate director for the regulatory policy and programs division of FinCEN and senior Treasury advisor on anti-terrorism and anti-money-laundering issues.

One of the strongest arguments for blending the intelligence gleaned by banks’ anti-fraud and anti-money-laundering functions came from Treasury’s Cohen. He noted that, unlike traditional money laundering—an attempt to put dirty money into clean form—terrorist financing traditionally involves “good money being put to bad use.”

“The increasing use of financial crime by terrorist organizations to fund their activities places financial institutions in a much stronger position to detect terrorist financing, and to provide valuable information to the government to help us disrupt financing networks,” said Cohen. He said that decades of experience and systems development involving detection of money laundering and illicit activity, coupled with know-your-customer procedures and related due diligence, could pay off.

“What may appear to be routine suspicious activity relating to criminal conduct—whether it be fraud, counterfeiting, or money laundering—could also be the critical piece of information necessary to map out a terrorist network,” he said. BJ

The electronic version of this article available at: http://www.nxtbook.com/nxtbooks/sb/ababj1209/index.php?startid=22