Account opening costs increases by $6.82

Last week ended with Merrill Lynch being probed for not detecting money laundering facilitated by its financial advisors. This is in addition to the FA being investigated by FINRA and, likely, will have licenses revoked or fined heavily. What caught my attention in a sentence in the a roundup paragraph in a Reuters article regarding this issue.

In December 2014, FINRA ordered two brokerage units of Wells Fargo & Co (WFC.N) to pay a joint $1.5 million fine for failing to verify 220,000 new accounts during a nine-year period.

This comes out to a fine of $6.82 per account not verified. This is less than minimum wage. Considering this fine covers a period of nine years, this is a relatively cheap. Many of those accounts might not even be open anymore, so, that would also mean Wells Fargo not having to go through the proper verification process for all of the 220,000.


Is your firm’s account verification process inadequate and willing to pay $6.82 nine years from now to fix it?


About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


Cantwell-King-McCain-Warren to re-up Glass-Steagall

Sens. Elizabeth Warren (D-Mass.), John McCain (R-Ariz.), Maria Cantwell (D-Wash.) and Angus King (I-Maine) proposed a 21st Century Glass-Steagall, which would separate commercial banking with investment banking. Sen. Warren has published a fact sheet, which we publish here in its entirety.

21st CENTURY GLASS-STEAGALL ACT

Fact Sheet

The original Glass-Steagall, the Banking Act of 1933, was introduced in reponse to the financial crash of 1929. Starting in the 1980s, regulators at the Federal Reserve and the Office of the Comptroller of the Currency reinterpreted longstanding legal terms in ways that slowly broke down the core function of the bill – a wall between investment and depository banking to curb risk. In 1999, after 12 attempts at repeal, Congress passed the Gramm-Leach-Bliley Act to repeal the core provisions of Glass-Stegall.

The 21st Century Glass-Steagall Act would reduce risk in the financial system and dial back the likelihood of future financial crises.

  • Returning basic banking to the basics. The 21st Century Glass-Steagall Act separates traditional banks that offer savings and checking accounts and are insured by the Federal Deposit Insurance Corporation from riskier financial services, such as investment banking, insurance, swaps dealing, and hedge fund and private equity activities. The bill also separates depository institutions from products that did not exist when Glass-Steagall was originally passed, such as structured and synthetic financial products including complex derivatives and swaps.
  • Countering regulatory loopholes for risky activities. The 21st Century Glass-Steagall Act specifies what activities are considered the “business of banking” to prevent national banks from engaging in risky activities, and bars non-banking activities from being treated as “closely related” to banking. Over time, the Office of the Comptroller of the Currency and the Federal Reserve used these terms to allow traditional banks and bank holding companies to engage in a wider and wider range of high-risk activities. This bill would end those practices.
  • Taking on “Too Big to Fail.” The 21st Century Glass-Steagall Act cannot end “Too Big to Fail”on its own, but it moves the financial institutions in the right direction by making them smaller and safer. By separating depository institutions from riskier activities, large financial institutions will shrink in size and will not be able to relly on federal depository insurance as a safety net for their high-risk activities. Although some financial institutions might be large, they would no longer be intertwined with traditional depository banks, reducing the implicit government guarantee of a bailout.
  • Enforcing Glass-Stegall. The 21st Century Glass-Steagall Act institutes a five-year transition period and penalties for violating the law.

Does this proposal to separate commercial banking and investment banking forget that it was repealed because foreign banks were eating into the global financial services market share?
With China having half of the largest global banks, will this separation effectively bar the US from becoming the greatest financial center?
Is giving up much of this market a risk we are willing to take?


About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


How could the Iran-nuclear deal affect your compliance department?

Flag of Iran

Assuming your bank performs transactions for people with international connections, Americans are barred from doing most types of transactions with Iran interests because of the economic sanctions. There are several sets of economic sanctions on Iran and only the the set that were implemented because of the nuclear activity were lifted. Practically, very little has changed for your bank, so, very little has changed for your compliance department.

Even, still, the elation alone is building interest in investment and trade activity with Iran. American entities with subsidiaries in Europe are likely to try to get around these sanction by claiming European sovereign rule. But this only works if the subsidiary can prove that it is not controlled by the American umbrella.

There’s no way to prove this. Just the fact that the subsidiary is a subsidiary and not a joint venture or minority interest deems it American jurisdiction on transactions because the net income is accounted for here in the States.

Minority interest is where things get tricky. If a client is doing business with an entity which has American minority interests and does business with Iran, then that’s territory that requires some legal analysis. The reason for the complication is even though there are many situations where Americans may have minority interests in European entities that will do business with Iran, one of those entities could be a fund that is specifically initiated to do that business. Wealth Americans have access to foreign markets without working through the American markets. It is possible that an American investor can buy into a Iran direct investment fund in London using his British assets. If he is able to do this, then he adds a legal entity layer. He will own a majority interest in an entity that is investing into a fund as a minority investor.

Your department will have to decide whether American jurisdiction applies to ownership of legal entities or if business will benefit the American.


About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


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Black Market Peso Exchange (BMPE)

Black Market Peso Exchange (BMPE) is a way of laundering money, or to make illegitimately earned monies seem legit, hiding the criminal activity that created the income.

Diagram of Black Market Peso Exchange from Chase & Associates, Inc.

It is really no different than other common forms of laundering money but a term was created to capture the massive amount of activity that takes place to clean drug money.


About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


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Bank Resolution Plan

http://www.hotelroomsearch.net/
Basel, Switzerland

You may or may not have heard about something called a Resolution Plan. A requirement from Title 1, Section 165(d) of the Dodd-Frank Act, any bank holding company with assets greater than $50 Billion is required to have one submitted to the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC). The Plan is specifically fulfilling the requirement in subsection 1 of the section. It has three enumerated requirements and one catch all requirement. The enumerated requirements are: the extent to which the institution is adequately protected from nonbank subsidiary risks; descriptions of the org structure, assets, liabilities and other obligations; and enumerate collateral with which securities are guaranteed. The catch all requirement just states the institution must provide “any other information that the Board of Governors and the Corporation jointly require by rule or order.”

This is a yearly exercise banks must pass in order to keep their bank charters. The idea is that the two major insurers of these institutions receive enough information so that there is enough insurance to cover for any losses by depositors and debtees. Unlike regular insurance plans, the insurance premium won’t go up. That has been taken off of the table. Instead, the institution could be required to increase its ability to cover for the risks.

The risks are measured using Basel 3 standards. Metrics such as CCAR and CVar are used to determine a financial instrument’s ownership and level of risk. So, basically this is an exercise in accounting, primarily, and finance, secondarily.

Despite the title of the section, it is left up to the Fed and the FDIC to figure out if a resolution plan can be derived from the requirements. That is to say, the “Resolution Plan and Credit Exposure Report,” submitted by the institution does not actually contain a plan on how to resolve a dissolution of the institution. It provides information with which the Fed and FDIC can do so.

For banks that are smaller and simpler, FDIC is implementing a plan to perform the exercise itself, taking the burden of performance off of these other institutions that do not face direct risks from collateralized securities.

Credit Unions have their own equivalent to the FDIC called National Credit Union Administration (NCUA). There are some similar rules for credit unions but because of the limited offerings credit unions are allowed to provide, the risks are inherently lower, therefore, the standards are lower.

This short explanation is a good start to understanding the goals DFA Title 1 Section 165 (d)1.

BitCoin Enthusiasts Celebrate Regulation

from Bloomberg
Benjamin Lawsky, Superintendent of New York Financial Services

Last month, New York Department of Financial Services announced that it will start regulating digital currencies.

Normally, people groan at the news of more regulation. However, digital currencies are on the fringe and seek legitimization. Being regulated is a clear sign of impact.

BitCoin enthusiasts mostly cheered on the news, even though for many, mainstream regulation and economy is something they oppose.

Wall Street is on the fence about this. The banks are given another product they can trade, but at the cost of possible loss of control in that market. Banks sit as members of the Federal Reserve Banks, making them part of the money supply. Digital currencies are decentralized and if there is a center of power for them, it would be Silicon Valley.


About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses. He is the author of the forthcoming book Money Laundering: How criminals got paid and got away.


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Many Banks Cut Clients Over Money Laundering Fears

http://robertkaplinsky.com/work/drug-money/
(credit: Robert Kaplinsky)

Many banks have cut clients over money laundering fears. With fewer clients, low interest rates and low volatility, there are less ways for financial institutions with multiple lines of businesses can earn money. Bank of America, Citigroup and JPMorgan Chase combined cut 50,000 jobs in 2014. Industry wide, some have reported 80,000 cuts. Profits are up at banks because of the job cuts, not because of improving economy.

One area that hasn’t seen a decline in headcount is Compliance. All compliance-related areas of the bank (Compliance, Legal, Risk, Controls, Audit) have all seen headcount increases. For many of the areas, skills from other areas of the bank is quite transferable. Knowledge as well.

But knowledge of AML is particularly lax. And, sadly, many of the top decision makers are not versed enough in AML issues to figure out a way to restructure the organization to keep clients. So, the only thing they can do is to cut clients.

While this might be good for the domestic banking industry, on the long run, this will be bad when these firms are trying to compete with their large Chinese competitors. The five largest Chinese banks have an edge on AML programs, should they choose to implement it: government support.

Because Chinese banks are essentially government owned, AML programs in these institutions can implement government level standards even with bank secrecy laws. This integrated approach is at the risk of bank secrecy laws, but it also means that even without knowledge of AML, top decision makers can decide to keep all clients and adjust AML programs as the government sees fit.

This issue has been playing out the last few years because the US has been seeking ways to punish Chinese bank clients through their correspondent accounts for revenue from counterfeit products they sell. The measure should really be tied to counterfeit products that are made, not those that are sold, but that’s especially difficult since the US government has no jurisdiction in production abroad. But US laws allow extra-jurisdictional reach on banking when correspondent bank accounts are in the US. But, of course, Chinese banks are against this. So is the Chinese government. On the other hand, the Chinese government doesn’t want their economy to be so heavily depended on counterfeit products. So, the conundrum is for the Chinese government. The US is enforcing the type of laws they would like to implement, but the punishment will be doled out in the US. If the Chinese government also pursues this, the punishment will be on both sides. And the Chinese government also has to look out for the short term economy, which is heavily depended on counterfeits.

So, at least US and European banks can breath one sigh a relief: the clients they are dropping must find banks within the western government jurisdictions because shifting the economics of counterfeit financing and transactions would provide more leverage to implement more stringent AML programs on the institutions that currently do not have such programs.


About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


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KYD Mean Know Your Data

http://datamigrationresources.com/
Data Migration from Data Migration Resources

Knowing your data is very important and I find that many bankers think they know data. I’m not exactly sure what they are envisioning, but if they are envisioning pivot tables and vlookups, then they know about as much as a freshman MIS student after week of classes. (MIS means management information systems.) All systems can be configured to generate data.

This subject is just too big to even do an overview, which would take a semester worth of  classroom work. The best thing for any organization is to make sure to hire a team of technical experts in both computer sciences and statistics to manage and analyze data to get a good understanding about what the data is saying. For now, I will just briefly mention the two sides of KYD – data management and data analysis. Knowing one does not make one remotely close to knowing the other.

Data Management is the work of software and hardware professionals who keep data like inventory. They are often under-appreciated. For the data layman, data management looks like a bunch of overpaid people who move around bits of information from one server to the next. Data Analysts, however, know how crucial these people are. In order to do data analysis, understanding of all of the issues to maintain data analyzable is incredible difficult, especially as the organization gets larger. Size of data sets present technical problems that most people do not encounter, but data analysts do. Software often cannot handle computing data set size beyond a certain point. Data managers are the people who solve these issues, making it technically possible for data analysts to do their work. Also, data managers can keep data safe from corruption or breaches in security or controls.

Data analysts have received lots of attention over the past decade. Almost all consuming facing internet now is feeding data centers so that analysis about potential customers can be mined. But newspaper reporters are often poor interpreters of data. So, reading their work might lead one to have false sense of confidence about this topic. The only place I can think of right now that a data layman can go for news and data analysis is Nate Silver‘s Five Thirty Eight, the blog that first used to do data analysis of baseball stats and then turned to using the same type of analysis to predict presidential campaign results for every county in the United States. In 2012, he correctly predicted the presidential election results for each state and 31 of the 33 senate elections as well. This type of work cannot be done through mere argument. One cannot convince someone else of the correctness of a prediction. One must simply wait for the results. And then one must analyze whether the predictions were correct due to luck or predicted causes.

Opinion

In order for banks to be able to better protect their businesses from cybercrime and enhance business opportunities, they will need to hire data managers and data scientists in every area of the bank. Currently, most of these people are in operations. But this simply isn’t going to be enough. A large portion of the world, even a large portion of Americans, are not in the traditional banking system and now they are being provided options without having to join the banking system. This is good for an economy up to a certain point. And then it will hinder economic growth. Why? Because banking is the industry that finds excess money and invest into areas of the economy that needs money. Providing transaction services might facilitate transactions that could not be done before but as long as those funds never enter the banking system, governments will be required to borrow more money to fund their private sector growth, rather than private sector figuring it out for itself.

Tech-up Compliance Now with CompliTech!

ABA Center For Regulatory Compliance
ABA Compliance Central

Compliance has a much bigger role in the business of banking than responding to regulators. Compliance must prevent mishaps.

Banks are continually investing in technology to defend themselves against cyber crime. But because Compliance as a function of its own only has come into prominence in the last few years, there aren’t any status quo compliance technologies. Plus, Compliance is an area that covers a lot of ground. There are the core Compliance functions like AML, Compliance Training, Compliance Audit and Compliance Advisory. And then there are both support functions and regulatory groups. The knowledge required to have a fully functional Compliance department is as large as the number of products and services the financial institution has. The major investment in technology right now support monitoring, reporting and analysis. And these tools are fairly rudimentary.

The solution is to have startups who partner with law firms and compliance professionals to develop Compliance products and services using a SaaS model. SaaS is Software as a Service. If you’ve never heard of it, you have definitely been involved with it. Cloud computing is generally SaaS-model business. Dropbox is a SaaS-modeled business. It provides the customer with storage space on a need-basis. Amazon has a cloud system for web businesses. Tumblr uses Amazon’s cloud.

The SaaS model is perfect for most banks. Most banks do not have profits in the billions. Investment in tailored technology is just not feasible. Community banks sometimes eek out a profit in the hundreds of thousands. Credit Unions are theoretically profit neutral, but if there is a surplus that can be set aside for technology investment, they are just trying to keep up with all of the various online and mobile banking products and services that are available for customers.

So, someone needs to marry Compliance with Technology for these smaller financial institutions that simply cannot afford the develop their own technology and yet they face all of the same AML risks and most of the same Compliance requirements.

I would be willing to to join someone who is interested in doing this. I am not a Luddite but I am not a query master. My area of expertise is in managing Compliance departments, relationships with regulators and operations. A truly well rounded CompliTech firm should have the following people as founders or early on: lawyer, AML specialist, statistician, UI/UX developer, database developer and Compliance specialist. I fulfill two of those areas. If you think this is a viable business, let me know.


About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


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Cuckoo Smurfing Means Criminal A Pays Criminal B In Different Countries

Cuckoo Smurfing is a way for criminals to move money from one country to another, usually. Sometimes it is used to move money from one bank to another within a country but with so many ways to move money these days, intra-country movements don’t requires an elaborate procedure.

large Cuckoo chick and smaller non-Cuckoo surrogate

The term comes from two things. First is cuckoo, which is a sneaky bird. When a bird of a similar or slight smaller build lays eggs and leaves the nest to find food, a cuckoo will push off some of those eggs and lay its own. What happens is that the cuckoo eggs will be taken care of by the unsuspecting bird. The bird will take care of it after it is hatched and because cuckoo chicks tend to grow more quickly than other bird, it will compete better when asking for food, causing other chicks to be malnourished and often die. Second is Smurfing, which is a verb created by the creators of The Smurfs, a Belgian television show from the 1960s that became very popular all over the world. The smurfs often replaced verbs with the word smurf. So, a smurf might say, I feel like smurfing some bread, replacing “eating” with “smurfing.” Combined, Cuckoo Smurfing is discretely replacing funds to take care of a transaction that criminals needed done to begin with.

It is important to note, in order for cuckoo smurfing to work, a money remitter must be knowledgeably involved.

Here’s how it works:

  1. NY Criminal (NC) has a need to pay London Criminal (LC) $10,000.
  2. A London Merchant (LM) has a need to pay NY Supplier (NL) $10,000.
  3. LM goes to the London Bank (or any money service that can make this transaction), and provides $10K with instructions to have it transferred to NL to the New York Bank.
  4. Banker at London Bank is part of this cuckoo smurfing operation. He instructs NC to deposit $10,000 to NL’s New York Bank account. Then he gives LC $10,000.
    Neither LM nor NL know that the fund was never transferred because what matters to them is that LM paid $10,000 and NL received $10,000. But doing this transaction this way, NC has successfully paid LC the $10K he owed.

There are many places that describe this on the internet but what almost all of them fail to describe the procedure in any meaningful way. They fail for two reasons. They do not:

  1. start by what criminal need creates the need to make the transfer to begin with, and
  2. explain the significance of having performed this transaction this way.

I hope I was able to describe it in a way that is more enlightening. I may do a video about this transaction since there doesn’t seem to be one that exists.

UPDATE Feb. 18/2016: There is now a video explaining Cuckoo Smurfing.

 


Marcus Maltempo is a Certified Anti-Money Laundering Specialist and a Certified Fraud Examiner with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.