Deutsche Bank Faces Growing U.S Scrutiny Over Money Laundering

By Bloomberg

Deutsche Bank AG is facing broadening U.S. scrutiny as a leading Republican lawmaker joined Democratic colleagues in questioning the company’s steps to combat money-laundering amid reports that its U.S. unit may have been a key conduit for dirty cash.

Representative Patrick McHenry, the top Republican on the House Financial Services Committee, sent a letter Thursday to CEO Christian Sewing, seeking documents that outline what internal and independent reviews have turned up about how the bank shields against illicit transactions.

The North Carolina lawmaker’s move comes as the bank acknowledged that it has received an inquiry from House Democrats who are coordinating efforts to probe the Frankfurt-based lender and as the Federal Reserve looks into the company’s involvement with a scandal-plagued Danish bank.

“It is critically important for the American public to have confidence Deutsche Bank is adequately addressing the vulnerabilities that allowed billions of dollars tied to criminal activities to move through the international banking system,” McHenry said in his letter, which set a Feb. 7 deadline for a response from the bank.

McHenry highlighted Deutsche Bank’s involvement in scandals ranging from “mirror trading” to how its U.S. unit handled billions of dollars in tainted transactions from Danske Bank A/S. Bloomberg reported Wednesday that the Fed is looking into the Danske transactions, adding to the international authorities, including the U.S. Department of Justice, pursuing investigations on those interactions.

In response to the probes, the bank has launched internal reviews and been required to bring in outside firms to investigate its conduct and controls. McHenry requested that findings from those reviews be provided to the committee, even though the reports haven’t been made public.

“We remain committed to providing appropriate information to all authorized investigations,” the bank said Thursday in a statement responding to a request for comment. Deutsche Bank acknowledged earlier Thursday that it is engaged in “productive dialogue” with the House Financial Services and Intelligence Committees, whose leaders have said they will work together on oversight of the company.

Representatives Maxine Waters of California, who leads the financial services panel, and Adam Schiff of California, who leads the intelligence group, have said they’d jointly pursue information on the bank’s dealings with the real estate business of President Donald Trump.

The Democrats, who ascended to chairmanships when their party took control of the House this year, have long been interested in the bank’s ties to the Trump Organization, but previously lacked authority to call witnesses or issue subpoenas for other material.

“The House Financial Services and Intelligence Committees are engaged in productive discussions with Deutsche Bank, and look forward to continued cooperation,” Waters and Schiff said in a statement.

Senate Democrats Elizabeth Warren of Massachusetts and Chris Van Hollen of Maryland last month urged Banking Committee Chairman Mike Crapo to probe the company’s correspondent banking business for vulnerabilities to money laundering.

The German lender has been sanctioned before by the Fed, its primary U.S. regulator. In 2017, the company agreed to pay $41 million to settle allegations its U.S. business failed to keep up sufficient money-laundering protections.

The bank’s faulty monitoring involved billions of dollars in “potentially suspicious transactions” processed from 2011 through 2015, the Fed said, adding that the transactions involved affiliates in Europe that failed to provide “accurate and complete information.”

In corruption-plagued Chicago, high-level shakedown charges loom over mayoral race, candidates

By Aamer Madhani

CHICAGO – Over the last four decades, federal prosecutors have racked up more than 1,700 corruption convictions of elected officials, government employees and contractors, a whopping toll of graft and malfeasance that’s left longtime Chicagoans accustomed to the sight of public servants taking perp walks on the evening news.

Former Illinois Gov. Rod Blagojevichex-Rep. Jesse Jackson Jr. and disgraced public schools chief Barbara Byrd-Bennett are among the many who in recent years have done or are still doing time in the federal penitentiary for using their office to enrich themselves.

More than 30 Chicago aldermen – members of the City Council – have been convicted of political corruption since 1973. Another, Willie Cochran, heads to trial in June to answer charges of wire fraud, bribery, and extortion. Federal authorities say the retired police officer solicited a bribe from a local business owner and made off with $30,000 he collected to help people in his ward.

But the latest political scandal unveiled by federal prosecutors this month has shocked even hardened veterans of Chicago’s political scene – and cast a shadow over next month’s mayoral election.

Authorities say Democratic Alderman Ed Burke, a 50-year veteran of the City Council and chairman of its powerful finance committee, tried to shake down officials of a company that operates dozens of Burger King franchises in Illinois.

The 14-candidate mayoral race already was shaping up to the city’s most competitive in decades. In the weeks since charges of attempted extortion against Burke were unsealed Jan. 3, political corruption has become the dominant topic in the campaign.

“Chicago is still America’s most corrupt city,” said former Alderman Dick Simpson, a political scientist at the University of Illinois at Chicago.

Simpson co-authored a study last year that showed Chicago had tallied more convictions for political corruption than any other U.S. city between 1976 and 2016.

“There is still a patronage problem left over,” Simpson told USA TODAY. “The bold corruption isn’t as rampant as it once was. But as we saw in Alderman Burke’s criminal charge, the old-style politics of shaking down businessmen for illegal bribes or campaign contributions still continues.”

Burke, who is running for re-election to the City Council next month, said he’s “not guilty of anything.”

“I have not done anything wrong,” Burke said. “And I’m sure that once it gets to court it will be clear.”

The nation’s third-largest city abounds with thorny challengesPersistent gun violence terrorizes pockets of the city, taxpayers face $27 billion in unfunded pension obligationsfor city workers, and an ongoing exodus of residents from Chicago complicates nearly all facets of governing.

Mayor Rahm Emanuel, who has served as Chicago’s mayor for nearly eight years, announced in September that he would not seek a third term.

Now, the city’s long-simmering problem with corruption has moved to the forefront.

The four top-funded candidates to succeed him – Cook County Board President Toni Preckwinkle, Illinois Comptroller Susana Mendoza, former Chicago Board of Education President Gery Chico and former U.S. Commerce Secretary Bill Daley – have all found themselves under scrutiny for longstanding ties to Burke.

Preckwinkle, who was endorsed by the powerful Chicago Teachers Union, says she has returned $116,000 in political donations she collected at a fundraiser at Burke’s home last year.

She’s also faced questions about why her administration hired Burke’s son, Edward Burke Jr., in 2014 to serve as the training and exercise manager for the Cook County Homeland Security and Emergency Management Department. The younger Burke left the job last year.

Mendoza was married at Burke’s home in a ceremony officiated by the alderman’s wife, Illinois Supreme Court Justice Anne Burke.

When Mendoza announced she was running for city clerk in 2010, she called Ed Burke her “true champion,” and told supporters the alderman was “primarily the reason why I stand before you today.”

Burke endorsed Chico, who worked as an aide to the alderman 30 years ago and in recent years partnered in a law firm that has earned millions lobbying at City Hall on behalf of Cisco Systems, Exelon Generation and Clear Channel and other companies.

Burke said “there’s probably nobody more qualified” in the mayoral race than Chico.

Daley, commerce secretary under Bill Clinton and chief of staff to Barack Obama, is the son and brother of Chicago’s two most famous mayors – Richard J. and Richard M. Daley.

Burke has given the Daley family at least $30,000 in political contributions over the years, according to the Chicago Tribune. But the Daleys and Burke have also been rivals: Richard M. Daley beat Burke in the 1980 race for the Cook County State’s Attorney’s office.

Former Obama strategist David Axelrod, director of the Institute of Politics at the University of Chicago, said the Burke case “already has had an impact in that there is more focus on ethics than there has been in previous elections.”

“Elections are often turned by things you never anticipate,” he told USA TODAY. “This certainly fits that.”

The four candidates with ties to Burke are working mightily now to distance themselves. Some are trying to use the moment to tout ethics reform plans they say will purge city from the pay-to-play and kickback schemes that have bedeviled the political scene.

Preckwinkle has called on Burke to resign from City Council. She has proposed prohibiting council members from holding outside employment.

Bill Daley has also called for banning outside employment, shrinking the size of the council from 50 to 15 and imposing term limits.

Chico has also backed term limits and called for a ban on most outside income for aldermen.

He also wants to do away with aldermanic prerogative – the Chicago practice, dating back to the 1930s, that gives council members wide latitude over permits, zoning changes and parking and liquor licenses within their wards.

“The time has come to end this old-school practice,” Chico said. “No one deserves this much power.”

Daley says any politician who has been active in Chicago over the last half-century has inevitably had contact with Burke. Still, he said, his three rivals’ ties to Burke should be more concerning to voters than his own.

He said he’s had an “arms-length political relationship with Burke.

“You have to get along for political reasons,” Daley told USA TODAY. “The others have business, and really strong personal or political (ties) with Burke.

I have yet to have someone do a fundraiser of $110,000. … That is a big fundraiser. Getting married in someone’s home is more than just showing up at a political event. Having your law business be very focused on City Hall – where Ed Burke is a force – is a different thing than engaging him around politics every four years when there is a campaign.”

Preckwinkle has also tried to play down her connections to Burke while spotlighting her rival’s connection to the powerful alderman.

“I won’t have my name dragged through the mud over the alleged criminal conduct of Susana Mendoza’s mentor, Gery Chico’s best friend and Bill Daley’s long-time political ally,” she said in a statement.

Mendoza has attempted to turn the spotlight on her rivals without addressing her own connections to Burke.

In a statement to USA TODAY, she said there is a “stark contrast to Bill Daley, who won’t release his tax returns and has chosen instead to hide his conflicts of interest, Toni Preckwinkle, who has a history of lying until she gets caught, and Gery Chico, who spent years lobbying Ed Burke at City Hall and is Ed Burke’s endorsed candidate in this race.”

Some candidates untouched by the Burke scandal question whether any candidate who has long been part of Chicago’s political establishment has the will or ability to bring meaningful change.

Former federal prosecutor Lori Lightfoot, ex-chairwoman of a city police accountability task force, began pushing ethics reform as key to solving other issues soon after she announced her candidacy last year.

She says voters should question the credibility of candidates who waited until the Burke charges landed to talk about corruption.

“If we’re going to truly have a new day in city government where we put people first, then we have to start attacking the elephant in the room,” Lightfoot said. “In some ways, we’re rotting from the inside out. We’re losing population, we’re losing our tax base, and the gap between the haves and have-nots continues to grow. I think there is a moral imperative to do something about it.”

Amara Enyia, a community organizer and municipal consultant running for mayor, said the Burke scandal seems to be spurring voters to consider how corruption connects to the other ails of a cash-strapped city that has seen the closure of dozens of schools in African-American neighborhoods, the shuttering of mental health clinics and disproportionate levels of poverty in black and Latino neighborhoods.

“Voters don’t want business as usual,” Enyia said. “They want someone who does not carry the baggage of corruption.

Burke, who was forced to give up his role as chairman of the finance committee after he was charged, has faced a federal investigation before.

In February 2012, a federal grand jury subpoenaed finance committee records related to the city’s workers compensation program.

Burke denied wrongdoing and vowed to cooperate with authorities. No charges were brought.

In the alleged Burger King shakedown, Burke first applied a light touch on operators of Tri City Foods Inc., the second-largest franchisee of Burger King restaurants with stores in six Midwest states.

Federal prosecutors say in court papers that Burke told the company’s owner that he had been holding up permits to renovate one of its Burger King restaurants in his wardbecause constituents expressed concerns about trucks parking there overnight.

Prosecutors say the company promised to address the matter.

Prosecutors say Burke told owner Shoukat Dhanani and another Tri City official that he was a partner in a law firm that works with clients on property tax appeals.

Dhanani told the FBI that he “read between the lines” that Burke was suggesting he’d smooth the permits in exchange for their business, prosecutors say. Dhanani said he told Burke that his company already had legal representation.

Less than two weeks later, prosecutors say, another official with the restaurant group called to give Burke an update on steps they had taken to address concerns about the trucks parking at the restaurant.

This time, prosecutors say, Burke was more direct.

“Good,” Burke said, in a conversation the FBI says was wiretapped. “And, um, we were going to talk about the real estate tax representation and you were going to have somebody get in touch with me so we can expedite your permits.”

Dhanani and others working for the restaurant group said Burke pressed them to give his law firm their business, prosecutors say. The FBI surveillance also picked up talk from the alderman that suggested he wanted the company as a client, they say.

Burke slow-walked the permitting process for months, prosecutors say, causing the Burger King franchise to lose 40 to 50 percent in sales because it couldn’t open an unfinished dining room to customers.

Dhanani told the FBI he eventually relented and informed Burke his company would hire his law firm, prosecutors say, but he never followed through.

Dhanani also told the FBI that he made a $10,000 political donation to Preckwinkle at the urging of Burke, prosecutors say.

Preckwinkle said her campaign returned the contribution to the donor because it exceeded the $5,600 contribution limit for individual contributions.

Former federal prosecutor Patrick Cotter, a white-collar defense attorney in Chicago, said an alarming number of city politicians have been caught committing graft and stealing taxpayer money.

Still, he said, it’s important to keep in perspective that Chicago is hardly alone in having to deal with political corruption.

Federal prosecutors in Los Angeles tallied more than 1,500 convictions for public corruption between 1976 and 2016, according to Simpson’s study. Federal prosecutors in New York counted more than 1,300 convictions during those years.

“The problems here are not because every once in a while an alderman gets caught doing something crooked,” Cotter said. “It is a bad thing, and it’s important to prosecute. But it’s not why the schools are not good. It’s not why we have a homeless issue in this city that’s insane. It’s not why we have the pension problem that is going to make life hard for every Chicagoan’s kids and their grandkids.

“There are basic structural problems in this city, and solving corruption alone is not going to bring an end to these big issues.”

https://www.usatoday.com/story/news/2019/01/23/chicago-federal-political-corruption-scandal-mayor-election-alderman-ed-burke/2581411002/

 

Why Aren’t Hedge Funds Required to Fight Money Laundering?

By Heather Vogell

For many years, the federal government has required banks, brokerages and even casinos to take steps to stop customers from using them to clean dirty money.

Yet one major part of the financial system has remained stubbornly exempt, despite experts’ repeated warnings that it is vulnerable to criminal manipulation. Investment companies such as hedge funds and private equity firms have escaped multiple efforts to subject them to rules meant to combat money laundering.

The latest attempt, which began in 2015, appears to have ground to a halt, according to sources familiar with the process.

“You’ve got several trillion dollars, the management of which nobody is required to ask any questions about where that money is coming from,” said Clark Gascoigne, deputy director of the Financial Accountability and Corporate Transparency Coalition. “This is very problematic.”

The Financial Action Task Force, an intergovernmental organization that seeks to combat money laundering around the world, characterized the lack of anti-money laundering rules for investment advisers, such as those who manage hedge funds and private equity funds, as one of the United States’ most significant lapses in a report two years ago.

The push to regulate hedge funds and similar investment firms took off after the Sept. 11 attacks, when Congress passed the Patriot Act. Among other things, the law required federal agencies to take new steps to keep illicit money out of the U.S. financial system. The Treasury Department exempted investment firms at the time, planning to return to them after tackling other sectors. “Eighteen years ago, the Patriot Act required investment companies to install their own AML [anti-money laundering] programs,” said Elise Bean, a former staff director of the U.S. Senate investigations subcommittee who supports the proposed rule. “But Treasury has yet to enforce the law,” she said.

The Treasury Department, through its Financial Crimes Enforcement Network, or FinCEN, initially proposed rules in 2002 and 2003 requiring firms like hedge funds and their investment advisers to adopt anti-money laundering measures. That attempt languished as FinCEN waited for the Securities and Exchange Commission to retool its approach, said Alma Angotti, who wrote the original proposal while at FinCEN and is now co-head of global investigations for the consulting firm Navigant. So much time passed that FinCEN withdrew the proposed rules in 2008. FinCEN then launched its second attempt to impose such regulations seven years later.

That second attempt is the one that has now crawled to a virtual stop. “It’s the kind of thing that should have taken two to three years, not 17,” said Joshua Kirschenbaum, senior fellow focusing on illicit finance at the nonpartisan think tank the German Marshall Fund and a former supervisor in FinCEN’s enforcement division.

Hedge funds and private equity funds can be attractive to big-dollar launderers who prize the funds’ anonymity, the variety of investments they offer and, in some cases, their use of off-shore tax and secrecy havens, experts say. After 2001, the number of annual hedge fund launches surged more than threefold, according to one report, and investments by high net worth individuals exceeded those of institutional investors.

“They’re a black box to everyone involved,” Kirschenbaum said. “They’re sophisticated and can justify moving hundreds of billions.”

Money launderers seek to hide illicit proceeds by making it appear they come from legal sources. Laundering hides crimes as diverse as drug dealing, tax evasion and political corruption. Experts say the massive, untracked streams of cash it creates can fuel more illegal activity, including terrorism.

That’s one reason banks are required to implement protocols aimed at identifying and reporting dodgy transactions to authorities, and verifying that customers are who they say they are.

FinCEN’s latest proposed rule targets investment advisers who manage funds for clients such as hedge funds. The rule would apply primarily to the largest advisers with $100 million or more in assets under management, who are required to register with the SEC.

“As long as investment advisers are not subject to AML program and suspicious activity reporting requirements, money launderers may see them as a low-risk way to enter the U.S. financial system,” the proposed rule states, noting that in 2014, 11,235 advisers registered with the SEC reported roughly $61.9 trillion in assets for their clients.

Foreign political corruption is one of the money laundering risks for investment advisers, Angotti said. Instead of needing quick access to their money, the ultra-wealthy involved in such graft often want to park their illicit profits somewhere safe, making them more tolerant of fund rules that can delay withdrawals for a year or more.

Having federal anti-money laundering protocols is no panacea. Regulators periodically conclude that certain banks and brokerages are not abiding by various aspects of the rules. Last year, for example, regulators announced more than $2 billion in penalties against Morgan Stanley Smith Barney, Charles Schwab & Co., UBS Financial Services, CapitalOne Bank and others, according to a company that tracks such enforcement. (The companies neither admitted nor denied the allegations against them.)

Experts say it’s impossible to quantify how much money may be laundered through hedge funds. And prosecutors retain the right to charge such a fund if it is proven to have participated in money laundering; but without the FinCEN rules, regulators cannot fine the fund’s managers for, say, not taking steps to prevent abuse.

There are multiple reasons the attempts to adopt rules have bogged down. The principal ones include the financial industry’s cascade of requests for modifications to the rule and inertia among federal bureaucracies, according to people familiar with the process.

The industry has tended to proclaim that it favors the principle of anti-money laundering rules — while simultaneously contesting many of the specifics. Several industry groups contend that the proposed rule overstates the risk that private equity funds will be used for illicit finance.

“We’re very supportive of having an aggressive AML regime,” said Jason Mulvihill, general counsel of the American Investment Council, which represents private equity funds. But, he added, “if you were trying to launder money, the last place you’d want to put it is in a private equity fund” because of the industry’s standard practice of requiring investors to leave their investments in place for 10 years. And, he added, most private equity firms already have some anti-money laundering policies in place, just in case.

Mulvihill’s organization has proposed that FinCEN exclude advisers who require investors to hold their investment for more than two years — a carve-out included in the original FinCEN proposal — which effectively would allow most private equity funds to remain exempt from the anti-money laundering rule.

The Investment Adviser Association also supports the goal of the regulations, said Karen Barr, the group’s president and CEO. But it worries that some advisers will need to implement costly changes that aren’t warranted. Those include advisers who also have clients for whom they provide recommendations, not money management. “We think investment advisers are a low risk because they don’t hold assets,” she added. More than half have 10 employees or fewer, she said, and “the sort of cumulative effect of all these regulations on small shops is really burdensome.”

In response to a request for an interview, a spokesman for the Managed Funds Association, which represents hedge funds, referred to a letter the group sent FinCEN in 2015, in which it stated that it “strongly supports adoption of the Proposed Rule.” The letter also included 25 pages of “background,” suggestions and requests for clarification.

Industry concerns were not the only reason for the rule’s stasis, said former FinCEN employees who spoke with ProPublica. They said staffing, competing agency priorities and other factors also contributed. The Trump administration’s general slowdown in rule-making added to delays, they said.

The rule’s implementation would also require coordination with the SEC, whose job it would be to make sure investment advisers are complying. Policing advisers has not been a major priority for the agency, which five years ago examined only 8 percent of registered advisers. The agency increased the number to 15 percent in 2017.

FinCEN and Treasury spokespeople did not return calls or provide answers to questions about the proposed rule that ProPublica sent by email. Many Treasury employees are not working because of the government shutdown. A spokesman for the SEC said the agency could not answer questions about the rule until the shutdown ended.

Seeing the rule flounder is vexing for Angotti. Some firms may be effectively executing their own anti-money laundering measures, she said. But without more scrutiny, she said, “who knows?” Such steps are expensive “and it requires them to turn away business,” Angotti said. “Without strong enforcement, it’s hard to get businesses to do this stuff.”

https://www.propublica.org/article/why-arent-hedge-funds-required-to-fight-money-laundering

Attorneys for Russian national charged in money laundering, murder-for-hire plot want him released due to health concerns

By Natalie Matthews

Attorneys for a wealthy Raleigh man at the center of an international money laundering and murder-for-hire case want him freed for health reasons and say he is not a threat, according to newly released documents.

Leonid Teyf, a Russian national with connections to the Putin administration, is due in court on Tuesday for a detention appeal hearing.

Teyf and associates allegedly scammed more than $150 million in kickbacks on Russian government contracts, according to the charges against him.

In newly filed documents opposing Teyf’s motion for release, the attorneys for the federal government say Teyf not only tried to murder his wife’s suspected lover (his housekeeper’s son), but also discussed killing her.

Teyf allegedly bribed an undercover Department of Homeland Security official to try to have the young man deported, authorities said. When that took too long, he paid another federal agent to kill the man, even supplying him with an illegal gun, authorities said.

Federal officials raided Teyfs’ north Raleigh mansion in December. They also raided a condo Leonid Teyf owned in the Glenwood South area, where they found a safe, several assault weapons and a lot of ammunition.

The government believes that Teyf is a flight risk and said he has multiple apartments, a compound in Russia and a home in Switzerland.

Since December 2010, the Teyfs opened at least 70 financial accounts at four different banks, and wire transfers show money coming into the couple’s bank accounts from countries known to launder money, including Belize, the British Virgin Islands, Panama and the Seychelles. Investigators said the Teyfs bought hundreds of thousands of dollars’ worth of luxury cars and more than $2.5 million worth of art.

Teyf, his wife Tatyana, and four others are charged in the case involving murder for hire, bribery, money laundering and violation of immigration laws.

Federal attorneys promise to release more information at Tuesday’s court hearing.

Leonid Teyf remains in jail without bond.  Tatyana Teyf was released from jail without bond last month.

The Red Pill Realities of Anti Money Laundering

By Shirish Netke

Money laundered through the banking system is estimated to be over 2 trillion dollars a year. A recent study by BAFT (Bankers Association of Finance and Trade) estimates that 1% of the proceeds from financial crimes are intercepted. Meanwhile, nine out of ten suspicious activities flagged by AML software in banks are false alarms.

Let’s put these numbers in perspective. 99% of laundered money is not caught. 90% of the resources spent catching suspicious actors are wasted. 100 % of US banks have known this for years.

The bottom line is that 70 billion dollars are spent every year in compliance costs by banks to intercept less than 25 billion in illicit funds.

How did we get here? Modern technology, specifically data analytics, is well-suited to address this problem. Why hasn’t this problem been solved?

Let’s look at what happened over the last few decades.

Most banks use process automation software for Anti-Money Laundering. This software was designed many years ago based on abstracting human tasks and automating them to be more efficient. This seemed like a very good idea at that time when AML/BSA/CFT compliance was a matter of running through a checklist.

This was a very efficient solution until the stakes for non-compliance became very high. The business process was no longer effective and there was no provision in the software to change it. Meanwhile, financial crimes posed a clear and present danger to banks. Banks did the only thing they could do to solve the problem – they created manual workarounds to process automation and hired more people to implement them.

Bank compliance teams are well-aware of the limitations of the process and use their judgment to execute their functions while staying within guidelines. However, exercising sound judgment does not necessarily free them from the tyranny of a process designed for a different time.

It is not unusual to see a bank increased its staff ten-fold in five years. Many people in banks have been deployed to manually (and intelligently) intervene where the software fell short. As banks continue to be fined for AML related activities, staffing continues at a frantic pace. Today, banks are actively looking at hiring more compliance people. Some are also moving compliance teams to low-wage geographies to reduce the burgeoning cost for compliance. Others are looking for outsourcing firms to manage this business process.

What is a banker to do?

Here are a few things to consider.

#1 There is No “App for That”

A risk-based business process is not something you buy. It’s something you do.

The FFIEC manual on AML/BSA says “The first step of the risk assessment process is to identify the specific products, services, customers, entities, and geographic locations unique to the bank.”

Sadly, this requirement is in direct conflict with the specifications of packaged enterprise software. This software was created as a solution that works for all banks. It caters to the “least common denominator” requirement of a large number of banks. It is very unlikely that a business process built into an enterprise solution will be optimized to a bank’s unique risk profile.

Today, when you buy a traditional AML software application you tacitly commit to a business process that goes with it. If the business process does not suit the risk profile of your bank, you need to deal with it. You can follow the process anyway even though it is neither efficient nor effective and rationalize it as an industry standard solution. You can also manually override the process and customize it to your needs. The first is not sustainable and the second requires manpower and resources, the extent of which depends on the amount of customization.

A third choice is to re-design the business process. This requires re-examining the objectives of the process and the underlying technology. It also means convincing your bank examiners that an updated process is more effective, efficient and minimizes risk.

A risk-based process can be broken down in terms of the 4 M’s – Measure, Monitor, Manage and Mitigate. There is some skill involved in deploying the right combination of human intelligence and machine intelligence in deploying such a process. As a bank, you have a unique understanding of your risks. These risks will determine your business process and the allocation of resources to that process.

An important question to ask a technology vendor in implementing a risk-based process – will the technology drive process, or will the process drive technology? If the process drives technology, will it let the bank change its business process when the risks change?

The question to ask yourself – how are the vendors’ incentives aligned with those of the banks’? Do they get paid for the success of a risk-based process, or for selling a software license and billable hours irrespective of the outcome?

#2 Understand the Modeling Math

Mathematical models can make your AML process more effective and slash your costs if (and only if) they are implemented judiciously.

George Box, a British statistician, is credited with the quote “all models are wrong, but some are useful”. A model cannot guarantee or predict an outcome, but it can provide a metric for its accuracy. Understanding model accuracy is a key input to designing a risk-based process.

Let’s take an example.

Current models used by AML software are wrong 90% of the time. Which means when they call out 100 suspicious actors, only 10 of them are suspicious enough to require a SAR (suspicious activity report) to be filed with FinCEN. A better model may produce 80% false positives for those 10 SARs. The second model is an obvious improvement. What is not so obvious is that the second model will produce a 100% increase in productivity because it produces only 50 alerts for the same 10 SARs – and only needs 50% of the resources.

Both models have a finite possibility of being wrong and letting some bad actors slip through the cracks. However, the second one is more useful. A model’s usefulness can be measured in mathematical terms which can be the basis for allocating resources to the business process.

The important question to ask a vendor who provides a model is – how can a model’s performance metrics be used to modify the business process?

The question to ask yourself is – do I clearly understand the trade-offs of using a risk-based approach powered by a mathematical model? Can I explain this approach to a regulator during a bank examination?

#3 Regulatory guidance is global. Bank exams are local.

The long-term impact of policy changes is often underestimated. The short-term impact of these changes is often overestimated.

Bank regulators are encouraging banks to adopt new technology to make it easier to manage AML processes. A recent report from the US Dept. of Treasury says “Regulators should not impose unnecessary burdens or obstacles to the use of AI and machine learning and should provide greater regulatory clarity that would enable further testing and responsible deployment of these technologies by regulated financial services companies as the technologies develop.”

This is a welcome change from the past. Implementing this change will need alignment with the rank and file of all regulatory organizations. Regulators understand that this entails a process of education and training of bank examiners to familiarize them with the technology.

Much as we would like changes to be immediate, banks and regulators have a history of being deliberative in adopting new ways of doing things. There is a natural gestation period between policy changes and gaining familiarity with new approaches by bank examiners and compliance officers.

Recent guidance from regulators indicates that the stage is set for pilots to deploy in a manner where bankers will get some relief from regulatory scrutiny. This will make it easier for banks to try new technologies.

The important question to ask a vendor who provides a new technology is – can they help you through the transition to the new way of doing things?

The question to ask yourself is – can my bank define a path from the current situation to a future where new technology can be used to work with regulators?

In the science fiction film, The Matrix, Neo, played by Keanu Reeves, is given a choice between the blue pill of comfort coupled with ignorance and the red pill of reality that has an uncertain future. The rebel leader’s closing words to Neo are – “Remember, all I am offering is the truth. Nothing more.”

Here are our truth offerings on AML for bankers:

Design your AML process around desired outcomes; not legacy technology.

Understand trade-offs between human intelligence and machine intelligence.

Be practical about the ground realities of affecting change.

Criminals using ‘Fortnite’ to launder money ‘with relative impunity’: report

The virtual currency used by millions of gamers who play “Fortnite” has become popular with money-laundering cybercriminals, according to reports.

Money launderers use stolen credit cards to purchase V-bucks – which players use to purchase weapons, outfits and other items in the wildly popular game – from the “Fortnite” store and then resell them on the dark web.

Agents with the cybersecurity firm Sixgill posed as customers and uncovered operations being conducted globally in Chinese, Russian, Spanish, Arabic and English.

“Criminals are executing carding fraud and getting money in and out of the Fortnite system with relative impunity,” said Benjamin Preminger, a senior intelligence analyst at Sixgill.

“Threat actors [a malicious person or entity] are scoffing at Epic Games’ weak security measures, saying that the company doesn’t seem to care about players defrauding the system and purchasing discounted V-bucks… This directly touches on the ability of threat actors to launder money through the game.” he continued.

The Independent noted one example of a seller who accepted Bitcoin and Bitcoin Cash as payment who claimed to be selling at a discount and wanted “to give back to the deep web at a massive discounted rate.”

Epic Games, the North Carolina-based developer of “Fortnite,” told the Hollywood Reporterit takes the money-laundering claims seriously.

“Epic Games takes these issues seriously, as chargebacks and fraud put our players and our business at risk,” a company spokesperson said. “As always, we encourage players to protect their accounts by turning on two-factor authentication, not re-using passwords and using strong passwords, and not sharing account information with others.”

Some security experts have said the company isn’t doing enough to monitor how its products are being used.

“Epic Games doesn’t seem to clamp down in any serious way on criminal activity surrounding Fortnite, money laundering or otherwise,” Preminger said, adding that “several steps could be taken to mitigate the phenomenon, including monitoring the transfer of high-value goods in the game, identifying players with large stockpiles of V-bucks, and sharing data with relevant law enforcement agencies.”

Epic Games did not immediately respond to Fox News’ request for comment early Friday regarding the accusations of illegal activity on its platforms.

The immensely popular game is free to download and play and has around 200 million players worldwide. It has generated upwards of $3 billion in revenue, the Reporter said.

Between September and October, IT security firm Zerofox found 53,000 instances of online scams related to the video game.

Today is National Human Trafficking Awareness Day

Today is National Human Trafficking Awareness Day. Human trafficking is the second fastest growing criminal industry in the U.S.

Some signs of human trafficking are:

  • Brusies
  • Appears malnourished
  • Looks extremely tired

If you or someone you know is a victim of human trafficking please call the human trafficking hotline at 1-888-373-7888.

https://www.wsmv.com/today-is-national-human-trafficking-awareness-day/video_6a3fd963-7d2b-5181-b6c8-46a28f9171b3.html

Danske Bank, ex-CEO are sued in U.S. over money laundering scandal

By Jonathan Stempel

NEW YORK (Reuters) – Danske Bank A/S and four former top executives were sued on Wednesday by a U.S. shareholder that accused Denmark’s largest bank of defrauding investors and inflating its share price by hiding and failing to stop widespread money laundering at its Estonian branch.

The complaint was filed in the U.S. District Court in Manhattan by a New York pension fund that is seeking class-action status and damages for investors in Danske’s American depositary shares from Jan. 9, 2014 to Oct. 23, 2018.

Danske was accused of being “intentionally less than forthcoming” to Danish regulators even after a whistleblower alerted the Copenhagen-based bank to suspected money laundering, while overstating its legitimate profitability and ability to thwart misconduct.

The bank did not immediately respond to requests for comment after market hours in Europe on behalf of the defendants, who include former Chief Executive Thomas Borgen, former Chairman Ole Andersen, and two former chief financial officers.

Borgen resigned last Sept. 19, when Danske said an internal probe had uncovered about 200 billion euros (US$231 billion) of payments made from 2007 to 2015 through its small Estonian branch, and that many payments appeared suspicious.

Andersen was replaced in December.

Authorities in Denmark, Estonia, Great Britain and the United States are investigating the payments, including in a criminal probe by the U.S. Department of Justice. Danske has said it has been cooperating with authorities.

The Sept. 19 report came one year after Danske expanded its probe into the Estonian branch, following what it called “a root cause analysis concluding that several major deficiencies led to the branch not being sufficiently effective in preventing it from potentially being used for money laundering.”

According to the complaint, the market value of Danske’s ADRs fell by more than $2.54 billion as investors learned of the full scope of the scandal.

It is common for shareholders to sue companies in the United States after what they consider unexpected share price declines.

The lawsuit is led by the Plumbers & Steamfitters Local 773 Pension Fund of Glens Falls, New York. Its law firm Robbins Geller Rudman & Dowd specializes in securities fraud.

The case is Plumbers & Steamfitters Local 773 Pension Fund vs Danske Bank A/S et al, U.S. District Court, Southern District of New York, No. 19-00235.

DEA agent linked to Colombian money laundering scheme, prosecutors say

By Scott Glover

(CNN)An agent with the US Drug Enforcement Administration is under investigation in connection with a scheme to launder millions of dollars for Colombian drug traffickers, CNN has learned.

The years-long conspiracy sometimes “involved the use of undercover accounts controlled by the DEA,” according to court papers filed in US District Court in Tampa, Florida.
The agent is not identified by name but is characterized as a “co-conspirator” in the case against a long-time DEA informant who has pleaded guilty to money laundering for the Colombians.
The agent, according to court papers, received cash payments from an account containing hundreds of thousands of dollars in drug money. The agent also directed additional money to be deposited into the accounts of his family members, the documents state.
A DEA spokeswoman in Washington declined comment.
Though the case was filed in Tampa, the prosecution is being overseen by the US Attorney’s Office in Atlanta, Georgia. The transfer of the matter to another jurisdiction is the sort of step federal authorities sometimes take in investigations involving allegations of official corruption.
Kurt Erskine, a top official in the US attorney’s office in Atlanta, declined comment on the case.
The information about the allegedly rogue agent is contained in a plea agreement between federal prosecutors and former DEA informant Gustavo Yabrudi, a Venezuelan-born Miami resident.
Yabrudi’s defense attorney, Leonardo E. Concepcion, said in an email that the case is “still active” and, “I cannot discuss it as this time.”
Yabrudi worked on and off as an informant for the DEA from 2010 to 2016 with stints in New York, Boston and Miami, according to court records. He was deactivated at one point in 2013 for “unauthorized money movements.”
According to court records, the agent identified as a co-conspirator instructed Yabrudi in 2015 to recruit someone to open a bank account under a false name in Miami. Hundreds of thousands of dollars “from illegal drug sales” was deposited into the account, the records state.
Neither the agent nor Yabrudi informed the DEA of the existence of the account, according to the court records.
The pair subsequently spread the money around among fellow conspirators who laundered the proceeds in various ways and got the money into the hands of traffickers in Colombia, the documents allege.
At least $7 million in “illegal funds” passed through a business account belonging to one co-conspirator, according to Yabrudi’s plea agreement.Yabrubi was charged with money laundering in September. He agreed to plead guilty later that same month.
In December, federal prosecutors and Yabrudi’s defense attorney filed a joint motion requesting that his sentencing be postponed for six months. He is currently set to be sentenced in May.
“The defendant is cooperating against others who facilitated sophisticated money laundering schemes, in part, by using undercover accounts that were shell companies and controlled by law enforcement,” the motion states. “Some of the illegal proceeds laundered during these schemes derived from drug trafficking and public corruption related offenses.” The agent’s current status with DEA is unclear.

Former Ohio City nightclub owner pleads guilty to drug, money laundering charges

By Eric Heisig

CLEVELAND, Ohio — A former Ohio City nightclub owner arrested by the FBI as part of a large-scale investigation pleaded guilty Monday to federal drug and money-laundering charges.

Emad Silmi, 44, the owner of Global Auto Body & Collision in Cleveland’s Puritas-Longmead neighborhood, acknowledged to a federal magistrate judge that he ran a drug ring out of his shop that spread large amounts of marijuana, cocaine and a designer drug similar to “molly” throughout Northeast Ohio.

His arrest came after a federal investigation that lasted more than a year and also resulted in charges against 25 other people. It is the second time the North Olmsted resident, who previously owned the popular club Moda, was caught trafficking drugs.

He was sentenced in 2006 to 57 months in federal prison for similar charges.

Silmi said little more than “yes, your honor” during his plea hearing in front of Magistrate Judge Jonathan Greenberg. A bald, gray-bearded man in an orange jumpsuit, he has been in the custody of the U.S. Marshals Service since his arrest in December 2017. He acknowledged his crimes to the judge as Assistant U.S. Attorney Matthew Cronin read them aloud from a plea agreement.

His lawyer Craig Weintraub said after the hearing his client is looking at a likely sentence of about 10 years in federal prison. Silmi also agreed to forfeit more than $54,000 and a gun, and federal prosecutors agreed to drop several charges in exchange for his plea.

U.S. District Judge Christopher Boyko will sentence Silmi on April 29.

The FBI dubbed the investigation “Operation Snow Globe.” Agents discovered that drugs were shipped through the mail, FedEx and UPS. The drug money was laundered through auto shops throughout Cleveland and in Parma. Agents listened in on phone calls and read text messages, according to court records.

Silmi obtained large amounts of cocaine from Cleveland resident Samer Abu-Kwaik, prosecutors said. He also obtained large amounts of designer drugs from Huron resident Anthony Quinn Greenelee, who obtained it from China.

He sold all the drugs out of his shop and disguised drug payments as business expenses to launder the money.

Others netted in the FBI’s investigation were also caught shipping and selling heroin, fentanyl and the synthetic opioid U-47700 from Puerto Rico, court records said.

Prior to his recent arrest, Silmi was likely best known as the owner of his West 25th Street nightclub, which in its day was frequented by stars such as LeBron James, Shaquille O’Neal, the rapper 50 Cent, Mötley Crüe drummer Tommy Lee and hip-hop mogul Russell Simmons.

The Ohio City club was shuttered in 2006, and its former building now houses the Mitchell’s Homemade Ice Cream shop.

Weintraub described Silmi’s charging and plea as a “fall from grace” for a once-successful businessman.

“That was the club in Cleveland for a while,” the attorney said of Moda. He said Global Auto Body & Collision is still open and is run by Silmi’s wife.