AML/CFT RISKS FOR GLOBAL FINANCIAL INSTITUTIONS

September 17, 2013

OBJECTIVES OF WORKSHOP

• Commence a constructive dialogue about the changing AML/CFT landscape

• Understand and prepare against regulatory and litigation risks

• Understand and address scope, breadth and depth of AML/CFT obligations

• Share best practices for detecting suspicious transactions

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THE CURRENT REGULATORY ENVIRONMENT

Assume U.S. standards apply extraterritorially

• U.S. regulators effectively operate on this basis

• Compliance with lesser local standards will not impress U.S. regulators

• Increasing collaboration among FIU’s worldwide (but with increasing data privacy tension)

• Counter-terrorism ends justify departures from historical practices

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THE CURRENT REGULATORY ENVIRONMENT

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U.S. standards are evolving, and conduct today may well be measured against tomorrow’s best practices

• Financial institutions are expected to fill in gaps between legal requirements and practical regulations

• Financial institutions have been penalized based on previously unarticulated standards

• KYCC and monitoring of correspondent banking transactions are the new normal

• Clear Message: Increase AML/CFT compliance or face civil and/or criminal enforcement

THE CURRENT REGULATORY ENVIRONMENT

Financial institutions increasingly are expected to perform law enforcement functions

• Not simply report, but detect suspicious activities

• Investigate beneficial owners and purposes of international funds transfers

• New focus on AML cases based on weak internal procedures, not just adjunct to substantive criminal violations

• U.S. regulators (and judges) have minimal respect for bank secrecy

• Scope of AML/CFT expanded to include broker-dealers, insurance companies and non-traditional financial institutions (e.g., money remitters, paycheck services, pawnbrokers, etc.)

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CURRENT FOCUS ON BENEFICIAL OWNERSHIP

Senator Levin’s Legislation Focusing on the Corporate Formation Process

• Incorporation Transparency and Law Enforcement Assistance Act was recently introduced

• Focus is on requiring privately formed entities in the U.S. to disclose beneficial owners

• Goal is to help law enforcement in the U.S. and abroad in tracking money launderers, tax evaders and terrorist financiers

Anticipated Proposed CDD Rule from FinCEN

• Consolidates and formalizes the CDD Rules for “financial institutions”

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CURRENT COMPLIANCE CHALLENGES Sanctions – Iran

• New legislation on the horizon

• Section 219 of the Iran Threat Reduction Act

• High risk industry sectors: insurance, marine, petro-chemical, automotive, aviation

• De-centralization of enforcement

Virtual Currencies/Internet Business

• Liberty Reserve, Bitcoin

• Developing typologies

Trade Transactions

• KYCC

• Diversion

• 20/20 hindsight

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CURRENT COMPLIANCE CHALLENGES

• Synthetic Identities

• Third Party Payment Processors

• Data Privacy Laws

- Swedish Personal Data Act

- Norway

• Horizontal and Vertical Corporate Culture

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THE CURRENT LANDSCAPE BEYOND BANKING

Focus on Broker-Dealer AML Compliance

• AML a top issue in 2013 for FINRA

• Revised Chicago Stock Exchange AML compliance rules

- Emphasis on qualifications of the AML Officer and independent testing

- Effective May 2013

• Banks with B-D affiliates: AML compliance system must capture all parts of the business

- Difficult in a changing regulatory environment where businesses are shifting – cannot just “set it and forget it”

- “Know Your Third Parties” – Emphasis on non-U.S. counterparties, renewed focus on U.S. B-Ds in currency trades with non-U.S. B-Ds

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THE CURRENT LANDSCAPE BEYOND BANKING

Investment Advisers

• FinCEN expected to require IAs to implement AML programs

• OFAC currently applies

• SEC B-D “No Action Letter”

• Advisers should not wait for FinCEN rule

Insurance Products and Companies Targeted

• "Operation Capstone" – U.S. Customs uncovers massive drug money laundering through the international life insurance industry.

• New York DFS investigation of reinsurance firms for terrorist financing.

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POTENTIAL TRIGGERS FOR GREATER SCRUTINY

• Extensive activities in emerging markets

• Midsized banks with sizable overseas customer bases

• Private banking or correspondent banking relationships

• Accounts of non-U.S. non-operating companies

• Relying on another financial institution’s certification (e.g., relying on an introducing broker)

• Numerous subsidiary non-bank financial companies

• Transactions with or business arrangements with virtual currency firms/organizations

• Foreign currency transactions

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THE CURRENT REGULATORY ENVIRONMENT

What does this all mean for global financial institutions today?

• Need a top-down culture of compliance

• Training on strictest U.S. and international standards

• Constructive dialogue with regulators and ongoing program to update policies and practices

• Clearly cannot engage in any acts perceived as facilitating avoidance of detection, but also evaluated for proactive measures to detect and report suspicious transactions

• Attention to compliance obligations throughout all the businesses of the institution

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THE CURRENT LITIGATION LANDSCAPE

There is an increasing convergence of regulatory enforcement and litigation

• Senate Permanent Subcommittee on Investigations (PSI) 3Q12 hearing (triggered HSBC investigation)

• Enhanced whistle-blower provisions in Dodd-Frank

• FCPA investigations that morph into AML cases (Haiti Teleco)

The jurisdictional reach of U.S. courts for civil litigation is expansive

• U.S. branches (Arab Bank, NatWest, Bank of China, Credit Lyonnais)

• U.S. correspondent accounts (Licci)

• U.S.-based transactions with extraterritorial impact (Kiobel)

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THE CURRENT LITIGATION LANDSCAPE

Exclusively foreign transactions may be the basis for civil liability in the U.S.

• Foreign transactions for organizations designated by OFAC

• Transactions with foreign governments

• Transactions that result in alleged violations of international law

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THE CURRENT LITIGATION LANDSCAPE

The playing field in U.S. courts is not level

• Influence of plaintiffs’ attorneys

• Bias in cases involving terrorism

• Lack of respect for bank secrecy or deference to foreign sovereignties

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THE CURRENT LITIGATION LANDSCAPE

What does this all mean for global financial institutions today?

• The same lessons that apply in the regulatory context will aid litigation prevention/defenses

• Perform an institution-wide analysis of litigation risks

• Regular risk-based reviews of customers, products and geographic scope of the business are advisable

• Preach vigilance and zero tolerance throughout the institution

• Conduct hands-on training for appreciation of U.S. litigation risks and reputational risks

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Q&A Discussion

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WITH YOU TODAY

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Alan Howard Partner

Crowell & Moring LLP New York

212.803.4021 ahoward@crowell.com

Eric Edwards Partner

Crowell & Moring LLP Washington DC 202.624.2660

eedwards@crowell.com

Cari Stinebower Counsel

Crowell & Moring LLP Washington DC 202.624.2757

cstinebower@crowell.com