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Dennis M. Lormel President & CEO DML Associates, LLC Association of International Bank Auditors December 2, 2010 Terrorist Financing and Bankers’ Responsibilities.

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Presentation on theme: "Dennis M. Lormel President & CEO DML Associates, LLC Association of International Bank Auditors December 2, 2010 Terrorist Financing and Bankers’ Responsibilities."— Presentation transcript:

1 Dennis M. Lormel President & CEO DML Associates, LLC Association of International Bank Auditors December 2, 2010 Terrorist Financing and Bankers’ Responsibilities

2 Terrorist Financing Introduction Current Terrorism Threat in the U.S. Terrorist Groups and Their Financial Requirements Current and Emerging Trends Money Laundering and Terrorist Financing BSA Information Facilitates Investigations Conclusion

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4 All Banks are Vulnerable All banks, regardless of size, location and product offerings are vulnerable to servicing individual criminals, groups of criminals, and criminal organizations All banks, regardless of size, location and product offerings are vulnerable to facilitating terrorist financing The back office has evolved into the front line in the fight against money laundering and terrorist financing ▫ Compliance professionals not only play an important role in defending the economic threat posed by criminal enterprises but also play a role in safeguarding national security from terrorist groups

5 Terrorist Financing Extremely difficult to identify ▫ Coordination ▫ Innovation ▫ Training Not adequately understood ▫ Four elements must be considered  Terrorist groups  Funding capacity  Financial mechanisms  Individuals, entities and cells Perspectives ▫ Government ▫ Industry Possibility v. probability of detection ▫ Detection possible but not probable ▫ Must develop mechanisms to increase probability

6 Areas of Terrorist Exploitation Criminal Activity ▫ Fraud ▫ Drug trafficking ▫ Human smuggling ▫ Counterfeit goods/currency ▫ Stolen goods ▫ Violent crimes ▫ Kidnapping ▫ Extortion ▫ Cyberfraud ▫ Money laundering Facilitation tools ▫Internet ▫Credit/debit cards ▫Stored value cards ▫NGOs/charities ▫Illegal money remitters ▫Informal value transfer systems ▫Shell companies ▫Off shore havens ▫Correspondent banking ▫Wire transfers

7 Understanding Regional Risks Geographical ▫ Tri-Border Region ▫ Middle East ▫ Eurasia ▫ Europe Cultural vulnerabilities ▫ Bribery/corruption  Accepted business practice ▫ Drug trafficking/money laundering  Black Market Peso Exchange ▫ Lack of government transparency ▫ Lack of government capacity Level of criminal/terrorist threat ▫ United States ▫ Mexico ▫ Africa ▫ China

8 Areas of Vulnerability For society ▫ Terrorists are adept at identifying and exploiting systemic weaknesses  Risk recognition ▫ Adaptability factor For terrorists ▫ Communications ▫ Finance

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10 Terrorism: The Reality There will be more successful terrorist attacks in the U.S. Understand the problem before assessing and determining the solution ▫ Not adequately understood ▫ Extremely difficult to identify ▫ Perspectives  Industry / government ▫ Possibility v. probability The best chance to prevent terrorists from succeeding is to disrupt their ability to raise, move and access money ▫ Terrorists must have effective financial infrastructures ▫ Terrorists require financial support to achieve their goals

11 Reality Check Ongoing threat to New York City ▫ Nazibullah Zazi  Plot to attack New York City subway system ▫ Faisal Shahzad  Times Square bomber Law enforcement response ▫ Good police work ▫ Bad police work ▫ Luck factor

12 Current Terrorism Threat in U.S. On April 15, 2010, Director Robert S. Mueller testified before the Senate Committee on Appropriations, Subcommittee on Commerce, Justice, and Related Agencies. Regarding terrorism, he stated: “Terrorism, in general, and al-Qaeda and its affiliates in particular, continue to leverage proven tactics and tradecraft with adaptations designed to address its losses and the enhanced security measures of the United States. Al-Qaeda seeks to infiltrate overseas operatives, who have no known nexus to terrorism, into the United States using both legal and illegal methods of entry...”

13 Compliance Concerns Adaptations (adaptability) ▫ Risk recognition Al-Qaeda seeks to infiltrate overseas operatives, who have no known nexus to terrorism, into the United States (anonymity) ▫ Know your customer What if… ▫ Terrorist group succeeds with attack in U.S. ▫ You banked them  Potential adverse impact to bank

14 Terrorist Attack Cycle Target selection Planning Deployment Attack Escape Exploitation

15 Dhiren Barot aka Issa al Britani Muslim convert and British citizen Al-Qaeda operative ▫ Trained in terror camps Sent to U.S. (pre 9/11) to survey potential terror targets to include: ▫ International Monetary Fund ▫ World Bank ▫ New York Stock Exchange ▫ Citigroup Center ▫ Prudential Building Evidence discovered on computer of Mohammed Naeem Noor Khan and via interrogations of captured Al-Qaeda leader Planned attacks in Britain & U.S. ▫ Made detailed proposal to Al-Qaeda financiers in Pakistan Indicted in U.S. Convicted in Britain (40 year sentence) ▫ Plot to blow up subway train and limousines

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17 Must understand four dimensions ▫ Organization ▫ Funding Capacity  Source of funds  Money laundering method  Availability of funds ▫ Funding mechanism  Formal financial system  Informal system ▫ Group members Funding cycle ▫ Raise ▫ Move ▫ Store ▫ Spend Understanding & Disrupting Funding Flows Raise Store Move Spend

18 Al-Qaeda Regional terrorist groups aligned with Al-Qaeda Homegrown cells Shia extremists Palestinian terrorist groups Domestic terrorist groups Types of Terrorist Groups FBI assessment issued January 11, 2007, identified the following groups as threats to the U.S.:

19 Terrorist and Criminal Groups Must have continuous stream of funds available ▫ Must have capacity to raise funds Fraud and money laundering often key ▫ Nexus between fraud and money laundering Drug trafficking the most lucrative criminal activity Must have immediate access to funds Pose threat to national security and economy ▫ Importance of disruptive and preventive measures

20 Criminal Activity Terrorists increasingly rely on criminal activity to raise funds ▫ Makes them more vulnerable Terrorists are adept at exploiting systemic vulnerabilities to facilitate and commit crimes ▫ They are only limited by their imagination Investigators should remain vigilant for criminal activity which could be linked to terrorism

21 OC – Terrorism Comparison Organized Crime Motivated by profit/greed Seek economic ends Engage in corruption Network and cell based structure Require safe-havens Need to recruit new members Requires specialists Group identity important Threat of violence Select targets that pose threat to the group Avoid public attention Money laundering essential operating tool Terrorist Groups Motivated by ideology Seek political ends Engage in corruption Network and cell based structure Require safe-havens Need to recruit new members Requires specialists Group identity important Threat of violence Select symbolic targets Seek public attention Money laundering essential operating tool

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23 FATF Global ML/TF Threat Assessment Released July 2010 Based on typologies and threat assessment ▫ Strategic Surveillance Initiative  Detailed questionnaire responded to by FATF members 2009 Strategic Surveillance Survey ▫ Main source for money laundering  White collar crimes  Drug related crimes ▫ Main source of terrorist financing  Financial crimes (particularly fraud)  Trafficking in narcotics, cigarettes, weapons, human beings, or diamonds  Petty crimes ▫ Identifiable global trends  A noteworthy proportion of ML/TF activity involves cash  Increased use of internet and new payment mechanisms

24 Rise of Electronic Payments Moving toward elimination of cash and checks Setting the stage for mobile commerce Upward Trend Cash19%18%15% Check46%33%13% Debit Card 7%12%30% Credit Card24%26%28% Electronic Transfer 4%11%14% Where is the forward thinking? ▫ Law enforcement, regulators and compliance professionals should be forward thinking  Identify/assess future trends  Identify areas of vulnerability  Develop methodologies to minimize exploitation

25 New Payment Methods Services that provide virtual accounts ▫ Stored value cards ▫ Online payment services (Paypal) ▫ Digital currency (e-Gold Ltd.) ▫ Mobile payments ▫ Online virtual world transactions

26 The Threat Anonymous Untraceable Reusable Universally accepted Requires no intermediary Instant settlement ▫ The closer an electronic payment method comes to mimicking cash, the greater the money laundering and terrorist financing threat

27 Terrorist Exploitation of the Internet Psychological warfare Propaganda ▫ Recruitment Fundraising Communications Information gathering ▫ Training

28 Ranging from credit card fraud to money laundering Terrorists can be extremely internet savvy ▫ Imam Samudra  Mastermind of Bali bombing  Jailhouse manifesto “Hacking, Why Not” ▫ Ali Al Marri  Al-Qaeda facilitator for post 9/11 activity in U.S.  Internet expert ▫ Younes Tsouli aka Irhabi (Terrorist) 007  Used and radical websites for propaganda and communications  Committed massive cyber crime and credit card fraud Internet / Cyberfraud

29 Exploitation of Systemic Vulnerabilities Terrorist and criminal organizations constantly exploit systemic vulnerabilities Vulnerabilities or high risk areas in the financial services sector October 3, 2001* ▫ Wire transfer ▫ Correspondent banking ▫ Fraud ▫ MSBs * Lormel testimony before House Committee on Financial Services December 2, 2010 ▫ Fraud ▫ Money laundering  Wire transfer  Correspondent banking  Illegal money remitters/hawalas  Shell companies  Electronic mechanisms

30 Illegal Money Remittance Business Abad Elfgeeh ▫ American citizen born in Yemen Carnival French Ice Cream Shop ▫ Annual average revenue about $185,000 ▫ Illegally wired $22 million overseas  Mostly to Yemen Used account with a major bank to wire money overseas Illegally transferred money for Sheik Mohammed Ali Hassan al-Moayad ▫ Al-Qaeda and Hamas fundraiser/supporter ▫ Ties to Osama bin Laden Elfgeeh claimed he was not running unlicensed money transfer business but providing a “community service”

31 Illegal Funding Flow Carnival French Ice Cream Shop operated as an unlicensed and unregistered money transmitter $22.2 million was deposited by cash, checks and wire transfers into 12 accounts held at multiple U.S. banks from 1996 through 2003 ▫ Deposits were structured to avoid reporting requirements Funds subsequently consolidated into central account in the U.S. using checks and wire transfers from the 12 accounts ▫ From central account, $21.9 million wired to accounts in 25 countries on behalf of customers in U.S. ▫ Hawala operators who controlled recipient accounts in those countries then exchanged the funds into local currency and distributed payments to intended beneficiaries

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33 Illegitimate Funding Money Laundering Funds deposited into financial system Placement Legitimate Funding OR Illegitimate Funding Terrorist Financing The Process Funds moved to other institutions to obscure origin LayeringIntegration Funds used to acquire legitimate assets Funds distributed to finance terrorist activities

34 Money Laundering and Terrorism Finance Comparison Money Laundering Motivation is profit Circular funding flow ▫ Vlademiro Montesinos  PEP ▫ Abused his trust  Laundered over 400 million globally (80 million in U.S.)  SARs instrumental to investigation Terrorism Finance Motivation is ideological Linear funding flow ▫ Shawqi Omar  Terrorist ▫ Abu Musab al-Zarqawi  Beneficiary of multiple frauds involving family members in U.S.  SARs instrumental to investigation

35 Targeting the Money Launderer Key vulnerabilities in the money laundering process ▫ Cash ▫ Wire transfers ▫ Fixed assets Identifying money laundering mechanisms Intelligence gathering and exploitation Disrupting illicit money flows

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37 GAO Report February 2009 Bank Secrecy Act: Suspicious Activity Report use is increasing... ▫ Automated monitoring systems can flag multiple indicators of suspicious activities and identify significantly more unusual activity than normal monitoring ▫ Public enforcement actions against depository institutions prompted other institutions to look more closely at client and account activity ▫ Greater awareness of and training on BSA requirements ▫ More regulator guidance for BSA examinations ▫ Federal agencies have taken actions to more effectively analyze SAR data  Better integration of BSA data with law enforcement data

38 Value of Financial Institution Records Investigations rely on bank financial data Compliance with subpoenas and regulatory reporting requirements absolutely vital Financial records have potential value as evidence of financial crime or transactions, or to enhance other parts of an investigation ▫ Bank records: transaction records, loan applications, signature cards, etc. ▫ Reporting records: SARs, CTRs, etc. Financial institutions are gatekeepers of information about terrorists’ financial activity in the regulated sector

39 FBI Investigative Data Warehouse Implementation of data sharing / data mining technology ▫ Time sensitive and meaningful data exploitation Importance of Suspicious Activity Reports ▫ Thorough completion of forms to include as much identifying data as possible Importance of Know Your Customer and Customer Identification Programs ▫ Proliferation of false identity documents

40 Yemeni Shopkeepers Three Yemeni shopkeepers in Rochester, New York engaged in a scheme to launder money for undercover operatives from ICE ▫ Seleh Mohamed Takei Saeed ▫ Yehia Ali Ahmed Alomari ▫ Mohamed Al Huraibi Investigation predicated on analysis of Currency Transaction Reports (CTRs) ▫ Saeed’s social security number associated with 324 CTRs totaling approximately $12.3 million dollars between October 2002 and November 2004 ▫ Alomari’s social security number associated with multiple CTRs totaling approximately $2.6 million dollars during the same time period ICE conducted two year undercover investigation Subjects transferred approximately $200,000 outside the U.S. after the money was represented to be proceeds of specified unlawful activity, and intended for Hizballah Saeed, Alomari and Huraibi plead guilty in August 2009 Durnan Mini Mart Short Deli & Grocery MOJO’s Stars Restaurant

41 Suspicious Activity Reports (SARs) Most serious compliance breakdown Failure to file SARs SARs must be filed within 30 days of detecting suspicious activity Should be comprehensive and thorough Answer who, what, when, where, why, how Include all identifying data SARs make an important difference 41

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43 Internal measures ▫ Break down fraud and money laundering silos ▫ Understand the problem ▫ Vigilance ▫ Communication, cooperation, coordination External measures ▫ Terrorist financing specific training ▫ Security clearances for select bankers ▫ Feedback mechanisms regarding importance of BSA ▫ Assessment of all SARs identifiable with terrorism cases ▫ Case studies of terrorist financing investigations ▫ Combining BSA data with other data to include empirical and anecdotal information for trend analysis Improving Possibility v. Probability

44 President & CEO DML Associates, LLC Winmeade Drive Lansdowne, VA


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