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Susan L. Berger Intermittent Advisor Office of Technical Assistance

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Presentation on theme: "Susan L. Berger Intermittent Advisor Office of Technical Assistance"— Presentation transcript:

1 Susan L. Berger Intermittent Advisor Office of Technical Assistance

2 Actual Examples of how money laundering happens in the securities and capital markets Or Actual Cases brought by Regulators against securities firms

3 Stockbroker accepts criminal funds in cash  Broker continuously accepts cash deposits from customer  Deposits range in individual amount USD 7,000-18,000  Cash deposited in customer’s sister’s money market account  Funds subsequently withdrawn by checks.

4 Stockbroker accepts criminal funds in cash Source: FATF Report on Money Laundering Typologies  Stockbroker arrested on unrelated charge.  Following arrest, law enforcement learns of customer’s identity.  Customer was a known drug dealer.

5 Issues?  Know your employee  Know your customer  Activity in account consistent with brokerage account?  Cash Deposits

6 Criminal Proceeds Placed in Financial System Through Margin Trading  Case involves the theft of USD 384 million over a 10 year period from a bank in Country A by 4 individuals.  4 individuals sent the money to Country B where it was deposited into approximately 550 bank accounts opened by 80 companies (all fictitious companies established for purposes of opening accounts).

7 Criminal Proceeds Placed in the Financial System Through Margin Trading Source: FATF Report on Money Laundering Typologies  Money in these accounts withdrawn by 4 individuals and used to invest in real estate and stock market in Country B.  One of 4 individuals traded very actively in Country B’s stock markets and had a huge turnover of stocks in Country B public companies.

8  He was known as the largest margin investor in Country B.  Stock brokers who handled individual’s trading never made any disclosures about customers, or trading activity to regulators.  4 individuals charged with criminal offenses including money laundering.

9 Issues?  Know Your Customer  Layering-extraordinary number of accounts, institutions, etc. Meant to be confusing!  Margin trading-considered higher risk?  Should brokers have seen red flags and reported?  Stockbrokers: Willful blindness?? Conflict between profit and reporting??

10 Fraud Money Invested in Securities Markets  Brokerage firm opened several accounts for a group of related individuals, including a non-resident account.  The non-resident account was used as a “conduit” to transfer approximately USD 18 million.  All accounts received large sums from countries of concern which were then invested in listed stocks of public companies.

11 Fraud Money Invested in Securities Markets Source: FATF Report on Money Laundering Typologies  Proceeds of securities transactions transferred to non-resident account.  Wired out to regions of concern and offshore financial centers.

12  Investigation revealed that brokerage firm had been used to launder the proceeds of various frauds.  Red flags in this scenario?

13 In the Matter of Oppenheimer & Co.  Oppenheimer: US broker-dealer  Fined USD 2.8 Million by FinCen (U.S. FIU) For FAILING TO HAVE ADEQUATE AML PROGRAM  Firm did not have adequate procedures for filing STRs  Evident in activities of accounts domiciled in a foreign branch office and a Florida branch office.

14 In the Matter of Oppenheimer & Co. FinCen 12/29/05  Numerous wire and journal transfers between related and unrelated accounts which lacked related securities transactions and appeared to lack economic benefit.

15 ISSUES?  Oppenheimer fined for failing to have adequate AML program: NOT for money laundering.  Large fine  Red Flags: 1. Activity not consistent with securities account 2. Transfers to/from unrelated/related accounts.

16 Money Laundered Through Sham Commodities Trades o Patel, a money launderer based in Dubai, UAE o Laundering money for Albanian narcotics trafficking organization operating in Italy o Patel and 39 others arrested in Dubai for ML  According to records seized, Patel controlled various entities either directly or through nominees

17  These entities controlled by Patel included “Hainke & Anderson Trading” and “Jayna Trading”  Patel directed that wire transfers be made from his controlled entities in Dubai accounts to 15 separate accounts controlled by him at Man Financial in NYC

18  Activity in Man Financial accounts “inconsistent with legitimate commercial activity” but rather with layering  Patel engaged in sham commodities trading in which he and his nominees would always suffer losses and other entities controlled by him would enjoy profits  “Wash” trades having no commercial

19 justification and resulting in no real change in trading position for either party  Similar to trade based ML

20 Stock Manipulation Launders Money and Produces a Profit  Organized crime proceeds used to purchase 2 listed companies (a stock brokerage and a small bank) in Country A.  Purchase funds are transferred to Country A from a private bank in Caribbean controlled by organized crime.  Small investors from different countries using false names bought stock in companies, making sure not to trigger individual disclosure rules.

21 Stock Manipulation Launders Money and Produces a Profit Source: FATF Report on money laundering typologies  Fictitious shareholder meeting elects new board of directors (front men for organized crime)  Company issues USD 42 million public offering  Disbursed through banks in Country A and laundered by a series of transfers to foreign accounts. Circuit repeated to further obscure origin of funds.

22 Stock Manipulation Launders Money and Produces a Profit Source: FATF Report on money laundering typologies  Activity simulated foreign investment in stock  Price of shares inflated 640% of face value.  Stock broker complicity

23 New York Stock Exchange v. Bear Stearns  Firm and individuals failed to supervise 10 accounts opened by an individual and various entities involved in a Russian bank which was the subject of previously reported news alleging fraud and other improprieties.  Accounts were active for 5 years during which:  20 incoming wires totaling in excess of USD 20 million.  95 outgoing wires totaling in excess of USD 18 million.

24 New York Stock Exchange v. Bear Stearns NYSE Hearing Panel Decision 12/22/05  145 journal transfers between 10 accounts totaling USD 15 million.  Most without any underlying security transaction  USD 1.5 million fine

25 Narcotics Trafficker Takes Control of Publicly Traded Company  Mr. Drug Dealer buys majority of shares of ABC Ltd., a public company located in Country A.  ABC Ltd. is a speculatively traded, low priced stock trading over the counter in Country B.  Mr. Drug Dealer sells drugs to Mr. Drug Buyer.  Instead of paying for drugs, Dealer instructs Buyer to buy shares of ABC Ltd. through the stock market.

26  Because ABC Ltd is so thinly traded, there were no competing bids for the shares and the trades cleared through a clearing firm.  Result: Dealer received the money and Buyer received the drugs and stock shares.  Cost was a few hundred dollars in commissions

27 To Make Things Worse…  This transaction repeated several times through several countries and brokers.  Public was lead to believe that there was actual interest in the stock.  Stock began to increase in value because of illusion of activity.  Mr. Dealer’s and Mr. Buyer’s shares increased in value.

28  Buyer had previously opened securities account in non-cooperative jurisdiction and instructs his agent to buy shares of ABC  Agent contacts broker in Country B and gives order to purchase shares.  At the same time, Drug Dealer instructs his agent in Country C to sell shares of ABC in the same amount.

29 Narcotics Trafficker Takes Control of a Publicly Traded Company Source: FATF Report on Money Laundering Typologies  Generated additional profits.  Dealer was able to legitimize source of funds as market profit.  Issues?  Thinly traded speculative stock-red flag.  Layers of transactions through foreign entities

30 TEODORO OBIANG CORRUPT FINANCIAL OFFICIAL USES GAPS IN US LAW AND THE ASSISTANCE OF US PROFESSIONALS TO FUNNEL MILLIONS OF DOLLARS OF ILLICIT MONEY INTO THE US

31 Politically Exposed Persons (PEPS)  Teodoro Nguema Obiang- Equatorial Guinea

32 Teodoro Obiang  41 Year old Son of President of Equatorial Guinea  Cabinet Minister in Equatorial Guinea  Equatorial Guinea, small and oil rich, with a population approximately 700,000 of which 70% lives on less than 2 USD per day.

33 Teodoro Obiang Currently under investigation by US Justice Dept. Between 2004 and 2008, Obiang used US lawyers, bankers and real estate and escrow agents to move more than 110 million USD in suspected funds through US bank accounts. Used funds to buy 30 million USD home in Malibu, CA and 38.5 million USD to purchase an aircraft.

34 How Did He Do It? Obiang used shell companies, attorney- client and law office accounts controlled by his attorneys to bring suspect funds into the US and conduct transactions through US banks without their knowing of his activity, including at banks that had made it clear they did not want his business.

35 US AML WEAKNESS  Under current US law, attorneys, lobbyists, real estate and escrow agents HAVE NO OBLIGATION TO ESTABLISH AML PROGRAMS, KNOW THEIR CUSTOMERS, OR EVALUATE SOURCE OF FUNDS TRANSFERRED INTO US.  IN CERTAIN US STATES, ENTITY CAN BE ESTABLISHED WITHOUT PROVIDING BENEFICAL OWNERSHIP INFORMATION

36 Thank you. Questions?


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