AML Training Program Presented by Continental Funding Corp.

Background Patriot Act FinCen Financial Institutions Lender/Originator

Bank Secrecy Act The Bank Secrecy Act (BSA) requires all financial institutions including residential mortgage lenders and originators to: -Monitor customers behavior -File reports on transactions that meet a certain dollar amounts -Maintain records of certain transactions * The purpose of the BSA is to aid law by uncovering criminal activities such as money laundering, mortgage fraud, and possible terrorist activities

US Patriot Act USA PATRIOT Act signed into law in response to 9/11 Provides government with additional tools to prevent, detect and prosecute money laundering and the financing of terrorism including: - Amend the BSA to require all “financial institutions” to implement a written anti-money (AML) laundering program - Directing treasury to prescribe regulations requiring “financial institutions” to identify customers in connection with the opening of accounts - Various sections addressing suspicious activity reporting requirements -

FinCen Financial Crimes Enforcement Network Possible future effect - Bureau of the treasury - Treasury delegated to FinCen the authority to implement, administer and enforce compliance with the Bank Secrecy Act (BSA) Possible future effect - Switch focus from funding terrorism to mortgage fraud

Customer Identification FinCen did not expressly require a customer identification requirement for non bank mortgage lenders and originators, however the Fair Credit Transaction Act amended the Fair Credit Reporting Act to add identity theft programs such as the Red Flag Rule requirement.

Financial Institutions Financial institutions broadly defined include among others: - Banks and other depository institutions - Money service businesses - Security broker-dealers -Loan and finance companies - Insurance companies - Sellers of vehicles - “Persons involved in real estate closing and settlement”

Definition…Lender/Originator A “residential mortgage lender” is the person to whom the debt arising from a residential mortgage loan is initially payable on the face of the evidence of indebtedness A “residential mortgage originator” is a person who accepts a residential mortgage loan application or offers or negotiates terms of a residential mortgage loan

Reportable Activity Money Laundering -Money laundering is the process of conducting financial transactions and/or taking the proceeds from an illegal activity and making them appear to be from a legal source, or hiding them or placing them beyond the reach of the government. - Also, utilizing a series of transactions, transferring the proceeds to a bank, and later transferring those funds to their original source.

Money Laundering In other words, the bad guys are trying to: - Disguise the source of funds - Change the form - Move the funds to a place where they are less likely to attract attention - Place the funds back in the mainstream

Anti-Money Laundering (AML) Program Requirements Four Minimum Requirements 1. Development of written internal policies and procedures and controls. 2. Designation of an AML compliance officer responsible for ensuring that: - AML program is implemented effectively, including monitoring compliance by companies agents and brokers. - AML is updated as necessary. - Appropriate persons are educated and trained.

Anti-Money Laundering (AML) Program Requirements (cont) Ongoing periodic training of appropriate employees about the company’s AML policies and procedures Periodic independent testing of the AML program to ensure that: - Company agents and brokers are complying with the AML program - Company is maintaining an adequate program commensurate with risk profile of the company - That there is a yearly audit of policies and procedures performed by independent third party who has a working knowledge of the BSA

When Must a SAR be Filed A suspicious activity report must be filed on any known or suspected federal violation of law. Suspicious activity requires reporting if it involves at least $5000 aggregate, and the institution knows or suspects that (for example): - The funds are derived from illegal activities -The funds are part of a plan to violate or evade any federal law or regulation -The transaction is designed to evade other reporting requirements - The transaction is not the sort in which the particular customer would normally be expected to engage, and the institution knows of no reasonable explanation for the transaction

SARs = Something Ain’t Right The means and techniques of money laundering and mortgage fraud are continually evolving. Therefor there is no way to provide a list of all suspicious transactions. The decision to file a SARs should be based on all the facts and circumstances relating to the transaction and the customer in question First question to ask is whether the activity is reasonable for that customer or whether something just isn’t right. If not, than that rises to the level of suspicious activity. Whether the activity is fraudulent or criminal or related to terrorist activity it is up to the Government to determine.

Reportable Actions (cont) Red Flags that signal possible money laundering or criminal activities may include: - A consumer reporting agency notice of a credit freeze in response to a request for a credit report - A fraud or activity alert is included with a consumer report obtained with respect to the consumer - The customer exhibits unusual concern about the firms compliance with government reporting and the firms AML policies particularly concerning his or her identity or type of business or is reluctant to reveal any information concerning business activities, or furnishes unusual or suspicious identification or documents

Red Flags A consumer reporting agency provides a notice of an address discrepancy The customer wishes to engage in a transaction that does not make sense The information provided by the customer that identifies a legitimate source for funds is false, misleading or substantially incorrect Customer exhibits a lack of concern regarding transaction costs

Red Flags (cont) The customer (or person associated with the customer) has a questionable background or is the subject of news reports indicating possible criminal, civil or regulatory violations. Customer has difficulty describing the nature of his or her business. Customer asks for exemptions from the firms AML policy. Customer requests that a transaction be processed to avoid your firms normal documentation requirements

Mortgage Fraud Red Flags The broker or other agents are receiving excessive commissions The sale price exceeds fair market value A party requests that the loan be used to pay debts not secured by the property or required by the lender The buyers check indicates another to be the provider of funds and no gift letter is presented

Reportable Activity The customer appears to be acting as an agent for an undisclosed principal, but declines or is reluctant, without legitimate reasons, to provide information or is otherwise evasive regarding that person or entity (straw buyer) The property securing the loan was recently paid off. The proposed sale is occurring within a year of obtaining title

Mortgage Loan Fraud SAR Stats The most prevalent activities described in SARs reports… - Use of straw borrowers - Sellers remaining in the property by renting it back from the scammer - Equity skimming or property theft - Misrepresentations in income, employment or occupancy/ false statements - Advance fee scams

SARs Reporting Deadlines A SARs must be filed: - No later than 30 days after the date the firm becomes aware of a suspicious transaction - If no suspect is identified on the date of the initial detection, the firm must file no more than 60 days after the date of initial detection

Retention of records Copies of SARs and supporting documentation must be maintained for 5 years from the date of filing Supporting documentation should be identified and maintained as such, and shall be deemed to have been filed with the SARs The firm shall make all supporting documentation available to FinCen and any appropriate law enforcement agencies or regulators upon request

Strict Confidentiality All SARs information that would reveal the existence of a SAR must be kept confidential SAR may only be disclosed to: - FinCEN - Federal, State or local law enforcement - Federal regulatory authority that examines the company for compliance with the BSA - State regulatory authority administering a state law that requires the company to comply with the BSA The firm must not notify any person involved in the transaction that the transaction has been reported except as permitted by BSA regulations Disclosure of the fact that a SARs filing is contemplated or has been made is a violation of Federal law

Safe Harbor No company (or its officers, director, employees and agents) may be held liable to any person or entity under any federal statute or regulation, or under the constitution, law or regulation of any state or political subdivision, for disclosing suspicious activity or for failing to notify the person or entity who is the subject of, or named in the report

What Every Employee Needs to do And Look For Understand and comply with the letter and spirit of the AML laws and policy and procedures Never disclose to a customer that a suspicious activity report has been filed Be alert to unusual or suspicious activity Verify the information on the application Be aware if any large sums have been deposited into the accounts in the last 6 to 12 months Compare credit report information with what you see on the bank statements or tax returns

Employee Procedure for Reporting Suspicious Activity No employee will be disciplined for reporting suspicious activity If a Red Flag is detected, immediately contact your compliance officer. He or she will determine whether further investigation should be undertaken

Civil Penalties for noncompliance Failure to comply with recordkeeping requirements: up to $1000 per violation Failure to comply with reporting requirement: Not to exceed the greater of the amount involved in the transaction (not to exceed $100,000) or $25,000 Continued noncompliance could result in issuance of a cease and desist order and forfeiture of assets

Criminal Penalties For Noncompliance A person willfully violating the BSA shall be fined not more than $250,000, or imprisoned for not more than five years or both. A person willfully violating the BSA while violating another laws of the United States or as part of a pattern of any illegal activity involving more than$100,000 in a 12 month period, shall be fined not more than $500,000, imprisoned for not more than 10 years, or both. A separate violation occurs for each day the violation continues and at each office, branch or place of business at which a violation occurs or continues.

Penalties For Noncompliance Employees should understand that it is not necessarily just the employer that will suffer penalties for noncompliance, but also individual employees

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