1. AIBA Annual Compliance Conference
Congressional Review of the BSA/ AML/ Sanctions Landscape
June 15, 2018
Dennis M. Lormel
President & CEO
DML Associates, LLC

2. Congressional Consensus Regarding BSA
BSA legislation should or must be updated
Concerns regarding the effectiveness & efficiency of BSA reporting
Multiple Congressional committees assessing numerous issues and considering legislation
More bipartisan than not
Congressional interest is gaining momentum

3. Concerns, Prior Experience & Possibilities
Congressional will / motivation / understanding
Stakeholder engagement
Getting it right
Prior experience dealing with the Hill
Possibilities
Potential legislation in due course
Potential legislation driven by 9/11 like event
PATRIOT Act 2.0

4. Key Issues & Testimony Key issues Congressional testimony
AML reporting requirements / thresholds
Safe Harbor / information sharing
CDD / beneficial ownership
Financial inclusion / de-risking
Terrorist financing
Transnational crime
Human trafficking
Other matters
Congressional testimony
Clearing House representatives (various hearings)
Dennis Lormel (Senate Banking Committee) (January 9, 2018)

5. BSA in Action Regulatory Requirements Regulatory Expectations
BSA Reports (SARs / CTRs) Through FinCEN
Financial Institution
Law Enforcement
Challenges to Reporting Effectiveness & Efficiency
Frontend Provider
Backend Consumer
Feedback Mechanisms Improve Effectiveness & Efficiency 5

6. Takeaways
Updating and enhancing BSA legislation is gaining momentum in Congress
The right stakeholders must be engaged in the deliberations leading to legislative action
We should all be cognizant of proposed legislation and speak out to ensure they get it right

7. AIBA Annual Compliance Conference
Terrorist Financing: Funding Mechanisms from Hawala to Cryptocurrency
June 15, 2018
Dennis M. Lormel
President & CEO
DML Associates, LLC

8. The Challenges of Terrorist Financing Mechanisms
Introduction
Terrorist Threat Environment
Funding Flows Required to Sustain Terrorist Organizations
Takeaways 8

9. Introduction

10. Situational Awareness from a Terrorist Financing Perspective
Situational awareness from a terrorist financing perspective should focus on:
The threat
The threat environment
Current and emerging trends
Funding flows
Sources / methods / access
Three funding streams (with numerous variations)
Who you are dealing with
Organizations (global / regional / local)
Individuals (leaders / fundraisers / facilitators / recruiters / fighters)

11. Contrasts of Using Financial System
In using the financial system, terrorists are confronted with distinct contrasts
Facilitation tool v. detection mechanism
Serves as facilitation tool by providing continuous access to funds
Financing the lifeblood of terrorist organizations
Serves as detection mechanism because funds can be identified through monitoring and / or investigation
Financing a major vulnerability

12. The SWAT Team Concept for Financial Institutions
Special Weapons and Tactics (SWAT) Teams were formed by law enforcement to deal with extremely dangerous and violent criminal confrontational situations
SWAT officers receive regular intensive training
SWAT duties are normally collateral to primary investigative responsibilities
Analogous to the SWAT Team concept, financial institutions should form Critical Incident Response Teams to deal with a BSA / AML response to emergency situations such as terrorist attacks
Should be comprised of specially trained BSA / AML investigators / analysts as conducive to the financial institution
Conduct “urgent’ reactive investigations following a violent event
Conduct proactive and targeted monitoring initiatives
Establish, and maintain appropriate law enforcement contacts

13. Terrorist Threat Environment

14. Seeds of Islamic Terrorism
Sectarianism
Sunni v. Shia acrimony and conflict
Corruption
Collapse of Arab governance in the region
Unprecedented waves of immigration from the Muslim world to the West, particularly to Europe
Anti-immigration sentiment
Muslims in parts of Europe live largely separate and unequal lives
Islam is a religion, not the problem

15. Terrorist Threat Environment
Evolution and devolution of terrorist groups
Contrasting al-Qaeda & ISIS
Homegrown violent extremists
Return of foreign fighters to their homeland (three mindsets)
Continued internet exploitation by al-Qaeda & ISIS
Hizballah / Iran
Convergence of terrorists and transnational criminals
Drivers for evolving trends
Inherent factors
Ideology / politics
Adaptive factors
Technology / counterterrorism tactics

16. Key Threats & Challenges to U.S.
Congressional testimony of FBI Director Christopher Wray on 5/16/2017
Our adversaries take advantage of modern technology
Terrorists, foreign intelligence services & criminals
Threat perspective concerning three areas
Those inspired by terrorist propaganda
Empowered to act out in support (more likely self funded)
Those enabled to act
Provided with guidance on operational planning or targets (self or terrorist funded)
Those directed
Specific directed acts (more likely terrorist funded / possible self funding)
Terrorist threats
FBI views ISIS and homegrown violent extremists as main terrorism threat in U.S.
Threat posed by ISIS foreign terrorist fighters extremely dynamic
Al-Qaeda maintains desire for large scale attacks
In near term, focused on small scale attacks against U.S. and allies in Afghanistan / Pakistan region
Domestic violent extremist movements collectively pose steady threat of violence and economic harm to U.S.

17. Funding Flows Required to Sustain Terrorist Operations

18. Funding: Sources / Methods / Access
LAYERING
PLACEMENT
INTEGRATION
Raise
Move
Store
Spend
Funding Methods
Formal & Informal
Facilitation v Detection
Funding Sources
Legitimate & Illicit
Funding Streams
Many Variations
Funding Access
$25 to Millions $$$
To Organizations
$$Thousands to Many Thousands $$
To Operations
$Hundreds to Thousands $$
To Operatives 18

19. Funding Sources Groups Cells / networks Individuals Private donations
Abuse and misuse of non-profit organizations
Proceeds of criminal activity
Extorting local and diaspora populations and businesses
Kidnapping for ransom
Legitimate commercial enterprise
State sponsors of terrorism
Cells / networks
Group funded
Self funded
Individuals

20. Criminal Funding Streams
Theft (oil / antiquities in Syria / Iraq)
Trade (licit / illicit)
Kidnapping
Extortion (taxation)
Drug trafficking
Charities (witting / unwitting)
Wealthy donors
Foreign fighters / recruits
Recruitment / fundraising networks
Wildlife trafficking
Other sources

21. Funding Methods Bulk cash / cash currier Barter IVTSs (hawala)
Illegal money remitters
Money exchangers
Financial institutions
Banks
Correspondent banks
MSBs
Wire transfers
ACH payments
TBML
Credit / debit cards
Stored value cards
Shell companies
Front companies
NGOs / charities
Internet
Mobile devices
Pay Pal
ebay
Virtual currencies (bitcoin)
Other mechanisms

22. Terrorist Funding Flows
There are three primary funding flows / streams terrorists rely on
There can be many variations to the three primary funding streams
The key for terrorists is having direct access to funds at select intervals between points of origin and points of distribution
Coupling the differing types of terrorist actors with the multiple variations of the three primary funding streams can become a daunting challenge
Simplify and visualize the flow back to origin / forward to strike teams

23. Three Primary Funding Streams
Back to origin / forward to strike teams
Funding to networks / organizations from point of origin
Ranging from less than one hundred to millions of dollars
Requires considerable bandwidth
Funding from organization to operations
Ranging from one thousand or less to hundreds of thousands of dollars
Sent directly to operatives or through facilitators
Funding to individual operatives, cells, or groups
Ranging from hundreds to low thousands of dollars
New variation in the form of reverse flow
Instead of money flowing from the organization, money is generated directly by the operatives through a variety of sources

24. Assess Who You are Dealing With
Organizations
Identify their business model
Mission statement
Desired infrastructure
Funding requirements
Funding sources
Funding mechanisms
Individuals
Identify their role and in what capacity you deal with them
Leaders / fundraisers / facilitators / recruiters / fighterx
Each actor has a different funding requirement
Determine if they are inspired, enabled or directed
Important for determining source of funds

25. Business Model Funding Considerations
A business model is a plan detailing how an organization generates revenue and how it incurs cost
Terrorist organizations must continuously generate funds to cover expenses in order to sustain operations
Revenue streams
Revenue from business activity
Locally raised revenues
Revenue from “traditional” terrorist financing
Cost structure
Cost of business operations
Cost of governance
Cost of terrorist operations, public relations and financial facilitation
Overhead costs

26. Case Studies with a Funding Focus
Faisal Shahzad (arrested fleeing U.S.)
Times Square bomber
Enabled / directed
Received $5,000 in cash in Pakistan (from Pakistani Taliban)
Received $7,500 from Pakistani Taliban via hawala
Mohamed Elshinawy
Homegrown violent extremist arrested by FBI before he could act
Inspired / enabled
Received $8,700 from foreign company in Egypt
Online financial account / wire transfers
Zoobia Shahnaz
Homegrown violent extremist arrested trying to travel to Syria
Inspired
Committed credit card and bank fraud to illicitly obtain over $85,000 (purchased bitcoin)
Wired over $100,000 to Pakistan, China and Turkey intended for ISIS
Sayfullo Saipov
Carried out New York City truck attack (October 31, 2017)
Rented truck from Home Depot
Shot and arrested during attack

27. Case Studies: Funding Methods Used
Faisal Shahzad (Times Square bomber)
Bulk cash smuggling
Hawala / illegal money remittance
Retail
Salary / bank account
Mohamed Elshinawy
Foreign front company
Internet online account
Wire transfers
Online financial account / wire transfers
Bank account
Zoobia Shahnaz
Credit cards (at least 12)
Bank loans
MSBs
Bitcoin
Wire transfers
Salary / bank account
Sayfullo Saipov
Retail

28. The Challenge of Identifying Homegrown Violent Extremists
Little likelihood of identification through transaction monitoring or normal AML filters
Negative news hits not likely until attack, attempted attack or law enforcement disruption takes place
Banking activity will likely involve legitimate employment compensation or petty crimes that can be reasonably explained for due diligence purposes
In most instances, financial institutions would not identify having facilitated a terrorist as a customer until after the fact
Requires “urgent” reactive response
Immediate contact should be made with FBI’s TFOS and / or JTTF in the attack / event jurisdiction

29. Takeaways

30. Takeaways
Understanding the terrorist threat can lead to detection, intervention, disruption and prevention
Incremental process
Visualize funding flows
Sources / methods / access
Three funding streams
Develop typologies and response capabilities based on the specific risk to your institution from organizations and / or individuals
“Urgently” reactive and proactive response capabilities
SWAT concept

31. Dennis M. Lormel President & CEO DML Associates, LLC
19309 Winmeade Drive
Lansdowne, VA