Training staff to think about money laundering

by Chris Mathers

One of the most significant issues in money laundering prevention is the 'know your customer' rule - Bankers call it KYC.

What it means is that if you're going to do business with someone, you need to know who you are dealing with and what they do for a living. This isn't a complicated concept, but in spite of their best efforts, most financial institutions don't have it right. The other day, I went to the bank to open a business account.

The lady who opened it had obviously been given some kind of money laundering compliance training recently, as she was being very officious about looking at my driver's license and then at me to see if the picture matched. But a real money launderer would have slid right past her and she would never have known.

She missed the whole point of the exercise. What should have been of interest to her was the fact that I was an existing customer opening a new account. I already had an account. Why did I want a new one? Why was I changing the nature of my dealings with the bank? That kind of thing is exactly what should start a bank thinking KYC. Why is the customer doing this?

When an existing customer changes things or when a new customer comes in to establish a relationship, it's the perfect opportunity to obtain information: to develop a profile of just exactly what he is planning to do with his account, the sources of the money and what services he will require of the bank. It's perfectly acceptable for a bank to ask a customer about his business and the types of transactions he will be doing. And that doesn't only mean asking if he or she plans to make large cash deposits or foreign wire transfers.

Once you have established a profile of the customer, it becomes easier to spot suspicious transactions if he or she starts to display a pattern of activity that is a departure from the norm. It's also a good way to detect fraud, either by the customer or one being perpetrated on the customer. In smaller branches, where the staff knows their customers, they can often tell that con artists are victimizing their elderly clients when they come in looking for a large draft or a certified check.

Money launderers need to get their money into the banking system. To do this, they need bank accounts. Most financial institutions are big and impersonal, and bad guys are looking to take advantage of that. If they can set up the account without having to provide too much information, they can operate fairly anonymously. Once they have the account, the bank may never see them in person again.

Some banks still maintain what are known as lodge accounts. These are accounts that are established for charities, sports teams and not-for-profit organizations that regularly receive donations from large numbers of people. They are perfect for low-level laundering because, typically, the account traffic involves deposits of cash or third-party checks, which subsequently move out of the account in the form of an instrument of some type. This kind of activity is sometimes referred to as warehousing' and it is a strong indicator of money laundering activity.

If a launderer needs to open multiple accounts, another technique is to pay a "beard" to open the account, and then just take it over. Either that, or simply establish an account in another name using the false identification.

So how does a bank get its employees to do the things that are necessary to prevent and detect money laundering? Obviously, the answer is training. But the hard part is training people not just to go through the motions, but also to think.

One day a few years back, when I was still in the money laundering business, I went into a bank in Canada at which I maintained, on behalf of US Customs and the FBI, a number of corporate bank accounts that my colleagues and I used to warehouse criminals' funds while they thought we were investing and cleaning it up for them. I was making a deposit of a comparatively small amount of cash, about $50,000 that we had earned as commission on one of our deals.

When I approached the teller, a young man of about twenty-five or so, with my deposit slip and the cash, he slid a Source-of-funds (SOF) declaration form across the counter to me.

In those days, there was no legislation in Canada that obliged financial institutions to report suspicious transactions or transactions over a threshold amount. Not only that, but government hadn' t yet established a reporting centre to record and analyze reports, so there wasn't any place to send them anyway.

But the banks took it upon themselves to start having some of their customers fill out forms just the same; the forms were then sent on to their own security people for review. According to the rumor, banks were aware that the government was about to pass legislation forcing them to report wires and cash transactions over $10,000, and they hoped their voluntary action would delay the new laws. The bankers were smart.

They guessed that money-laundering legislation was going to cost them a fortune, because it would oblige them to create a huge infrastructure just to remain in compliance. They were right. Now that there is legislation, they spend a ton of money on obeying the law and it doesn't make them a cent in profits.

Anyway, the young teller gives me the form. Now, you have to remember I'm supposed to be this big gangster, so I can't just say anything and fill out the form. I had to act like a gangster. So I thought that maybe I'd try blustering my way out of it, and maybe intimidate him a bit while I was at it, just to keep my skills up.

Me: What is this?

Teller: This is a source-of-funds declaration, sir. It has to be completed for every cash transaction over $10,000.

Me: I'm not filling this out.

Teller: I'm sorry, sir, it's bank policy. You have to complete the form or I can't take your money.

Me: Listen, man, look me up on your computer there. I have about ten different accounts at this bank with about a million bucks in each one; so don't try to mess me around. You'll just end up getting fired.

Teller: Sir, If I take your money without having you fill in the form, I'll get fired anyway.

This kid was pretty good, and he wasn't having any of my hot air.

So I filled out the form. In the space where it said to put your name, I printed Brian Mulroney,' who was the prime minister of Canada at the time. Then I gave the form back to the teller. He took the form, thanked me and placed it in the appropriate slot. He never even looked at it. Obviously, no one else ever did, either, because the bank never called me on it and none of them knew who I really was.

That was the problem. The teller's training had worked right up until the point where he got me to fill out the SOF form. But it doesn't do much good to force customers to do the paperwork if you're not going to take the time to look at it when it's completed. It's still all about training people to think. A novel concept, I admit, but a good one.

Chris Mathers worked undercover for the Royal Canadian Mounted Police, Drug Enforcement Agency and FBI in Canada, US and other foreign countries, posing as a money launderer and drug trafficker, personally infiltrating Russian, Columbian and Asian Organized crime groups. Mr Mathers spoke at the Caribbean Compliance Association Conference in February.

Copyright © 2003 - 2005 Cayman Net Ltd All Rights Reserved