Table Of Content

Guide to U.S. Anti-Money Laundering Requirements Frequently Asked Questions Sixth Edition PREFACE “Recent record fines imposed on major financial institutions once again affirm that banks face unprecedented pressure to comply with financial crime regulations. … Regulators have levied more than $10 billion in fines and settlements on banks over the last 18 months, demonstrating the determination and ability of regulators to use civil and criminal law to enforce financial sanctions on a global level.”1 − Luc Meurant, head of banking markets and compliance services, Society for Worldwide Interbank Financial Telecommunication We are pleased to publish this sixth version of Protiviti’s Guide to U.S. Anti-Money Laundering Requirements. When we published the first edition of the Guide, our intent was to provide clear and concise answers to basic questions that surfaced in our discussions with clients, attorneys, regulators and others, both in the United States and other jurisdictions. Thirteen years after the enactment of the USA PATRIOT Act and 11 years since we published the first Guide, the financial services industry in the United States, and elsewhere, continues to struggle to meet continually evolving regulatory expectations for anti-money laundering and sanctions compliance, and there seems to be no end to the questions. This version of the Guide has expanded to more than 600 pages, covering thousands of questions. It includes new and expanded information on a range of topics, such as human trafficking and smuggling, virtual currency, the conflict between federal and state laws affecting marijuana-related businesses, the selection and use of U.S. anti-money laundering and countering the financing of terrorism (AML/CFT) technology, risk assessments, sanctions compliance, and more in-depth information about how U.S. AML/CFT standards compare to those issued by the Financial Action Task Force (FATF). The Guide begins by summarizing the basic principles of money laundering and terrorist financing in The Fundamentals section, and ensuing chapters address specific requirements of the Bank Secrecy Act (BSA), the USA PATRIOT Act and the Office of Foreign Assets Control (OFAC). These are followed by sections that delve into many of the practical considerations of maintaining effective AML/CFT Compliance Programs, such as Risk Assessments, Know Your Customer, and Transaction Monitoring and Investigations, including the selection and use of enabling technology. The next sections of the Guide discuss specific considerations for nonbank financial institutions and nonfinancial businesses, as well as the convergence of AML/CFT with fraud and other regulatory requirements. The final section of the Guide offers some international perspectives and related initiatives. It is important to note that this Guide is provided for general information only and focuses primarily on federal AML/CFT requirements; it is not intended to be legal analysis or advice, nor does it purport to address, except in a few instances, state or international money laundering requirements that may affect U.S. companies. The responses to the questions have been drawn from myriad regulatory publications, issuances and guidance from other governmental agencies and law enforcement, industry publications, media reports, and Protiviti’s own work with a wide range of companies. Companies should seek the advice of legal counsel or other appropriate advisers on specific questions and practices as they relate to their unique circumstances. We hope that you find the Guide a useful resource for AML/CFT and sanctions compliance. Given how dynamic the compliance environment is, we invite you to visit www.protiviti.com/AML for compliance updates and news. Protiviti November 2014 1 ”Financial Crime Compliance: The Case for an Industrywide Approach,” by Luc Meurant, American Banker, August 18, 2014: http://www.americanbanker.com/bankthink/financial-crime-compliance-the-case-for-an-industrywide-approach-1069406-1.html. | 1 Acknowledgements This update was researched and developed by our former Protiviti colleague, Karen L. Wilkes, with contributions by Luis Canelon and other members of Protiviti’s AML Team. Special thanks are also extended to Deborah Thoren- Peden, Christopher Wall and Elsa Broeker of Pillsbury Winthrop Shaw Pittman LLP, who served as reviewers of select sections of the Guide. | 2 CONTENTS AT A GLANCE PREFACE ..................................................................................................................................................... 1 THE FUNDAMENTALS .............................................................................................................................. 12 BANK SECRECY ACT ............................................................................................................................... 51 USA PATRIOT ACT ................................................................................................................................. 132 OFFICE OF FOREIGN ASSETS CONTROL AND INTERNATIONAL SANCTIONS PROGRAMS ....... 193 RISK ASSESSMENTS ............................................................................................................................. 263 KNOW YOUR CUSTOMER, CUSTOMER DUE DILIGENCE AND ENHANCED DUE DILIGENCE ...... 284 TRANSACTION MONITORING, INVESTIGATIONS AND RED FLAGS ................................................ 387 AML/CFT TECHNOLOGY ........................................................................................................................ 409 NONBANK FINANCIAL INSTITUTIONS AND NONFINANCIAL BUSINESSES ................................... 431 CONVERGENCE OF AML/CFT WITH FRAUD AND OTHER REGULATORY TOPICS ........................ 525 INTERNATIONAL PERSPECTIVES AND INITIATIVES ......................................................................... 585 RESOURCES ........................................................................................................................................... 643 ABOUT PROTIVITI ................................................................................................................................... 695 | 3 TABLE OF CONTENTS PREFACE ..................................................................................................................................................... 1 Acknowledgements ................................................................................................................................... 2 THE FUNDAMENTALS .............................................................................................................................. 12 Key Principles ......................................................................................................................................... 12 Overview of U.S. AML/CFT Laws ........................................................................................................... 18 Overview of the U.S. Regulatory Framework ......................................................................................... 25 Key U.S. Regulatory Authorities and Law Enforcement Agencies ..................................................... 25 Financial Crimes Enforcement Network ............................................................................................. 30 National and International Cooperation .............................................................................................. 32 Enforcement Actions .......................................................................................................................... 33 AML/CFT Compliance Program.............................................................................................................. 40 BANK SECRECY ACT ............................................................................................................................... 51 Overview of the BSA ............................................................................................................................... 51 BSA Reporting Requirements ................................................................................................................. 54 Currency Transaction Reports ........................................................................................................... 54 CTR Basics .................................................................................................................................... 54 CTR Threshold and Aggregation ................................................................................................... 58 Completion of a CTR ...................................................................................................................... 60 Armored Car Service Exception for CTRs ..................................................................................... 62 Filing of CTRs ................................................................................................................................ 63 CTR Exemptions and the Designation of Exempt Persons Form .................................................. 64 Filing of DOEPs .............................................................................................................................. 69 CTR Evasion .................................................................................................................................. 70 Form 8300 .......................................................................................................................................... 71 Form 8300 Basics .......................................................................................................................... 71 Annual Notification ......................................................................................................................... 75 Completing and Filing of Form 8300 .............................................................................................. 76 Reporting Suspicious Activity on Form 8300 ................................................................................. 77 Suspicious Activity Reports ................................................................................................................ 77 SAR Basics .................................................................................................................................... 77 SAR Filing Time Frame and Date of Initial Detection .................................................................... 83 Completion of a SAR ...................................................................................................................... 84 Filing SARs .................................................................................................................................... 86 Confidentiality ................................................................................................................................. 88 Third-Party and Joint Filings of SARs ............................................................................................ 90 Safe Harbor .................................................................................................................................... 90 Monitoring and Terminating Relationships with SAR Subjects ...................................................... 91 | 4 Law Enforcement ........................................................................................................................... 92 SAR Statistics and Trends ............................................................................................................. 95 Report of Foreign Bank and Financial Accounts ................................................................................ 99 FBAR Basics .................................................................................................................................. 99 Completing the FBAR and Third-Party Authorization .................................................................. 102 Filing of FBARs ............................................................................................................................ 103 Recent Tax Scandals ................................................................................................................... 104 Report of International Transportation of Currency or Monetary Instruments ................................. 105 CMIR Basics ................................................................................................................................ 105 CMIR Exceptions ......................................................................................................................... 108 Cross-Border Bulk Shipments of Currency .................................................................................. 109 CMIR Filing .................................................................................................................................. 110 Registration of Money Services Businesses .................................................................................... 110 RMSB Basics ............................................................................................................................... 110 MSB Registrant Search Web Page .............................................................................................. 113 Completing the RMSB .................................................................................................................. 114 Filing of RMSBs ........................................................................................................................... 114 BSA Recordkeeping Requirements ...................................................................................................... 115 Overview ........................................................................................................................................... 115 Funds Transfer Recordkeeping Requirement and the Travel Rule ................................................. 117 Basics ........................................................................................................................................... 117 Addresses and Abbreviations ...................................................................................................... 122 Verification of Identity ................................................................................................................... 122 Joint Party Transmittals and Aggregation .................................................................................... 122 Retrievability ................................................................................................................................. 123 Cover Payments and SWIFT ....................................................................................................... 123 Cross-Border Electronic Transmittal of Funds ................................................................................. 126 Recordkeeping Requirement for the Purchase and Sale of Monetary Instruments ......................... 128 USA PATRIOT ACT ................................................................................................................................. 132 Overview of the USA PATRIOT Act...................................................................................................... 132 USA PATRIOT Act – Analysis of Key Sections .................................................................................... 138 Section 311 – Special Measures ...................................................................................................... 138 Section 312 – Special Due Diligence for Correspondent Accounts and Private Banking Accounts ................................................................................................................ 141 Overview ...................................................................................................................................... 141 Due Diligence for Correspondent Accounts ................................................................................. 146 Enhanced Due Diligence for Correspondent Accounts ............................................................... 148 Due Diligence for Private Banking Accounts ............................................................................... 149 Senior Foreign Political Figure................................................................................................. 152 Section 313 – Prohibition on U.S. Correspondent Accounts with Foreign Shell Banks ................... 155 Section 314 – Cooperative Efforts to Deter Money Laundering ....................................................... 157 Section 314(a) – Cooperation among Financial Institutions, Regulatory Authorities and Law Enforcement Authorities ............................................................................................................... 158 Section 314(b) – Cooperation Among Financial Institutions ........................................................ 161 Section 319 − Forfeiture of Funds in United States Interbank Accounts ......................................... 163 Section 319(a) − Forfeiture of Funds in United States Interbank Accounts ................................. 163 Section 319(b) – Bank Records ................................................................................................... 164 120-Hour Rule ......................................................................................................................... 164 Foreign Bank Records ............................................................................................................. 164 Foreign Bank Certifications...................................................................................................... 165 Section 325 – Concentration Accounts at Financial Institutions ...................................................... 167 Section 326 – Verification of Identification ....................................................................................... 168 Overview ...................................................................................................................................... 168 | 5 Customer Defined ........................................................................................................................ 169 Account Defined ........................................................................................................................... 171 Verification ................................................................................................................................... 171 Updating CIP for Existing Customers .......................................................................................... 174 Record Retention ......................................................................................................................... 174 List Matching ................................................................................................................................ 175 Customer Notice .......................................................................................................................... 175 Third-Party Reliance .................................................................................................................... 175 Section 352 – AML Program ............................................................................................................ 176 Overview ...................................................................................................................................... 176 Policies and Procedures .............................................................................................................. 181 Designation of AML Compliance Officer and the AML/CFT Compliance Organization ............... 182 Independent Testing .................................................................................................................... 187 Section 505 – Miscellaneous National Security Authorities ............................................................. 192 OFFICE OF FOREIGN ASSETS CONTROL AND INTERNATIONAL SANCTIONS PROGRAMS ....... 193 OFAC Basics ........................................................................................................................................ 193 OFAC Sanctions Listings ...................................................................................................................... 202 Specially Designated Nationals and Blocked Persons List.......................................................... 204 Non-Specially Designated Nationals Palestinian Legislative Council List ................................... 205 Foreign Sanctions Evaders List ................................................................................................... 206 Sectoral Sanctions Identifications List ......................................................................................... 206 List of Foreign Financial Institutions Subject to Part 561 ............................................................. 208 OFAC Sanctions Programs .................................................................................................................. 208 Counter Terrorism Sanctions Program ........................................................................................ 208 Counter Narcotics Trafficking Sanctions Program ....................................................................... 210 Transnational Criminal Organizations Sanctions Program .......................................................... 211 Non-Proliferation Sanctions Program .......................................................................................... 212 Rough Diamond Trade Controls Sanctions Program .................................................................. 214 Country- and Regime-Based Sanctions Programs ...................................................................... 216 Iranian and Syrian Sanctions Overview ................................................................................... 217 Comprehensive Iran Sanctions, Accountability and Divestment Act of 2010 and the Iran Threat Reduction and Syria Human Rights Act of 2012 ................................. 222 National Defense Authorization Act .................................................................................... 232 NDAA for Fiscal Year 2012 ................................................................................................. 232 NDAA for Fiscal Year 2013 ................................................................................................. 235 Other Executive Orders ....................................................................................................... 238 Other U.S. and International Sanctions Programs ............................................................................... 241 Screening Customers and Transactions .............................................................................................. 242 Basics ........................................................................................................................................... 242 Cover Payments ........................................................................................................................... 245 U-Turn Payments ......................................................................................................................... 246 Automated Clearing House Transactions and IATs ..................................................................... 247 Trade Finance Transactions ........................................................................................................ 249 Investigating Potential Matches ............................................................................................................ 249 Blocking and Rejecting Transactions ................................................................................................... 250 OFAC Reporting Requirements ............................................................................................................ 252 Blocked/Rejected Transaction Reports ........................................................................................ 252 Annual Report of Blocked Property .............................................................................................. 253 OFAC Licensing .................................................................................................................................... 254 602 Letter and Prepenalty Notice ......................................................................................................... 256 | 6 Voluntary Disclosure ............................................................................................................................. 257 Independent Testing ............................................................................................................................. 257 Consequences of Noncompliance ........................................................................................................ 258 Common Gaps and Challenges............................................................................................................ 261 RISK ASSESSMENTS ............................................................................................................................. 263 Overview ............................................................................................................................................... 263 Enterprisewide Risk Assessment ......................................................................................................... 269 Horizontal Risk Assessment ................................................................................................................. 270 Line of Business/Legal Entity Risk Assessment ................................................................................... 270 Geographic Risk Assessment ............................................................................................................... 271 Product/Service Risk Assessment ........................................................................................................ 275 Customer Risk Assessment .................................................................................................................. 276 Office of Foreign Assets Control/Sanctions Risk Assessment ............................................................. 282 KNOW YOUR CUSTOMER, CUSTOMER DUE DILIGENCE AND ENHANCED DUE DILIGENCE ...... 284 Overview ............................................................................................................................................... 284 CDD vs. EDD ........................................................................................................................................ 286 KYC Challenges.................................................................................................................................... 290 Beneficial Owners ................................................................................................................................. 291 Know Your Customer Types ................................................................................................................. 296 Nonresident Aliens and Foreign Persons .................................................................................... 296 Private Banking ............................................................................................................................ 299 Politically Exposed Persons ......................................................................................................... 300 Foreign Embassy and Consulates ............................................................................................... 303 Charitable Organizations and Nongovernmental Organizations ................................................. 304 Marijuana-Related Businesses .................................................................................................... 308 Nonbank Financial Institutions ..................................................................................................... 313 Correspondent Banking ............................................................................................................... 315 Third-Party Payment Processors ................................................................................................. 319 Owners/Operators of Privately Owned Automated Teller Machines (ATMs) .............................. 322 Common Carriers of Currency and Armored Car Services ......................................................... 325 Deposit Brokers ............................................................................................................................ 327 Professional Service Providers .................................................................................................... 328 Business Entities: Shell Companies, Private Investment Companies ......................................... 329 Know Your Customer’s Activities: Product Considerations .................................................................. 332 Currency Transactions ................................................................................................................. 332 Bulk Shipments of Currency and Bulk Cash Smuggling ......................................................... 334 Restrictions on U.S. Currency Transactions with Mexican Financial Institutions .................... 338 Funds Transfers ........................................................................................................................... 340 Monetary Instruments .................................................................................................................. 342 Payable-Through Accounts .......................................................................................................... 344 Concentration Accounts ............................................................................................................... 346 Pouch Activity ............................................................................................................................... 346 U.S. Dollar Drafts ......................................................................................................................... 348 Trade Finance Activities ............................................................................................................... 350 Electronic Banking and Digital Value ........................................................................................... 358 | 7 Online and Mobile Banking ...................................................................................................... 359 Automated Teller Machines ..................................................................................................... 360 Remote Deposit Capture ......................................................................................................... 361 Prepaid Access and Stored-Value ........................................................................................... 363 Virtual Currencies .................................................................................................................... 366 Automated Clearing House Transactions .................................................................................... 370 Trust and Asset Management Services ....................................................................................... 374 Interest on Lawyers Trust Account .............................................................................................. 377 Nondeposit Investment Products ................................................................................................. 377 Lending Activities ......................................................................................................................... 379 Insurance Products ...................................................................................................................... 381 Know Your Customer’s Customer ........................................................................................................ 383 Know Your Employees ......................................................................................................................... 383 Know Your Third Parties ....................................................................................................................... 384 TRANSACTION MONITORING, INVESTIGATIONS AND RED FLAGS ................................................ 387 Monitoring Process ............................................................................................................................... 387 Investigation Process ............................................................................................................................ 392 Suspicious Activity Red Flags ............................................................................................................... 397 Account Opening Red Flags ........................................................................................................ 397 Account Activity and Transaction Execution Red Flags .............................................................. 398 Currency Red Flags ..................................................................................................................... 398 ATM Transactions and Owner/Operators of Privately Owned ATM Red Flags........................... 399 Bulk Shipments of Currency Red Flags ....................................................................................... 399 Branch and Vault Shipments Red Flags ...................................................................................... 399 Monetary Instrument Red Flags ................................................................................................... 400 U.S. Dollar Draft Red Flags ......................................................................................................... 400 Wire Transfer Red Flags .............................................................................................................. 400 Virtual Currency Red Flags .......................................................................................................... 401 Certificate of Deposit Red Flags .................................................................................................. 401 Safe Deposit Box Red Flags ........................................................................................................ 401 Lending Red Flags ....................................................................................................................... 402 Mortgage and Real Estate Red Flags .......................................................................................... 402 Credit Card Red Flags ................................................................................................................. 402 Trade Finance Red Flags............................................................................................................. 402 Capital Market Products Red Flags ............................................................................................. 403 Insurance Products Red Flags ..................................................................................................... 404 Casino Red Flags ......................................................................................................................... 404 Retail Red Flags ........................................................................................................................... 404 Consumer Products Red Flags .................................................................................................... 405 Terrorist Financing Red Flags ...................................................................................................... 405 Drug Trafficking and Marijuana-Related Businesses Red Flags ................................................. 405 Human Trafficking and Migrant Smuggling Red Flags ................................................................ 406 Elder Financial Abuse Red Flags ................................................................................................. 407 Informal Value Transfer System (IVTS) Red Flags ..................................................................... 408 Employee/Insider Abuse Red Flags ............................................................................................. 408 AML/CFT TECHNOLOGY ........................................................................................................................ 409 Overview ............................................................................................................................................... 409 Suspicious Transaction Monitoring and Suspicious Activity Report Filing Software ............................ 414 Overview ...................................................................................................................................... 414 Threshold and Tuning Methodology ............................................................................................ 416 | 8 Model Validation ........................................................................................................................... 420 Data Analytics .............................................................................................................................. 421 Case Management Software ................................................................................................................ 423 Large Currency Transaction Monitoring and Currency Transaction Report Filing Software ................ 423 Customer Information Database and Customer Risk Assessment Software ....................................... 424 Customer Verification Software ............................................................................................................ 425 List Providers ........................................................................................................................................ 426 Interdiction Software ............................................................................................................................. 427 Training Software .................................................................................................................................. 429 NONBANK FINANCIAL INSTITUTIONS AND NONFINANCIAL BUSINESSES ................................... 431 Nonbank Financial Institutions .............................................................................................................. 431 Overview ........................................................................................................................................... 431 Money Services Businesses ............................................................................................................ 434 Definitions .................................................................................................................................... 434 Issuers and Sellers of Money Orders and Traveler’s Checks ................................................. 436 Check Cashers ........................................................................................................................ 437 Dealers in Foreign Exchange .................................................................................................. 437 Providers and Sellers of Prepaid Access ................................................................................ 437 Money Transmitters ................................................................................................................. 438 Guidance on the Applicability of the Definition of Money Services Businesses ...................... 439 Key AML/CFT and Sanctions Requirements ............................................................................... 442 Registration Requirements of MSBs ............................................................................................ 447 Agents of MSBs ........................................................................................................................... 448 Informal Value Transfer Systems ................................................................................................. 449 Definitions ................................................................................................................................ 449 Black Market Peso Exchange .................................................................................................. 451 Reintegro ................................................................................................................................. 452 Virtual Currency Systems and Participants.................................................................................. 453 Definitions ................................................................................................................................ 453 Current and Pending AML/CFT and Sanctions Requirements ................................................ 457 Providers and Sellers of Prepaid Access ......................................................................................... 459 Definitions .................................................................................................................................... 459 Key AML/CFT and Sanctions Requirements ............................................................................... 465 Broker-Dealers in Securities ............................................................................................................. 469 Definitions .................................................................................................................................... 469 Key AML/CFT and Sanctions Requirements ............................................................................... 471 Futures Commission Merchants and Introducing Brokers in Commodities ..................................... 481 Definitions .................................................................................................................................... 481 Key AML/CFT and Sanctions Requirements ............................................................................... 482 Commodity Trading Advisers and Commodity Pool Operators........................................................ 486 Definitions .................................................................................................................................... 486 Key AML/CFT and Sanctions Requirements ............................................................................... 486 Mutual Funds .................................................................................................................................... 487 Definitions .................................................................................................................................... 487 Key AML/CFT and Sanctions Requirements ............................................................................... 488 Investment Advisers and Unregistered Investment Companies ...................................................... 490 Definitions .................................................................................................................................... 490 Key AML/CFT and Sanctions Requirements ............................................................................... 492 Insurance Companies ...................................................................................................................... 493 Definitions .................................................................................................................................... 493 Key AML/CFT and Sanctions Requirements ............................................................................... 494 | 9

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Guide to U.S. Anti-Money Laundering Requirements Frequently Asked Questions Sixth Edition PREFACE “Recent record fines imposed on major financial institutions once again affirm that banks face unprecedented pressure to comply with financial crime regulations. … Regulators have levied more than $10 billion in fines and settlements on banks over the last 18 months, demonstrating the determination and ability of regulators to use civil and criminal law to enforce financial sanctions on a global level.”1 − Luc Meurant, head of banking markets and compliance services, Society for Worldwide Interbank Financial Telecommunication We are pleased to publish this sixth version of Protiviti’s Guide to U.S. Anti-Money Laundering Requirements. When we published the first edition of the Guide, our intent was to provide clear and concise answers to basic questions that surfaced in our discussions with clients, attorneys, regulators and others, both in the United States and other jurisdictions. Thirteen years after the enactment of the USA PATRIOT Act and 11 years since we published the first Guide, the financial services industry in the United States, and elsewhere, continues to struggle to meet continually evolving regulatory expectations for anti-money laundering and sanctions compliance, and there seems to be no end to the questions. This version of the Guide has expanded to more than 600 pages, covering thousands of questions. It includes new and expanded information on a range of topics, such as human trafficking and smuggling, virtual currency, the conflict between federal and state laws affecting marijuana-related businesses, the selection and use of U.S. anti-money laundering and countering the financing of terrorism (AML/CFT) technology, risk assessments, sanctions compliance, and more in-depth information about how U.S. AML/CFT standards compare to those issued by the Financial Action Task Force (FATF). The Guide begins by summarizing the basic principles of money laundering and terrorist financing in The Fundamentals section, and ensuing chapters address specific requirements of the Bank Secrecy Act (BSA), the USA PATRIOT Act and the Office of Foreign Assets Control (OFAC). These are followed by sections that delve into many of the practical considerations of maintaining effective AML/CFT Compliance Programs, such as Risk Assessments, Know Your Customer, and Transaction Monitoring and Investigations, including the selection and use of enabling technology. The next sections of the Guide discuss specific considerations for nonbank financial institutions and nonfinancial businesses, as well as the convergence of AML/CFT with fraud and other regulatory requirements. The final section of the Guide offers some international perspectives and related initiatives. It is important to note that this Guide is provided for general information only and focuses primarily on federal AML/CFT requirements; it is not intended to be legal analysis or advice, nor does it purport to address, except in a few instances, state or international money laundering requirements that may affect U.S. companies. The responses to the questions have been drawn from myriad regulatory publications, issuances and guidance from other governmental agencies and law enforcement, industry publications, media reports, and Protiviti’s own work with a wide range of companies. Companies should seek the advice of legal counsel or other appropriate advisers on specific questions and practices as they relate to their unique circumstances. We hope that you find the Guide a useful resource for AML/CFT and sanctions compliance. Given how dynamic the compliance environment is, we invite you to visit www.protiviti.com/AML for compliance updates and news. Protiviti November 2014 1 ”Financial Crime Compliance: The Case for an Industrywide Approach,” by Luc Meurant, American Banker, August 18, 2014: http://www.americanbanker.com/bankthink/financial-crime-compliance-the-case-for-an-industrywide-approach-1069406-1.html. | 1 Acknowledgements This update was researched and developed by our former Protiviti colleague, Karen L. Wilkes, with contributions by Luis Canelon and other members of Protiviti’s AML Team. Special thanks are also extended to Deborah Thoren- Peden, Christopher Wall and Elsa Broeker of Pillsbury Winthrop Shaw Pittman LLP, who served as reviewers of select sections of the Guide. | 2 CONTENTS AT A GLANCE PREFACE ..................................................................................................................................................... 1 THE FUNDAMENTALS .............................................................................................................................. 12 BANK SECRECY ACT ............................................................................................................................... 51 USA PATRIOT ACT ................................................................................................................................. 132 OFFICE OF FOREIGN ASSETS CONTROL AND INTERNATIONAL SANCTIONS PROGRAMS ....... 193 RISK ASSESSMENTS ............................................................................................................................. 263 KNOW YOUR CUSTOMER, CUSTOMER DUE DILIGENCE AND ENHANCED DUE DILIGENCE ...... 284 TRANSACTION MONITORING, INVESTIGATIONS AND RED FLAGS ................................................ 387 AML/CFT TECHNOLOGY ........................................................................................................................ 409 NONBANK FINANCIAL INSTITUTIONS AND NONFINANCIAL BUSINESSES ................................... 431 CONVERGENCE OF AML/CFT WITH FRAUD AND OTHER REGULATORY TOPICS ........................ 525 INTERNATIONAL PERSPECTIVES AND INITIATIVES ......................................................................... 585 RESOURCES ........................................................................................................................................... 643 ABOUT PROTIVITI ................................................................................................................................... 695 | 3 TABLE OF CONTENTS PREFACE ..................................................................................................................................................... 1 Acknowledgements ................................................................................................................................... 2 THE FUNDAMENTALS .............................................................................................................................. 12 Key Principles ......................................................................................................................................... 12 Overview of U.S. AML/CFT Laws ........................................................................................................... 18 Overview of the U.S. Regulatory Framework ......................................................................................... 25 Key U.S. Regulatory Authorities and Law Enforcement Agencies ..................................................... 25 Financial Crimes Enforcement Network ............................................................................................. 30 National and International Cooperation .............................................................................................. 32 Enforcement Actions .......................................................................................................................... 33 AML/CFT Compliance Program.............................................................................................................. 40 BANK SECRECY ACT ............................................................................................................................... 51 Overview of the BSA ............................................................................................................................... 51 BSA Reporting Requirements ................................................................................................................. 54 Currency Transaction Reports ........................................................................................................... 54 CTR Basics .................................................................................................................................... 54 CTR Threshold and Aggregation ................................................................................................... 58 Completion of a CTR ...................................................................................................................... 60 Armored Car Service Exception for CTRs ..................................................................................... 62 Filing of CTRs ................................................................................................................................ 63 CTR Exemptions and the Designation of Exempt Persons Form .................................................. 64 Filing of DOEPs .............................................................................................................................. 69 CTR Evasion .................................................................................................................................. 70 Form 8300 .......................................................................................................................................... 71 Form 8300 Basics .......................................................................................................................... 71 Annual Notification ......................................................................................................................... 75 Completing and Filing of Form 8300 .............................................................................................. 76 Reporting Suspicious Activity on Form 8300 ................................................................................. 77 Suspicious Activity Reports ................................................................................................................ 77 SAR Basics .................................................................................................................................... 77 SAR Filing Time Frame and Date of Initial Detection .................................................................... 83 Completion of a SAR ...................................................................................................................... 84 Filing SARs .................................................................................................................................... 86 Confidentiality ................................................................................................................................. 88 Third-Party and Joint Filings of SARs ............................................................................................ 90 Safe Harbor .................................................................................................................................... 90 Monitoring and Terminating Relationships with SAR Subjects ...................................................... 91 | 4 Law Enforcement ........................................................................................................................... 92 SAR Statistics and Trends ............................................................................................................. 95 Report of Foreign Bank and Financial Accounts ................................................................................ 99 FBAR Basics .................................................................................................................................. 99 Completing the FBAR and Third-Party Authorization .................................................................. 102 Filing of FBARs ............................................................................................................................ 103 Recent Tax Scandals ................................................................................................................... 104 Report of International Transportation of Currency or Monetary Instruments ................................. 105 CMIR Basics ................................................................................................................................ 105 CMIR Exceptions ......................................................................................................................... 108 Cross-Border Bulk Shipments of Currency .................................................................................. 109 CMIR Filing .................................................................................................................................. 110 Registration of Money Services Businesses .................................................................................... 110 RMSB Basics ............................................................................................................................... 110 MSB Registrant Search Web Page .............................................................................................. 113 Completing the RMSB .................................................................................................................. 114 Filing of RMSBs ........................................................................................................................... 114 BSA Recordkeeping Requirements ...................................................................................................... 115 Overview ........................................................................................................................................... 115 Funds Transfer Recordkeeping Requirement and the Travel Rule ................................................. 117 Basics ........................................................................................................................................... 117 Addresses and Abbreviations ...................................................................................................... 122 Verification of Identity ................................................................................................................... 122 Joint Party Transmittals and Aggregation .................................................................................... 122 Retrievability ................................................................................................................................. 123 Cover Payments and SWIFT ....................................................................................................... 123 Cross-Border Electronic Transmittal of Funds ................................................................................. 126 Recordkeeping Requirement for the Purchase and Sale of Monetary Instruments ......................... 128 USA PATRIOT ACT ................................................................................................................................. 132 Overview of the USA PATRIOT Act...................................................................................................... 132 USA PATRIOT Act – Analysis of Key Sections .................................................................................... 138 Section 311 – Special Measures ...................................................................................................... 138 Section 312 – Special Due Diligence for Correspondent Accounts and Private Banking Accounts ................................................................................................................ 141 Overview ...................................................................................................................................... 141 Due Diligence for Correspondent Accounts ................................................................................. 146 Enhanced Due Diligence for Correspondent Accounts ............................................................... 148 Due Diligence for Private Banking Accounts ............................................................................... 149 Senior Foreign Political Figure................................................................................................. 152 Section 313 – Prohibition on U.S. Correspondent Accounts with Foreign Shell Banks ................... 155 Section 314 – Cooperative Efforts to Deter Money Laundering ....................................................... 157 Section 314(a) – Cooperation among Financial Institutions, Regulatory Authorities and Law Enforcement Authorities ............................................................................................................... 158 Section 314(b) – Cooperation Among Financial Institutions ........................................................ 161 Section 319 − Forfeiture of Funds in United States Interbank Accounts ......................................... 163 Section 319(a) − Forfeiture of Funds in United States Interbank Accounts ................................. 163 Section 319(b) – Bank Records ................................................................................................... 164 120-Hour Rule ......................................................................................................................... 164 Foreign Bank Records ............................................................................................................. 164 Foreign Bank Certifications...................................................................................................... 165 Section 325 – Concentration Accounts at Financial Institutions ...................................................... 167 Section 326 – Verification of Identification ....................................................................................... 168 Overview ...................................................................................................................................... 168 | 5 Customer Defined ........................................................................................................................ 169 Account Defined ........................................................................................................................... 171 Verification ................................................................................................................................... 171 Updating CIP for Existing Customers .......................................................................................... 174 Record Retention ......................................................................................................................... 174 List Matching ................................................................................................................................ 175 Customer Notice .......................................................................................................................... 175 Third-Party Reliance .................................................................................................................... 175 Section 352 – AML Program ............................................................................................................ 176 Overview ...................................................................................................................................... 176 Policies and Procedures .............................................................................................................. 181 Designation of AML Compliance Officer and the AML/CFT Compliance Organization ............... 182 Independent Testing .................................................................................................................... 187 Section 505 – Miscellaneous National Security Authorities ............................................................. 192 OFFICE OF FOREIGN ASSETS CONTROL AND INTERNATIONAL SANCTIONS PROGRAMS ....... 193 OFAC Basics ........................................................................................................................................ 193 OFAC Sanctions Listings ...................................................................................................................... 202 Specially Designated Nationals and Blocked Persons List.......................................................... 204 Non-Specially Designated Nationals Palestinian Legislative Council List ................................... 205 Foreign Sanctions Evaders List ................................................................................................... 206 Sectoral Sanctions Identifications List ......................................................................................... 206 List of Foreign Financial Institutions Subject to Part 561 ............................................................. 208 OFAC Sanctions Programs .................................................................................................................. 208 Counter Terrorism Sanctions Program ........................................................................................ 208 Counter Narcotics Trafficking Sanctions Program ....................................................................... 210 Transnational Criminal Organizations Sanctions Program .......................................................... 211 Non-Proliferation Sanctions Program .......................................................................................... 212 Rough Diamond Trade Controls Sanctions Program .................................................................. 214 Country- and Regime-Based Sanctions Programs ...................................................................... 216 Iranian and Syrian Sanctions Overview ................................................................................... 217 Comprehensive Iran Sanctions, Accountability and Divestment Act of 2010 and the Iran Threat Reduction and Syria Human Rights Act of 2012 ................................. 222 National Defense Authorization Act .................................................................................... 232 NDAA for Fiscal Year 2012 ................................................................................................. 232 NDAA for Fiscal Year 2013 ................................................................................................. 235 Other Executive Orders ....................................................................................................... 238 Other U.S. and International Sanctions Programs ............................................................................... 241 Screening Customers and Transactions .............................................................................................. 242 Basics ........................................................................................................................................... 242 Cover Payments ........................................................................................................................... 245 U-Turn Payments ......................................................................................................................... 246 Automated Clearing House Transactions and IATs ..................................................................... 247 Trade Finance Transactions ........................................................................................................ 249 Investigating Potential Matches ............................................................................................................ 249 Blocking and Rejecting Transactions ................................................................................................... 250 OFAC Reporting Requirements ............................................................................................................ 252 Blocked/Rejected Transaction Reports ........................................................................................ 252 Annual Report of Blocked Property .............................................................................................. 253 OFAC Licensing .................................................................................................................................... 254 602 Letter and Prepenalty Notice ......................................................................................................... 256 | 6 Voluntary Disclosure ............................................................................................................................. 257 Independent Testing ............................................................................................................................. 257 Consequences of Noncompliance ........................................................................................................ 258 Common Gaps and Challenges............................................................................................................ 261 RISK ASSESSMENTS ............................................................................................................................. 263 Overview ............................................................................................................................................... 263 Enterprisewide Risk Assessment ......................................................................................................... 269 Horizontal Risk Assessment ................................................................................................................. 270 Line of Business/Legal Entity Risk Assessment ................................................................................... 270 Geographic Risk Assessment ............................................................................................................... 271 Product/Service Risk Assessment ........................................................................................................ 275 Customer Risk Assessment .................................................................................................................. 276 Office of Foreign Assets Control/Sanctions Risk Assessment ............................................................. 282 KNOW YOUR CUSTOMER, CUSTOMER DUE DILIGENCE AND ENHANCED DUE DILIGENCE ...... 284 Overview ............................................................................................................................................... 284 CDD vs. EDD ........................................................................................................................................ 286 KYC Challenges.................................................................................................................................... 290 Beneficial Owners ................................................................................................................................. 291 Know Your Customer Types ................................................................................................................. 296 Nonresident Aliens and Foreign Persons .................................................................................... 296 Private Banking ............................................................................................................................ 299 Politically Exposed Persons ......................................................................................................... 300 Foreign Embassy and Consulates ............................................................................................... 303 Charitable Organizations and Nongovernmental Organizations ................................................. 304 Marijuana-Related Businesses .................................................................................................... 308 Nonbank Financial Institutions ..................................................................................................... 313 Correspondent Banking ............................................................................................................... 315 Third-Party Payment Processors ................................................................................................. 319 Owners/Operators of Privately Owned Automated Teller Machines (ATMs) .............................. 322 Common Carriers of Currency and Armored Car Services ......................................................... 325 Deposit Brokers ............................................................................................................................ 327 Professional Service Providers .................................................................................................... 328 Business Entities: Shell Companies, Private Investment Companies ......................................... 329 Know Your Customer’s Activities: Product Considerations .................................................................. 332 Currency Transactions ................................................................................................................. 332 Bulk Shipments of Currency and Bulk Cash Smuggling ......................................................... 334 Restrictions on U.S. Currency Transactions with Mexican Financial Institutions .................... 338 Funds Transfers ........................................................................................................................... 340 Monetary Instruments .................................................................................................................. 342 Payable-Through Accounts .......................................................................................................... 344 Concentration Accounts ............................................................................................................... 346 Pouch Activity ............................................................................................................................... 346 U.S. Dollar Drafts ......................................................................................................................... 348 Trade Finance Activities ............................................................................................................... 350 Electronic Banking and Digital Value ........................................................................................... 358 | 7 Online and Mobile Banking ...................................................................................................... 359 Automated Teller Machines ..................................................................................................... 360 Remote Deposit Capture ......................................................................................................... 361 Prepaid Access and Stored-Value ........................................................................................... 363 Virtual Currencies .................................................................................................................... 366 Automated Clearing House Transactions .................................................................................... 370 Trust and Asset Management Services ....................................................................................... 374 Interest on Lawyers Trust Account .............................................................................................. 377 Nondeposit Investment Products ................................................................................................. 377 Lending Activities ......................................................................................................................... 379 Insurance Products ...................................................................................................................... 381 Know Your Customer’s Customer ........................................................................................................ 383 Know Your Employees ......................................................................................................................... 383 Know Your Third Parties ....................................................................................................................... 384 TRANSACTION MONITORING, INVESTIGATIONS AND RED FLAGS ................................................ 387 Monitoring Process ............................................................................................................................... 387 Investigation Process ............................................................................................................................ 392 Suspicious Activity Red Flags ............................................................................................................... 397 Account Opening Red Flags ........................................................................................................ 397 Account Activity and Transaction Execution Red Flags .............................................................. 398 Currency Red Flags ..................................................................................................................... 398 ATM Transactions and Owner/Operators of Privately Owned ATM Red Flags........................... 399 Bulk Shipments of Currency Red Flags ....................................................................................... 399 Branch and Vault Shipments Red Flags ...................................................................................... 399 Monetary Instrument Red Flags ................................................................................................... 400 U.S. Dollar Draft Red Flags ......................................................................................................... 400 Wire Transfer Red Flags .............................................................................................................. 400 Virtual Currency Red Flags .......................................................................................................... 401 Certificate of Deposit Red Flags .................................................................................................. 401 Safe Deposit Box Red Flags ........................................................................................................ 401 Lending Red Flags ....................................................................................................................... 402 Mortgage and Real Estate Red Flags .......................................................................................... 402 Credit Card Red Flags ................................................................................................................. 402 Trade Finance Red Flags............................................................................................................. 402 Capital Market Products Red Flags ............................................................................................. 403 Insurance Products Red Flags ..................................................................................................... 404 Casino Red Flags ......................................................................................................................... 404 Retail Red Flags ........................................................................................................................... 404 Consumer Products Red Flags .................................................................................................... 405 Terrorist Financing Red Flags ...................................................................................................... 405 Drug Trafficking and Marijuana-Related Businesses Red Flags ................................................. 405 Human Trafficking and Migrant Smuggling Red Flags ................................................................ 406 Elder Financial Abuse Red Flags ................................................................................................. 407 Informal Value Transfer System (IVTS) Red Flags ..................................................................... 408 Employee/Insider Abuse Red Flags ............................................................................................. 408 AML/CFT TECHNOLOGY ........................................................................................................................ 409 Overview ............................................................................................................................................... 409 Suspicious Transaction Monitoring and Suspicious Activity Report Filing Software ............................ 414 Overview ...................................................................................................................................... 414 Threshold and Tuning Methodology ............................................................................................ 416 | 8 Model Validation ........................................................................................................................... 420 Data Analytics .............................................................................................................................. 421 Case Management Software ................................................................................................................ 423 Large Currency Transaction Monitoring and Currency Transaction Report Filing Software ................ 423 Customer Information Database and Customer Risk Assessment Software ....................................... 424 Customer Verification Software ............................................................................................................ 425 List Providers ........................................................................................................................................ 426 Interdiction Software ............................................................................................................................. 427 Training Software .................................................................................................................................. 429 NONBANK FINANCIAL INSTITUTIONS AND NONFINANCIAL BUSINESSES ................................... 431 Nonbank Financial Institutions .............................................................................................................. 431 Overview ........................................................................................................................................... 431 Money Services Businesses ............................................................................................................ 434 Definitions .................................................................................................................................... 434 Issuers and Sellers of Money Orders and Traveler’s Checks ................................................. 436 Check Cashers ........................................................................................................................ 437 Dealers in Foreign Exchange .................................................................................................. 437 Providers and Sellers of Prepaid Access ................................................................................ 437 Money Transmitters ................................................................................................................. 438 Guidance on the Applicability of the Definition of Money Services Businesses ...................... 439 Key AML/CFT and Sanctions Requirements ............................................................................... 442 Registration Requirements of MSBs ............................................................................................ 447 Agents of MSBs ........................................................................................................................... 448 Informal Value Transfer Systems ................................................................................................. 449 Definitions ................................................................................................................................ 449 Black Market Peso Exchange .................................................................................................. 451 Reintegro ................................................................................................................................. 452 Virtual Currency Systems and Participants.................................................................................. 453 Definitions ................................................................................................................................ 453 Current and Pending AML/CFT and Sanctions Requirements ................................................ 457 Providers and Sellers of Prepaid Access ......................................................................................... 459 Definitions .................................................................................................................................... 459 Key AML/CFT and Sanctions Requirements ............................................................................... 465 Broker-Dealers in Securities ............................................................................................................. 469 Definitions .................................................................................................................................... 469 Key AML/CFT and Sanctions Requirements ............................................................................... 471 Futures Commission Merchants and Introducing Brokers in Commodities ..................................... 481 Definitions .................................................................................................................................... 481 Key AML/CFT and Sanctions Requirements ............................................................................... 482 Commodity Trading Advisers and Commodity Pool Operators........................................................ 486 Definitions .................................................................................................................................... 486 Key AML/CFT and Sanctions Requirements ............................................................................... 486 Mutual Funds .................................................................................................................................... 487 Definitions .................................................................................................................................... 487 Key AML/CFT and Sanctions Requirements ............................................................................... 488 Investment Advisers and Unregistered Investment Companies ...................................................... 490 Definitions .................................................................................................................................... 490 Key AML/CFT and Sanctions Requirements ............................................................................... 492 Insurance Companies ...................................................................................................................... 493 Definitions .................................................................................................................................... 493 Key AML/CFT and Sanctions Requirements ............................................................................... 494 | 9

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evolving regulatory expectations for anti-money laundering and sanctions .. CTR Exemptions and the Designation of Exempt Persons Form .
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