International Seminar on AntiMoney Laundering Compliance Program Banking

International Seminar on Anti-Money Laundering Compliance Program - Banking March 30, 2005 © 2005 Citigroup, Inc. Prepared and presented by: Lauren L. Pickett Director of Global AML Training Citigroup Global Anti-Money Laundering Citigroup 425 Park Avenue, 4 th Floor, Zone 5 New York, NY 10022 Tel: 212 -559 -2440 / e-mail: pickettl@citigroup. com External

Anti-Money Laundering Goal • Effective, comprehensive anti-money laundering program that is tailored to the business and responsive to the external environment 2

What are the Overall Anti-Money Laundering Risks? • Reputation – Negative Press Reports • Legal – Criminal/Civil Fines – Restriction and/or revocation of authority to do business – Forfeitures of money/property – Seizure of Customer Assets – Imprisonment of Individual Employees • Supervisory – Enforcement Actions – Civil Money Penalties 3

Financial Institutions Fined for Violations of U. S. Anti. Money Laundering Regulations Am. South Bank $10, 000 $40, 000 AML Compliance Program Deficient 10 -12 -2004 Suspicious Activity Reports (SARs) – Fail to File (Forfeiture of assets) $25. 0 Million $16. 0 Million AML Compliance Program Deficient Korea Exchange Bank $1. 1 Million SARs – Fail to File 39 SARs ($32 Million – in transactions) Western Union Financial Services, Inc. $11. 0 Million SARs – Fail to File Banco Popular de Puerto Rico $20. 0 Million Sovereign Bank $700, 000 CTRs – Fail to File 4 -8 -2002 U. S. Trust Company $10, 000 SARs – Fail to File 7 -11 -2001 RIGGS Bank SARs – Fail to File 5 -13 -2004 1 -27 -2005 Currency Transaction Reports (CTRs) – Fail to File 5 -24 -2003 3 -6 -2003 SARs – Incomplete SARs CTRs – Fail to File AML Compliance Program Deficient 1 -6 -2003 SARs – Fail to File CTRs – Fail to File 4

Managing Money Laundering Risks • Accountability – Senior level support – Culture of integrity and compliance – Designated oversight responsibility (with proper authority) – Individual employee responsibility 5

Managing Money Laundering Risks • Training – Directors and senior management – All staff – Conduct regularly – Document 6

What Is Money Laundering ? • Money Laundering is the Process of Integrating the Proceeds of Crime into the Legitimate Stream of Financial Commerce by Masking its Origin – A process to make Illegitimate Funds Appear Legitimate 7

What Is Money Laundering ? • Concealing the existence or source of income from a crime • Disguising income from a crime so that it appears legitimate • Knowingly assisting a criminal in moving money or other property that constitutes the proceeds of criminal activity • In the U. S. Money Laundering is the Proceeds Related to Many Illicit Activities, Not Just Drug Trafficking 8

Some Examples of Proceeds of Activities Which Constitute Money Laundering in the U. S. are: • • • Drug Trafficking Foreign Official Corruption Embezzlement Securities, Wire and Mail Fraud Bribery Terrorist Financing Trafficking in Human Cargo Illegal Gambling Racketeering Arson Certain Foreign Smuggling & Export Control Violations Money Derived From Nearly 200 Predicate Crimes Money Laundering is separate from the charges of the underlying crime(s) 9

U. S. Requirement for Identifying Suspicious Activity Transaction conducted or attempted by, at, or through a business and the business Knows, Suspects or has Reason to Suspect the Transaction: • • • involves funds from illegal activities • • has no business or apparent lawful purpose hides or disguises funds or assets from illegal activities; is designed to evade a money laundering recordkeeping or reporting requirement; or is not the sort in which the particular customer would normally be expected to engage 10

Definition of “Knowing” Under U. S. Law • • Actual Knowledge • Collective Knowledge of Information Regarding the Source and Nature of Proceeds Willful Blindness – “Deliberate Indifference, ” “Conscious Avoidance” Knowledge is a Key Element of an Offense under U. S. Money Laundering Criminal Statutes 11

Anti-Money Laundering Compliance Program 12

Financial Institutions Can Protect Themselves By Establishing an Anti-Money Laundering Program At Citigroup each business shall be covered by a written Anti-Money Laundering Program that includes: • Designation of an Anti-Money Laundering Compliance Officer responsible for coordinating and monitoring compliance • • Verification of the identity of each customer that opens an account Evaluation of potential risks associated with the customers’ and their transactions – – – Business/Entity Country Product • Performance of appropriate due diligence at account opening and monitoring of transactions based upon the assessments of risk • Procedures to detect and report suspicious transactions to government authorities and in accordance wit the Global Anti-Money Laundering Policy • Development of a training plan that sets for the frequency of training and personnel to be trained • Assessments by the business of its adherence to its Anti-Money Laundering procedures 13

The Anti-Money Laundering Program should be Based Upon a Risk-Based Approach • Key Factors to be considered in assessing and developing appropriate controls to manage Money Laundering Risk: – Different categories of customers – Localities of the businesses and customers – Nature of the products and services provided – Expected use by customers of products and services • Determines where enhanced due diligence measures should be taken in obtaining customer information and in monitoring suspicious activity 14

The Enhanced Due Diligence Program • Criteria for determining product lines and customers that pose a “heightened risk or concern, ” for example, but not all inclusive : – Private banking – Onshore vs. Offshore client – Correspondent banking (foreign vs. domestic) – Foreign political figures/foreign corrupt officials – Accounts with frequent or excessive use of funds transfers (in and out or frequent purchase of bank drafts under reporting limits) 15

Citigroup Risk Based Approach to Money Laundering And Terror Financing Risk 16

Risk Based Approach To Money Laundering And Terror Financing Risk • Identify as early as possible suspicious activity that may represent money laundering and terror financing risk • Prioritize customer and transaction for review and investigation based upon risk; • Ensure that resources are deployed commensurate with perceived risks, and to • Establish a corporate baseline to ensure that money laundering and terror financing risk are given appropriate weight and addressed in a consistent and quality manner across Citigroup globally. 17

Risk Based Approach To Money Laundering And Terror Financing Risk Key considerations in the development of the model: • objective • verifiable • previously published material • where possible, international sources 18

Citigroup Risk Models • Risk Models for Three Principal Money Laundering/Terror Financing Factors – • Geography and Country Risk – 244 Countries Under Development – – Business and Entity Risk – 2, 500 Types Product and Transaction Risk – 130 Types 19

Risk Model Convergence H M L 20

Geography and Country Risk • Principal factors are those that in and of themselves are so significant that they will result in a high risk score; • Scoring factors, that can increase or decrease a risk score on the margin – • Scoring factors are not prime determinants of the risk score. 21

Geography and Country Risk Principal Factors Financial Action Task Force (FATF) Non-cooperative Countries and USA Patriot Act Section 311 Designated Countries Perceived Terrorist Finance Risk Country Drug Source or Transit Country – International Narcotics Control Strategy Report (“INCSR”) Tax Problem Country - Organization of Economic Cooperation and Development (OECD) Offshore Banking Location - INCSR Citigroup’s Global Market Risk Management Rating 22

Geography and Country Risk Scoring Factors INCSR Primary Money Laundering Concern INCSR Precursor Chemical Transparency International: Corruption Index INCSR: Money Laundering Crime Laws/Drug Crime Laws Heritage Foundation: Economic Freedom Index Member of FATF 23

Geography and Countries Risk Distributions H-M-L 24

Business and Entity Risk Model • Uses North American Industry Classification System (“NAICS”) as source of identifying 2, 500 Business and Entities – Permits a high level of specificity in describing businesses activities 25

Business and Entity Risk Model • Categorize Business or Entity as either High or Low risk based on U. S. and International Regulatory Sources – U. S. Comptroller’s Handbook – Bank Secrecy Exam Handbook – FATF Money Laundering Typologies – EU Directive – Egmont Group – Wolfsberg Principles 26

Business and Entity Risk Scoring Chart 27 Citigroup Draft

28 Citigroup Draft

Risk Businesses and Entities • Approximately 130 Businesses and Entities have been identified as High Risk – Retail Stores – Wholesale Stores – Electronics – High Value / Luxury Goods – Communication – Transportation – Services – Financial Institutions – Entertainment 29

High Risk Businesses and Entities Retail Stores Citigroup Draft

High Risk Businesses and Entities Wholesale Stores Citigroup Draft

High Risk Businesses and Entities Electronics Citigroup Draft

High Risk Businesses and Entities High Value Luxury Goods Citigroup Draft

High Risk Businesses and Entities Communications Citigroup Draft

High Risk Businesses and Entities Transportation Citigroup Draft

High Risk Businesses and Entities Services Citigroup Draft

High Risk Businesses and Entities Services Citigroup Draft

High Risk Businesses and Entities Services Citigroup Draft

High Risk Businesses and Entities Services Citigroup Draft

High Risk Businesses and Entities Financial Institutions Citigroup Draft

High Risk Businesses and Entities Financial Institutions Citigroup Draft

High Risk Businesses and Entities Entertainment Citigroup Draft

Product Risk Model • Evaluate 130 types of products as high, medium, or low risk based upon the following scoring factors – – – – Offering targeted as high risk by regulators or evaluated as high risk by business unit Favors anonymity and/or involves 3 rd parties Involves cash and/or cash-based instruments Involves cross-border transactions that may involve high risk geographies Funds in – i. e. customer's money May support high speed of funds movement May support high volume Citigroup Draft

Product Risk Scoring Model 44 Citigroup Draft

Product Risk Citigroup Draft 45

High Risk Products 46 Citigroup Draft

Medium Risk Products Citigroup Draft 47

Low Risk Product 48 Citigroup Draft

Risk Model Convergence H M L 49

How to Use the Rating Models • Assists in amount of KYC due diligence at account opening and for ongoing updates • Assists in decision on monitoring efforts to identify suspicious activity • Escalates the account opening approval process

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