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2014 10-05 juan llanos presentation (inside bitcoins)
This document provides a summary of a presentation on Bitcoin and AML regulation strategies. It discusses the history of anti-money laundering (AML) standards from the Financial Action Task Force (FATF) and recent reports addressing risks of virtual currencies. It also outlines the key risk areas for money transmitters related to AML compliance and how to design an effective AML program to mitigate those risks. Specific topics covered include FATF recommendations, money transmitter regulations in the US, risk identification and mitigation strategies for operations, customers, foreign counterparties, and tips for designing a robust AML compliance program.
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2014 10-05 juan llanos presentation (inside bitcoins)
- 1. Bitcoin & AMLRegulation: Strategies for Successful Compliance & Government Relations Las Vegas InsideBitcoins Conference Las Vegas, October 5, 2014 by @Juan Llanos
- 2. © 2014 JuanLlanos “Risk management is not only about reducing downside potential (the probability of pain), but also about increasing upside opportunity (the prospects for gain).” James Lam
- 3. MUST WANT CAN © 2014 JuanLlanos WANT – MUST = CAN
- 4. Agenda 1. Brief historyof AML standards The latest FATF & EBA reports 2. Risk identification Risk areas à Focus on AML 3. Risk mitigation a) Program design tips b) Overview of corporate and product safeguards c) Customer identification and behavioral analytics 4. Unsolicited (contrarian) advice © 2014 Juan Llanos
- 5. Agenda 1. Brief historyof AML standards The latest FATF & EBA reports 2. Risk identification Risk areas à Focus on AML 3. Risk mitigation a) Program design tips b) Overview of corporate and product safeguards c) Customer identification and behavioral analytics 4. Unsolicited (contrarian) advice © 2014 Juan Llanos
- 6. Financial Ac)on Task Force Groupe d’Ac)on Financière Interna)onale (FATF-‐GAFI) Independent inter-governmental body Develops and promotes policies to protect the global financial system against money laundering and terrorist financing FAFT recommendations à define criminal justice and regulatory measures that should be implemented to counter this problem à are recognized as the global anti-money laundering and counter-terrorist financing standard (AML/CFT)
- 7. Special Recommendation VI Eachcountry should take measures to ensure that persons or legal entities, including agents, that provide a service for the transmission of money or value, including transmission through an informal money or value transfer system or network, should be licensed or registered and subject to all the FATF Recommendations that apply to banks and non-bank financial institutions. Each country should ensure that persons or legal entities that carry out this service illegally are subject to administrative, civil or criminal sanctions Financial Ac)on Task Force Groupe d’Ac)on Financière Interna)onale (FATF-‐GAFI)
- 8. Anonymity = Anathema • Anonymous iden0fica0on • No value limits • Anonymous funding • No transac.on records • Wide geographical use • No usage limits Cash features © 2014 Juan Llanos F A T F R e p o r t o n N e w P a y m e n t M e t h o d s ( 2 0 0 6 )
- 9. FATF New PaymentMethods Risks © 2014 Juan Llanos F A T F R e p o r t o n N e w P a y m e n t M e t h o d s ( 2 0 1 3 )
- 10. FATF Virtual CurrenciesAML Risks © 2014 Juan LlanosF A T F R e p o r t o n V i r t u a l C u r r e n c i e s ( 2 0 1 4 -‐ 0 6 -‐ 3 0 ) Convertible virtual currencies • are potentially vulnerable to money laundering and terrorist financing abuse • may allow greater anonymity than traditional non-cash payment methods Virtual currency systems • can be traded on the Internet (global reach) • generally characterized by non-face-to-face customer relationships • may permit anonymous funding • may permit anonymous transfers • may operate in jurisdictions with inadequate controls Decentralized systems • are vulnerable to anonymity risks. E.g., Bitcoin… • addresses have no names or other customer identification attached • has no central server or service provider • does not require or provide identification and verification of participants • does not generate historical records of transactions associated with real world identity • has no central oversight body • no AML software is currently available to monitor and identify suspicious transaction patterns • law enforcement cannot target one central location or entity for investigative or asset forfeiture purposes
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- 12. © 2014 JuanLlanos Who is a money transmi@er in the USA? IS IS NOT …whoever as a business: • Exchanges virtual currency for government currency, and one virtual currencies for another (e.g., exchanges) • Mines and makes a payment to a third party on behalf of a customer (e.g., for-‐profit miners) • Accepts value from A and delivers it to B (e.g., some wallets) • Accepts value from A and delivers it to A at a different .me or place (e.g., vaults) …whoever • Mines, uses or invests virtual currency for own benefit • Provides network access services to money transmiIers • Acts as a payment processor by agreement with a seller or creditor • Acts as intermediary between BSA-‐regulated ins.tu.ons
- 13. Money Transmi@er Regula0on (US) © 2014 Juan Llanos Focus à AML/BSA + State Compliance Main Risk Areas Main Statutes and Regs An.-‐Money Laundering BSA, USA PATRIOT Act, Money Laundering Acts An.-‐Terrorism Financing (CFT) USA PATRIOT Act, OFAC Privacy and Informa.on Security Gramm-‐Leach-‐Bliley Safety and soundness State (via licensing) Consumer protec.on State (via licensing) + Dodd-‐Frank / Regula.on E (CFPB)
- 14. Agenda 1. Brief historyof AML standards The latest FATF & EBA reports 2. Risk identification Risk areas à Focus on AML 3. Risk mitigation a) Program design tips b) Overview of corporate and product safeguards c) Customer identification and behavioral analytics 4. Unsolicited (contrarian) advice © 2014 Juan Llanos
- 15. Money transmitters and theiragents are perceived as HIGH RISK of • ABUSE TO CONSUMER • MONEY LAUNDERING • TERRORIST FINANCING Money transmission = highly regulated industry © 2014 Juan Llanos
- 16. How Can WeAbuse Consumers? • Loss of funds • Wrong product/service • Failed transactions • Overpricing • Divulging/losing private data • Claims ignored © 2014 Juan Llanos
- 17. How Can Moneybe Laundered Through Us? • Identity theft & impersonation • Structuring • Fraudulent acts • Lax controls FRONT OFFICE BACK OFFICE © 2014 Juan Llanos General risks (all FIs) à fake IDs, negligence, incompetence & wrongdoing
- 18. Opera.onal Customer (Sender & Recipient) Foreign Counterparty Agent (B&M, online) MT Risks Money Transmitter Risk Fronts © 2014 Juan Llanos
- 19. © 2014 JuanLlanos
- 20. RISKS MITIGATORS • Commingling/diversionof funds • Poor cash management, accounting and settlement • Poor document management, reporting and record-keeping • Inadequate policies and procedures • Poor controls • Systems breakdowns • Employee acceptance, monitoring and termination protocols • Employee training and education • Professional financial, operational and compliance management • Dual controls and segregation of duties • Business continuity and disaster recovery planning • Independent auditing and testing • State-of-the-art technology Operational Risks and Mitigators © 2014 Juan Llanos
- 21. RISKS MITIGATORS • Complicitywith agent or foreign counterparty • Complicity with recipient (or sender) • ‘Drip-irrigation’ transfer of illicit funds (O2M recipients, M2O recipient, M2M recipients) • Intra-company structuring • Inter-company structuring (‘smurfing’) • Terrorist financing • Customer acceptance, monitoring and termination protocols • Transaction & behavior monitoring • Lower identity verification thresholds at origin and destination • For cards, maximum loadable amounts, expiration date, and limited number of recipients. • Redundant identity verification procedures at destination • POS training • OFAC screening • Eventually, intercompany transaction monitoring by highly-professional and secure clearing house. This is the only possible antidote against ‘smurfing’. Customer Risks and Mitigators © 2014 Juan Llanos
- 22. Foreign Counterparty Risks andMitigators RISKS MITIGATORS • Complicity with sender or agent • Poor cash sourcing, management, accounting and settlement • Poor documentation and record- keeping • Lax policies, procedures and controls • Poor regulatory regime • Credit risk • Systems breakdowns • Foreign counterparty acceptance, monitoring and termination protocols • Selecting reputable partners with proven track record and effective systems and controls • Transaction monitoring • Independent auditing and testing • OFAC screening © 2014 Juan Llanos
- 23. Agenda 1. Brief historyof AML standards The latest FATF & EBA reports 2. Risk identification Risk areas à Focus on AML 3. Risk mitigation a) Program design tips b) Overview of corporate and product safeguards c) Customer identification and behavioral analytics 4. Unsolicited (contrarian) advice © 2014 Juan Llanos
- 24. 1. Always understandthe flow of DATA and the flow of MONEY. 2. Life-cycle management and the right mix of detective and deterrent techniques, including effective training, are key. 3. Document or perish Program Design Tips © 2014 Juan Llanos
- 25. 1. Map Flows, and Processes 2. Iden.fy Risks 3. Design Controls 4. Write PPCs 5. Execute and Measure 6. Enhance and Improve Bottom-Up Program Design Spirit of law + Engineering Mindset © 2014 Juan Llanos
- 26. * AML ProgramElements (Section 352 of the USA PATRIOT Act) 1. A designated compliance officer + professional team 2. WriIen policies and procedures + opera.onal controls: • Licensing, renewal and repor.ng procedures (S) • Registra.on, record-‐keeping and report-‐filing procedures (F) • KY (Know Your…) Subprograms: Acceptance, monitoring, correc.on and termina.on • KY…Customer • KY…Agent (if applicable) • KY…Foreign Counterparty • KY…Employee • KY…Vendor • Monitoring, analysis and inves.ga.ng procedures • OFAC compliance program • Response to official informa.on requests • Privacy and informa.on security protec.on protocols 3. An on-‐going training program • Risk & Compliance CommiIee 4. An independent compliance audi0ng func.on CORPORATE Safeguards* © 2014 Juan Llanos
- 27. CUSTOMER Identification © 2014Juan Llanos Non-‐Face to Face à “Card not present” standards Non-documentary à contacting a customer; independently verifying the customer’s identity through the comparison of information provided by the customer with information obtained from a consumer reporting agency, public database, or other source; checking references with other financial institutions; and obtaining a financial statement. Documentary à Review an unexpired government-issued form of identification from most customers. This identification must provide evidence of a customer’s nationality or residence and bear a photograph or similar safeguard; examples include a driver’s license or passport. However, other forms of identification may be used if they enable the bank to form a reasonable belief that it knows the true identity of the customer.
- 28. “What customers do speaksso loudly that I cannot hear what they’re saying.” (Paraphrasing Ralph Waldo Emerson) Customer identification vs. customer knowledge BEHAVIORAL ANALYTICS © 2014 Juan Llanos
- 29. © 2014 JuanLlanos Machine Learning (AI) Methods SUPERVISED LEARNING: relies on two labeled classes (good vs. bad) Goal à Detect known suspicious paIerns 1. Training set: a. Select dataset with clean and dirty cases. b. Classifica.on algorithm to discriminate between the two classes (finds the rules or condi)ons) c. Probabili.es of class 1 and class 2 assignment 2. Run discrimina.on method on all future purchases. UNSUPERVISED LEARNING: no class labels Goal à Detect anomalies 1. Takes recent purchase history and summarize in descrip.ve sta.s.cs. 2. Measure whether selected variables exceed a certain threshold. (devia)ons from the norm) 3. Sounds alarm and records a high score. © 2014 Juan Llanos
- 30. • High amounts • High frequency • Use of mul0ple loca0ons • Use of mul0ple iden00es • Use of untrusted device • Values just below threshold • Immediate withdrawals Examples of Known Unusual Behaviors © 2014 Juan Llanos
- 31. Agenda 1. Brief historyof AML standards The latest FATF & EBA reports 2. Risk identification Risk areas à Focus on AML 3. Risk mitigation a) Program design tips b) Overview of corporate and product safeguards c) Customer identification and behavioral analytics 4. Unsolicited (contrarian) advice © 2014 Juan Llanos
- 32. Risk Areas • operational • credit • money laundering • terrorist financing • information loss • liquidity • fraud • Identity Theft Stakeholders • federal agencies • state agencies • investors • consumers • employees • society Goals • safety • soundness • security • privacy • crime prevention • health • integrity Regulation à Inevitable, yet valid Risks & Stakeholders © 2014 Juan Llanos Compliance à Onerous, yet valuable
- 33. • Prevention trumpsdamage control • Risk MGT à Both reducing downside and increasing upside • Simplicity and common sense • Train for behavior change, not theoretical knowledge • Form-substance continuum à substance • Letter-spirit continuum à focus on spirit (underlying purpose and values) facilitates • Operational synergies (leveraging tech) • Compliance without compromising performance • Flexibility and sustainability © 2014 Juan Llanos
- 34. Evolution of RegulatoryRelations VALUES AND CULTURE REGULATORY RELATIONSHIP Minimum Standards As little as can get away with Unthinking, mechanical Compliance Culture By the book Bureaucratic Beyond Compliance Risk focused, self-policing Ethical business Values-based Spirit, not just letter Focus on prevention Strong learning Policing Enforcement lesson Basic training Supervising / Educating Look for early warnings Themed, focused visits Educating / Consulting Culture development Lighter touch Mature relationship Reinforce best practice Benchmark Reallocate resources to problem firms Source: Financial Services Authority, UK © 2014 Juan Llanos Banking
- 35. SUBSTANCE (be) Handbooks, writtenpolicies, talk (lawyers, public relations) Operationalization, quality, walk (compliance officers, engineers, leaders) FORM (seem) © 2014 Juan Llanos
- 36. “Prosecutors are lookingfor substantive AML programs (not just paper ones) in determining whether you’re a victim or a suspect.” Former federal prosecutor “A well-written AML program will not by itself be sufficient. It’s the everyday operation, the execution and delivery, that matters.” Wells Fargo MSB Risk Manager © 2014 Juan Llanos
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- 38. © 2014 JuanLlanos Juan Llanos EVP, Strategic Partnerships & Chief Transparency Officer Bitreserve, Inc. New York, NY Mobile: (917) 684-0560 Email: juanbllanos@gmail.com LinkedIn: www.linkedin.com/in/Juan Llanos Twitter: @JuanLlanos Blog: ContrarianCompliance.com Thank you!