Understanding Money Laundering and Fraud Risks of Wire Transfers
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WATCH WEBINAR: https://www.caseware.com/alessa/webinars/fraud-risks-wire-transfers/ Wire transfers have long been the tool of choice for money launderers and fraudsters. To mitigate these risks to the financial institutions they serve, AML compliance and fraud professionals must understand how wire transfers work, both in the U.S. and globally, as well as be able to recognize the red flags in wire transfer transactions that may indicate money laundering or fraud is taking place through a customer’s account. In this presentation, Laurie Kelly, CAMS shares her knowledge and experiences gained from 20 years in leading the AML, fraud, and sanctions compliance functions for a $130 billion U.S. financial institution that processed 12,000 to 15,000 wire transfers per day. Attendees will learn about the mechanics of wire transfers, both in the U.S. and globally, and how wire transfers differ from other types of money movement methods. She will then discuss the FinCEN “Travel Rule”, as well as sanctions screening best practices for wire transfers. Finally, Laurie will explore the money laundering and fraud risks and red flags associated with wire transfers and ways to mitigate them. About Alessa, a CaseWare RCM product: Alessa is a financial crime detection, prevention and management solution offered by CaseWare RCM Inc. With deployments in more than 20 countries in banking, insurance, FinTech, gaming, manufacturing, retail and more, Alessa is the only platform organizations need to identify high-risk activities and stay ahead of compliance. To learn more about how Alessa can help your organization ensure compliance, detect complex fraud schemes, and prevent waste, abuse and misuse, visit us at caseware.com/alessa. Connect with us online: Visit the Alessa WEBSITE: https://www.caseware.com/alessa/ Follow Alessa on LINKEDIN: https://www.linkedin.com/caseware-alessa Follow Alessa on TWITTER: https://twitter.com/casewarealessa SUBSCRIBE to Alessa on YouTube: http://tiny.cc/Alessa
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Understanding Money Laundering and Fraud Risks of Wire Transfers
- 1. https://www.caseware.com/alessa/ Understanding Wire Transfers and their Money Laundering and Fraud Risks Laurie Kelly, CAMS
- 2. https://www.caseware.com/alessa/ Agenda 2 1. What is a wire transfer? 2. Wires vs. ACH 3. Fedwire, CHIPS and SWIFT 4. Wire transfer terminology 5. Fedwire’s biggest weakness 6. Myths and misconceptions about wire transfers 7. FinCEN “Travel Rule” 8. Sanctions screening for wire transfers 9. Wire transfers, money laundering and fraud 10. Concluding comments and Q & A
- 3. https://www.caseware.com/alessa/ 3 What is a Wire Transfer? • Originated with the telegraph in late 1800’s • Essentially, a message from one bank to another • Electronic Funds Transfer (EFT): • Wire transfers • ACH • Direct deposit • Online bill pay • Person to person payments (PayPal) • Digital wallets (Venmo, Google Pay, Apple Pay)
- 4. https://www.caseware.com/alessa/ 4 Wire Transfers vs ACH Type of transaction Single transaction Batches of transactions Cost $25 to $50 average Pennies Reversible No Yes Recipient can initiate (pull funds) No Yes Funds availability Same day (domestic) 1-2 business days (int’l) 1-2 business days Same day by 5pm
- 5. https://www.caseware.com/alessa/ Message: Instructions: Who’s sending, to whom, through what banks 5 Message vs. Settlement Settlement: Arranging for payment Sender Bank BBank A Recipient
- 6. https://www.caseware.com/alessa/ 6 Fedwire • Operated by the US Federal Reserve Banks • Primary U.S. wire transfer network • Real time gross settlement Source: FRBServices.org Fedwire Funds Service Volume and Value Statistics
- 7. https://www.caseware.com/alessa/ 7 A Fedwire Wire Transfer Beachside Bank Mrs. Smith Pinstripe Bank Mr. Jones Payment Order Fed Reserve Bank Pinstripe Fed account Debit $5,000 Beachside Fed account Credit $5,000 Fedwire System
- 8. https://www.caseware.com/alessa/ 8 Fedwire Wire Transfer – Non-Participating Bank Mrs. Smith Pinstripe Bank Mr. Jones First Nat’l Bank *Correspondent* Payment Order Beachside Bank Fed Reserve Bank First Nat’l Bank Fed account Debit $5,000 Beachside Fed account Credit $5,000 Fedwire System
- 9. https://www.caseware.com/alessa/ 9 Correspondent Accounts Pinstripe Bank Due To/From First Nat’l 5/1 Debit $5,000 5/6 Credit ($2,000) 5/8 Credit ($10,000) 5/28 Debit $12,000 End Bal May: Debit $5,000 First Nat’l Bank *Correspondent* Due To/From Pinstripe 5/1 Credit ($5,000) 5/6 Debit $2,000 5/8 Debit $10,000 5/28 Credit ($12,000) End Bal May: Credit ($5,000) Activity on Pinstripe’s behalf: 5/1 Outgoing wire $5,000 5/6 Incoming wire $2,000 5/8 Incoming wire $10,000 5/28 Outgoing wire $12,000
- 10. https://www.caseware.com/alessa/ • LARGE inter-bank transfers amongst ~ 50 participants • Private sector version of Fedwire • $1.5 trillion per day – average transfer $3 million • Slower, but less expensive than Fedwire 10 Clearing House Interbank Payments System: “CHIPS” • Smaller payments settled real-time; larger payments settled bilaterally or multilaterally • Daily “security deposit” required • International bank participants must have U.S. presence
- 11. https://www.caseware.com/alessa/ • Based in Brussels, Belgium; 11,000+ participants • $5 trillion in payment messages per day • ONLY a messaging system – no settlements • Relies on correspondent relationships • Message “types” – payments, ForEx, export LCs, securities, general communications • Primary system for international funds transfers 11 SWIFT Society for Worldwide Interbank Financial Telecommunications
- 12. https://www.caseware.com/alessa/ 12 How a SWIFT Wire Transfer Works BNP Paribas Bon Vie Winery Due To/From BNP Paribas Debit $2,000 USD Due To/From Banco de Brasil Debit $2,000 USD Banco de Brasil Senora Martinez Payment Order MT103 Payment Msg SWIFT Network
- 13. https://www.caseware.com/alessa/ 13 International WT – Not a SWIFT Participant First Nat’l Bank *Correspondent* Due To/From BNP Paribas Debit $2,000 USD Pinstripe Bank Mr. Jones Payment Order BNP Paribas Bon Vie Winery JPMChase *Correspondent* Fed Reserve Bank First Nat’l Bank Fed account Debit $2,000 Beachside Fed account Credit $2,000 Fedwire System MT103 Payment Msg SWIFT Network Due To/From JPMChase Credit $2,000 USD
- 15. https://www.caseware.com/alessa/ 15 Know the Lingo Beachside Bank Fedwire: Beneficiary’s Bank (BBK) SWIFT: Receiver Institution RTN Mr. Jones Fedwire: Originator (ORG) SWIFT: Ordering Customer Mrs. Smith Fedwire: Beneficiary (BNF) SWIFT: Beneficiary Customer Fedwire: ORG ID (Acct #) SWIFT: Ordering Customer Acct (#) OGB ID: Fed RTN SWIFT: Ordering Inst BIC Pinstripe Bank Fedwire: Originator’s Bank (OGB) SWIFT: Ordering Institution Fedwire: BNF ID (Acct #) SWIFT: Beneficiary Customer Acct (#) BBK ID: Fed RTN SWIFT: Receiver Inst BIC Fed RTN: 123 103 716 SWIFT BIC: BOFAUS3NXXX BOFAUS3MXXX BOFAUS6HXXX CHIPS UID: 136397 Fedwire System Payment Order
- 16. https://www.caseware.com/alessa/ 16 More than One Bank Involved Fedwire Term (abbrev) Meaning Sender Depository Institution (SDI) The bank that puts the payment instruction into the Fedwire system. MUST be a Fed RT (ABA) number Receiver Depository Institution (RDI) The bank that will receive the Fedwire payment. MUST be a Fed RTN (ABA number) Intermediary Bank (IBK) May be the same as the Receiver DI, or could be a second intermediary bank Intermediary Bank ID (IBK ID) The identifying number of the Intermediary bank – Fed RT, SWIFT BIC, or other Beneficiary’s Bank (BBK) The final bank in the transfer chain; where the Beneficiary’s account resides Beneficiary’s Bank ID (BBK ID) The identifying number of the Beneficiary’s bank – Fed RT, SWIFT BIC, or other
- 17. https://www.caseware.com/alessa/ 17 Multiple Banks Involved - Fedwire Pinstripe Bank Beachside Bank Mrs. Smith First Nat’l Bank *Correspondent* Sender DI Intermediary Bank (IBK) ID: Fed RTN Originator’s Bank (OGB) ID: Acct # w. First Nat’l Receiver DI Beneficiary’s Bank (BBK) ID: Fed RTN Originator (ORG) ID: Acct # w. Pinstripe Beneficiary (BNF) ID: Acct # w. Beachside Mr. Jones Payment Order Fedwire
- 18. https://www.caseware.com/alessa/ 18 Multiple Banks Involved – Fedwire cont’d Beachside Bank Sender DI Originator’s Bank (OGB) ID: Fed RTN First Nat’l Bank *Correspondent* Receiver DI Intermediary Bank (IBK) ID: Fed RTN Beneficiary’s Bank (BBK) ID: Acct # w. First Nat’l Pinstripe Bank Mr. Jones Beneficiary (BNF) ID: Acct # w. Pinstripe Mrs. Smith Originator (ORG) ID: Acct # w. Beachside Payment Order Fedwire
- 19. https://www.caseware.com/alessa/ 19 Multiple Banks Involved – Fedwire/SWIFT JPMChase *Correspondent* First Nat’l Bank *Correspondent* Pinstripe Bank Mr. Jones Payment Order BNP Paribas Bon Vie Winery MT103 Payment Msg SWIFT NetworkFed Reserve Bank Fedwire System Sender DI and IBK #1 Receiver DI and IBK #2
- 20. https://www.caseware.com/alessa/ 20 Fedwire Identifier Codes and Format
- 21. https://www.caseware.com/alessa/ 21 Fedwire’s Biggest Weakness - Address Fields 123 First St NewtownPA12345 2 Janta MktChopra EstLBSMarg400078Mah arashtraINMumbai Av Primera No123 4582 SantiagoCHI
- 23. https://www.caseware.com/alessa/ 23 Myths and Misconceptions About Wire Transfers
- 25. https://www.caseware.com/alessa/ • “Records to be Made and Retained by Financial Institutions” CFR §1010.410 • Funds transfer data must be collected, then “travel” to each subsequent bank • Goal: To help law enforcement “follow the money” 25 What is the Travel Rule? #1 – What information must be included #2 – When the Travel Rule does NOT apply
- 26. https://www.caseware.com/alessa/ Mandatory: • Originator’s name (the term used by the regulation is “transmitter) • Originator’s full address • Originator's account number (if there is one) • The amount of the payment • The execution date of the payment • The IDENTITY of the recipient’s financial institution Must be included IF PROVIDED by the Originator: • Recipient’s name • Recipient’s address • Recipient’s account number or other identifier • Any other payment instructions provided 26 Travel Rule: What Data Must be Included?
- 27. https://www.caseware.com/alessa/ When the type of transfer is excluded: • Transfers processed through an automated clearinghouse – ACH • Automated teller machine transfers • Point-of-sale system transfers • Direct deposits or withdrawals • Telephone banking transfers 27 When Does the Travel Rule NOT Apply?
- 28. https://www.caseware.com/alessa/ When the transfer meets any of these criteria: • Under $3,000 • Between a sender and recipient who are the same person • Between two account holders at the same institution (“book transfer”) • Between any two of these types of entities: 28 When Does the Travel Rule NOT Apply? Bank Commodities/futures broker The U.S. Government U.S. subsidiary of a bank U.S. subsidiary of a commodities/futures broker State or local government Securities broker/dealer U.S. subsidiary of a securities broker dealer Federal, state or local government agency or instrumentality
- 29. https://www.caseware.com/alessa/ Sanctions Screening of Wire Transfers: Best Practices
- 30. https://www.caseware.com/alessa/ • No specific regulations for screening protocols • Screen all wire transfers: Fedwire, SWIFT, CHIPS • Screen every key data field that could ID a sanctioned party • All party names (including banks) and addresses • Freeform text fields (OBI, BBI, remittance info) • Outgoing: before releasing to settlement/clearing system • Incoming: before posting to beneficiary’s account 30 Sanctions Screening: Best Practices
- 31. https://www.caseware.com/alessa/ Money Laundering and Fraud Risks with Wire Transfers
- 32. https://www.caseware.com/alessa/ 32 Wire Transfers and Money Laundering National Products LLC (shell company) $9,790 Sue Greedy $200 Bob Gullible Boris Badenov $9,990 $8,000$9,700 $90 fee Layering Placement Integration Crime: Fraud
- 33. https://www.caseware.com/alessa/ A Tool of Choice: • Irrevocable, same-day • Funds available immediately for withdrawal • Full information not required per Travel Rule • Huge volumes of payments per day – smaller amounts less noticeable • Rapid funds movement facilitates the layering process 33 Wire Transfers and Money Laundering
- 34. https://www.caseware.com/alessa/ 34 Wire Transfer Red Flags for Money Laundering Commercial accounts: • Sudden use of wires • Frequent wires with no apparent business purpose • Patterns of incoming wires followed by outgoing disbursements • Foreign wires, especially if no import/export • Explanations that don’t make sense • High volume of wire transfers on an account, but balance always low (possible funnel account) • Large wire transfers by a cash-based business • Incoming round amounts $25k to $50k Consumer accounts: • Any wire transfer • To/from financial secrecy country • PUPID (pay upon proper identification) wires • Non-account holders • Funded by cash or bearer instrument #1 – Out of pattern activity
- 35. https://www.caseware.com/alessa/ FRAUD: Happens to the customer MONEY LAUNDERING: Illegal activity by the customer 35 Fraud or Money Laundering?
- 36. https://www.caseware.com/alessa/ Research indicates 76% of all fraud attempts involve wire transfers Wire Transfers and Fraud cont’d Malware Social engineering Phishing, smishing, vishing Email compromise Call Center Mobile & online banking Bank employee FAX Branch Methods of compromise Points of compromise Wire Initiation Methods Email Computer or mobile device Call Center Bank employee
- 37. https://www.caseware.com/alessa/ #1: Business email compromise • No technology needed • Targets people, not systems vulnerabilities • Can bypass banks’ fraud monitoring systems • Medium-sized businesses are a common target – BUT big companies are also vulnerable 37 Social Engineering Social engineering: Manipulating a person into doing something they wouldn’t ordinarily do.
- 38. https://www.caseware.com/alessa/ CEO or executive impersonation scams: • Crelan Bank (Belgium): $75 million • FACC: $61 million • Upsher-Smith Laboratories: $50 million • Ubiquiti Networks: $47 million • Leoni AG: $44 million • Xoom Corporation: $31 million • Pathé: $21 million • Tecnimont SpA: $18 million • The Scoular Company: $17 million • Mattel Toys: $3 million 38 Social Engineering Vendor impersonation/fake invoices: • Facebook and Google: $100 million • MacEwan University: $11.8 million
- 39. https://www.caseware.com/alessa/ Red flags: • #1: Out of pattern activity • Sudden use of wires • Foreign wire transfers - especially consumer accounts • Incoming wire transfers of just under $10,000 then cash withdrawal • Wire request in non-standard format 39 Fraud & Wire Transfers: Red Flags, Best Practices Best practices: • Two-party authentication on free-form wire and new wire templates • No wire requests by fax or email OR: Confirm by calling established customer phone # • Educate customer service and fraud interdiction staff • Educate customers about fraud risks
- 40. https://www.caseware.com/alessa/ • Funds movement methods keep evolving – faster than the regulations can keep up • Will wire transfers disappear soon? • Understand the mechanics of wire transfers – and all other funds movement methods • Out of pattern activity is the #1 red flag • Consider the synergies of a FRAML approach 40 Concluding Comments
- 41. https://www.caseware.com/alessa/ Understanding Wire Transfers and their Money Laundering and Fraud Risks Laurie Kelly, CAMS