Understanding Beneficial Ownership Key To Catching Money Launderers, Dominions Caruso Says

David Caruso says banks should pay more attention to beneficial ownership issues. The managing director of Dominion Advisory Group, which designs and implements anti- money laundering (AML) programs for financial institutions, believes that knowing the sources of funds for an account or transaction is fundamental to anti-money laundering and anti-terror financing efforts. A former special agent with the U.S. Secret Service, Caruso managed the AML and enhanced due diligence group at JP Morgan & Co., served at two major U.S. accounting firms as a director in charge of anti-money laundering compliance and fraud investigations, and was tapped to head compliance and security for Riggs Bank in June 2003, after federal regulators said the bank failed to file suspicious activity reports on transactions through accounts owned by international political leaders.

Caruso, who launched Dominion Advisory Group in July 2005, spoke with Fortent Inform Editor-in-Chief Kieran Beer about beneficial ownership. Below is an edited transcript of his remarks.

These Accounts Are Also Likely To Get Attention Because They're Used For Tax Evasion, Aren't They?

Regulatory agencies often respond to issues that are the focus of Congress, and the off- shore tax shelter issue was the focus of hearings. It was a fairly bipartisan witch hunt. I have seen examiners begin to inquire with banks on specific investigations whether or not banks hold the view that it could be some sort of off-shore tax scheme. That presents an enormous challenge for financial institutions, because if you read through some of the hearing transcripts, you begin to understand the complexity of what's involved in these tax schemes. To expect financial institutions to have the same people with the knowledge and expertise to file SAR's to also know if something is a tax evasion scheme, is a bridge too far for regulators to press for. Even the best fraud and money laundering investigators I've ever met, very few of them are schooled in tax law.

But It Seems Like Bankers, Both Retail And Commercial, Would Be Suspicious Of The Inflow Of Large Amounts Of Money From Strange Companies.

Smart money launderers are not going to go crazy running millions of dollars through the accounts, but if they realize how easy it was to open one account, they'll decide to open five or six more at different branches and different banks. The motivation is to have as many of these accounts as possible, because the launderers and the terror financiers are aware of the detection system. They understand the concept that if you do too much cash or too many large wire transfers, these systems are likely to identify that. In that regard the good ones engage in moderate transaction amounts.

It's very difficult and time consuming to get a lot of cash into the U.S. banking system. Normally the issue of bearer share companies and companies like that are involved in the second stage of money laundering, the layering process, which is that the funds have been deposited elsewhere, often offshore where the regulatory requirements don't exist, aren't enforced, or are light. The funds, once in the banking system of that other country, either are wired in or deposited via checks into U.S. accounts. The criminals are aware that large cash deposits are unwise, especially in the retail banking system.

Wires from the British Virgin Islands are easy to detect because under the wire rules, the originating banks name and location must appear in one of the data fields. Most banks systems capture that, and it can be used to generate reports. They can say, we want to see all wires from the British Virgin Islands. But its difficult to keep track of check deposits. So if you're smart, you would use cashiers checks or counter checks from these banks. You would be the bank of first depositsay ABC bank in Kentucky. You receive the check, and the teller may not notice or care and puts it into the teller drawer. At the end of the day it gets sent to the operations facility, and overnight the operations facility enters it into the Fed clearing system, and they put their stamp on it as the bank of first deposit, and so begins the process of check clearing. Now with Check 21, the Federal Reserve check clearing system, the image of that check is presented and the network and I don't know all the details but the network knows which correspondent it goes to. And that Kentucky bank can collect its funds from whichever U.S. bank in the Fed system is a correspondent to that British Virgin Islands bank. Its just one of millions and millions of checks cleared every night. And if were smart, we've go six of these accounts and the checks that were doing are $15,000 or $20,000 dollars, nothing crazy. Over time, well increase that amount, because so many banks have systems that profile their customers and if they have an account that does $50,000 or $60,000 a week in activity, they come to expect that amount of activity and it doesn't trip any alarms. And for a business that's not necessarily a lot of money.

If you were to interview any seasoned law enforcement money laundering investigator someone from the Federal Bureau of Investigation, Secret Service, U.S. Customs Service, or whoever and ask them about significant money laundering cases they've investigated, I would be shocked if, in those investigations, the disguising of beneficial owners was not a paramount issue. And, I've heard law enforcement express skepticism about this whole concept of disguising beneficial owners of shell companies. They approach it that there is something wrong here because it has the earmarks of a company set up in a jurisdiction whose purpose is to disguise beneficial ownership. In fact, it's not the majority of cases. For the most part these are vehicles that are legally established for legal transactions and the people establishing them get their money legitimately.

Are There Tell Signs Banks Should Also Watch For?

Clever money laundering schemes involving beneficial ownership have lots of similarities. They are usually opened as far away from a head office as possible, because traditionally the compliance resources are all located in the headquarters of an institution. The further you get away from the head office, the more likely there are to be weaknesses in the internal controls. There isn't the number of permanent compliance staffers in these places that there are in the head office, and sometimes there are even time zone differences to exploit. The branch office far from the head office can have a hard time communicating, even calling up to ask a question. A branch in Manhattan can call a compliance officer at the Manhattan headquarters to get help. That's not the case if you're in an office six or seven hours away from the compliance resources, and the criminals know this.

The ABN Amro case, which involved a lot of Russian fraud, was perpetrated by the use of domestic shell corporations Kentucky, South Dakota and Oklahoma companies that opened accounts at LaSalle Bank branches in relatively small or mid-sized cities in the Midwest. Most of ABN's compliance resources are in New York or Chicago. They're not necessarily looking at these branches, which by and large tend to have low-risk types of customers. It's a suburban or ex-urban community and here comes a small business, because that's what the people opening these accounts purport to be.

Training corporate or commercial bankers is easy because they are generally in a handful of locations, work closely with one another and have similar systems. But the nature of retail banking is that you have high turnover and the ability of organizations to keep their people trained on issues like beneficial ownership, which is a complex issue, is limited. The person who opened accounts in the Peoria branch yesterday isn't there today and you have to train somebody new, who leaves two months later or who gets promoted two months later because of employee turnover.

So What Should Banks Do?

There have to be direct questions to people who open the accounts. We need to see their identities in some way. We need to have that information in our system and, if nothing else, be able to perform some basic data checks through public records. I know a lot of institutions that don't even ask for that information.

Banks should also try to understand the underlying nature of the business opening an account, because most shell corporations don't have an underlying business. They're just vehicles to pass the funds through. Banks should obtain some sort of verifiable information that this so-called business produces something. What is the product or, if it's a service, what is the service they provide? Do they support call center operations? Then banks can try to find some kind of verifiable evidence of that. The banks need to ask directly, why do you want to move funds and what is the origin of the funds? How were they earned? Where do they come?

This involves seeing that people charged with opening accounts have the proper training, something were often asked to do. While you can give them a list of questions to ask, the bankers have to understand why they're asking these questions: to identify risk and help determine if the bank wants to absorb these risks.