INTERNATIONAL GRADUATE DIPLOMA IN FINANCIAL CRIME COMPLIANCE

CASE BASED APPROACH FOR MLROs

DOWLUTH MANSINGH

Cohort 2

26.02.2023
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TABLE OF CONTENTS

Question 1 ……………………………………….. 3

Question 2 ……………………………………….. 8

References ………………………………………. 12

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EXECUTIVE SUMMARY

It is a matter of great concern that Deutsche Bank was fined $150 million in 2020
by the New York State Department of Financial Services for compliance
failures related to client Jeffrey Epstein sex trafficking enterprise, and
correspondent banks.

Transaction monitoring of such activity is important because financial crimes are

becoming fast because they have the latest technology, and resources to stay one
step ahead of law enforcement efforts. Compliance teams need more time to
investigate and prevent money laundering, more often than not and are
understaffed, bogged down by innumerable regulations etc.

Proper monitoring process would help the bank understand client activities from
deposits to withdrawals and wire transfers which will ultimately helps the bank
stay afloat with criminal methodologies while satisfying compliance
requirements.

The bank must design its AML transaction monitoring structure to track this type
of activity at the very soonest. Generally, the structure should be built based on
FAFT recommendations and the bank is expected to take a risk-based approach.
This approach states that the bank need to perform individual assessments on

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customers and then carry out the recommended compliance steps proportionate to
the risk the customer poses.

Risk-based approach for transaction monitoring will depend on how well the bank
will be able to accurately build its customer's risk profiles.

However, the transaction monitoring process should generally include the

following steps in order to avoid problems like Epstein and the Deutsche Bank.

1. Employee Screening

Regulations 22(1) (b) requires maintaining high standards when hiring

employees.

On joining the bank - appropriate level of AML/CFT induction training, or

a written explanation, is recommended to all new employees, board
members and senior management, before they become actively involved in
operations because in the Deutsche Bank case, the Senior Management, the
Compliance Officer and the Relationship Manager too were involved
supporting Epstein.

2. Customer Due Diligence

Customer due diligence (CDD) is the first and most important stage of
transaction monitoring to help banks understand and access custom risk
profiles. CDD involves proportionate “KYC” to help verify customers'
identities. Essentially, the bank collects identity information from
customers including their names, date of birth, address, company details
and relevant government-approved IDs.

3. Sanction Screening

At this stage, the bank will have to screen its customers against global
sanctions and watch lists. This is to ensure that the bank is not conducting
business with an individual, entities or countries including that are under
sanction(s) because Epstein and his representatives used bank accounts to

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send dozens of wires directly or indirectly including 18 wires to the

conspirators and Epstein related trust named, Butterfly Trust accounts over
120 wires totaling $ 2.65 million to beneficiaries. For example: Money
transfer to women in Russian Bank.

4. Politically Exposed Persons (PEP) Screening

Politically Exposed Persons are individuals that pose a higher risk of

AML/CFT activities. The Deutsche Bank did not classify Epstein as
“PEP” but designated him as “Honorary PEP” due to personal
relationship with the former U.S Presidents, Politicians billionaires, British
Royalty and had backing of powerful banking institutions. The bank must
scrutinize the accounts for the kinds of activity that are obviously
implicated by any client’s past. Moreover, as part of these obligations, the
bank is expected to identify and monitor the activity for unusual or
suspicious transactions when carrying business and should screen such
individuals appropriately and on an ongoing basis to establish their PEP
status.

5. Adverse Media Monitoring

This stage involves monitoring adverse media stories of customers to

ensure their risk profile remains accurate. Avenues to monitor include
print, screen and relevant online sources. Adverse media monitoring is
important because the risk level associated with a certain transaction may
be affected by a customer’s involvement in detrimental media stories. For
e.g. even extensive publicity of Epstein illegal sexual activities in 2013, the
Deutsche Bank knowingly and intentionally assisting him in sex
trafficking.

6. Training

The specific problem is that human trafficking involves front companies

who hide their true business nature, making it difficult to detect through

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transaction monitoring and money is funneled through accounts using

techniques that often avoid transaction alerts set by financial institutions
(FinCEN, 2020). Therefore, research and training on front company
scenarios hiding human trafficking crimes can improve the success rate of
detecting related transactions.

The bank must train staff to be on the front lines of fighting human
trafficking by spotting telltale signs which includes watching the body
language of people who walk into the branch even if they are not a
customer.

7. Transaction Monitoring Software

The amount of data which is involved in the transaction monitoring

process, means that manual transaction monitoring is unfeasible and, given
the likelihood of human error, risky. With that in mind, the bank should
implement a suitable software platform to facilitate their transaction
monitoring process.

Automated monitoring tools not only add speed, efficiency, and accuracy
to transaction monitoring in the bank, but will also bring added smart
technology benefits including risk categorization and prioritization
algorithms designed to aid the remediation of money laundering alerts.
Transaction monitoring software may also incorporate machine learning
systems that are capable of spotting suspicious activity based on
customers’ past behavior like Epstein sex venture, and of adapting quickly
to new criminal methodologies.

8. Structuring

However, we have other banking challenge like structuring. That is in

order to avoid regulatory reporting thresholds, money launderers may seek
to transact in specific amounts of money just below those designated
limits. Money launderers may use structured transactions across multiple

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different accounts to further conceal their criminal strategy which need to

be considered as well.

9. Compliance Officer

Finally, the Compliance Officer must comply with the AML guidelines to
detect and report such crime, operate within the regulatory framework,
keep reputational risks at a minimum, expose culprits and have an
obligation to file suspicious activity reports and not like the one in
Deutsche Bank.

Information to Management

Ensures there are a proper audit trail, foster sound supervisory reporting where
necessary and support criminal prosecutions for such activity. All information
obtained through client and transaction due diligence must be recorded and
documented, including the inputting of transcripts into the bank’s information
technology systems. Recorded information should be retained for at least five
years.

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RED FLAGS

With respect to red flags, no single clear indicator of trafficking activity, although
each can be indicative of trafficking (LexisNexis.com, 2022). Given that sex
trafficking is a predicate offense to money laundering, the financial red flags also
may be indicative of other money laundering related offenses.

Banks should consider additional factors, such as a customer’s previous financial

activity when determining whether transactions may be associated with trafficking
like the Deutsche Bank and Epstein sex-trafficking venture.

Common behavioral red flags for financial institutions include:

1. Media coverage of account holder’s activities relating to human

trafficking in the sex trade and/or prostitution rings.

Like during the KYC, even extensive publicity of Epstein’s sexual activity,
Deutsche Bank allowed him to open many accounts for illegitimate
companies ignoring blatant red flags and also allowing him to transfer and
access abundant cash without questioning in direct violation to the law.

2. Various accounts

The bank knowingly enabling Epstein to make payments to these victims

including directly or indirectly Jane Doe 1and others while obtaining large
sums of cash from various accounts to finance his sex-trafficking.

3. Account is funded primarily via cash deposits

Like the Deutsche Bank was providing financial underpinnings to have

ready and reliable access to cash to recruit, enticing young women and
girls to be sexually abused.

4. Each client relationship at intervals commensurate to the AML risks

posed by the client.

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This includes reviewing activity if still fits the nature of the account and if
new information or unexpected account activity is identified need to be re-
assessed. But in the Deutsche Bank case, this was not carried out. The
bank instead of making enquiries to entity who had been associated with
his client if had retired from his illegal trafficking operation, found it not
important.

5. Wire transfers

To keep below $3,000 or $10,000 in an effort to avoid recordkeeping

requirements or to evade Currency Transaction Reports (CTRs)
(recruitment, transportation, exploitation stages). Frequent outbound wire
transfers, with no apparent business or lawful purpose, directed to
countries with a higher risk for human trafficking or to countries
inconsistent with the customer’s expected activity (recruitment,
transportation, exploitation stages).

6. Transactions conducted in an area suspected to be a sex trafficking

location.

Like through an email, the CO submitted an enquiry to the Relationship

Manager of Deutsche Bank about a payment to the accounts of women
with Eastern European surnames at a Russian Bank and asking for an
explanation of the purpose of the wire transaction and the relationship
with the counterpart. In response to the Compliance Officer which read
“SENT TO A FRIEND FOR TUITION”. The Officer did not ask any
further follow-up questions and the transaction was cleared.

7. Trading limits

On July 21, 2015 Epstein again requested Deutsche Bank to increase his
trading limits and same was awarded without any problem.

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8. Sex-traffickers routinely establish and use front companies, sometimes

legal entities to hide the true nature of a business and its illicit
activities.

Like Epstein Accountant who requested to open a brokerage account for

Gratitude America and without running a due diligence the account was
freely opened.

9. Sometimes it becomes difficult to for the AML Officer and the bank to
identify red flags.

Therefore, human behavior, facial expressions, conduct and even their

explanations might help. For example: When the Attorney – 1 withdrew $
100,000 in cash on behalf of Epstein, he was questioned and the
explanation was not credible on his face.

In addition a customer establishes an account or conducts transactions

while always escorted by a third party under the pretext of requiring an
interpreter.

10. Alternative payment methods like debits/credits inconsistent with the

customer’s expected activity or occupation.

These transactions may lack a business or apparent lawful

purpose (recruitment, transportation, exploitation stages). Buyers of
commercial sex use prepaid cards, a method of payment using funds paid
in advance, which can be acquired anonymously or with cash or on dark
net websites to register with escort websites and to purchase sexual
services.

11. Frequent payments

Like online escort services for advertising (exploitation stage) and frequent
transactions inconsistent with expected activity and/or line of business

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such as payments for housing, lodging, regular vehicle rentals, and/or

purchases of large amounts of food (transportation, exploitation stages).

12. Common information

For example: address, phone number, employment information) used to

open multiple accounts in different names (exploitation stage).

Least but not last, frequent cash deposits made via an ATM rather than with a
cashier, sometimes followed by ATM withdrawals in a different location and
analysis of ATM activity shows that their ATM usage often occurred at the same
machine at the same time suggesting that a third party is in control of their cards.

References:

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 AML/CFT Handbook
 Guidelines Bank of Mauritius
 FATF Recommendations 2012
 Jane Doe1 v Deutsche Bank
 LexisNexis, Risk Solutions

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