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Financial Crime Wave – Regtech rescue, AML officer gets three years, ransomware attack, and more

Thursday, May 18, 2017   (0 Comments)
Posted by: Brian Monroe
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By Brian Monroe
May 18, 2017

In this week’s Financial Crime Wave, banks are hoping “regtech” will come to the rescue in the face of rising geopolitical risks, a federal judge sentences a former anti-money laundering (AML) officer to three years in prison for abusing her power and stealing $1.8 million from mostly elderly customers, a judge pleads guilty in half a billion dollar healthcare fraud scheme, and more.


Regtech to the rescue as banks broadly say they must rely more on technology to handle rising geopolitical risks

Banks have not had an easy time in recent years on the financial crime compliance front: squeezing on all sides from rising exam pressures and penalties, more law enforcement scrutiny and liability and in many cases falling program budgets. That could be why some 75 percent of anti-money laundering (AML) professionals believe they must rely more on technology to help them comply with complex and data heavy regulations in rising landscape of geopolitical risk, according to a new survey. So while your ears may still be ringing from the buzzword fintech, get ready to hear, obey and adopt another moniker: regtech, as it might be coming to your rescue.

That is the catchall term for tech firms that, as it says, helps banks comply with federal regulations to counter financial crimes, fraudsters and terrorists and keep rogue regimes and their supporters out of the internatioan financial system. To address these risks, more than half (54%) of respondents are planning to increase their investment in RegTech in the next three to five years, as the majority (59%) say technology has improved their company's ability to tackle AML, KYC and sanctions requirements. The annual survey - comprised of responses from more than 500 compliance and anti-money laundering professionals around the world - assesses the current regulatory environment and the impact of new regulation on international and regional banks' compliance departments, (via Finextra).

Indivial liability

Federal judge sentences former Maryland AML officer to three years in prison for stealing nearly $2 million from customers

A federal judge last week sentenced a former anti-money laundering (AML) compliance officer who worked at a Maryland bank to three years in prison for stealing $1.8 million from customer over a six year period. Melissa Strohman, 54, also must pay restitution of $1.6 million as part of the sentence, which includes three years of supervised release. From April 2010 through July 2016, Strohman, also a senior vice president, was responsible for managing the bank’s savings department, including overseeing deposits and Individual Retirement Accounts for every customer. She was responsible for filing Currency Transaction Reports and Suspicious Activity Reports for any transactions that were deemed to be suspicious or potentially illegal.

Strohman admitted that she used her position of trust at the bank to cause more than 200 unauthorized transfers and withdrawals of funds from six customers’ bank accounts to pay for mortgages, credit card bills and property tax bills associated with Strohman and her family members. Three of the six victim customers were at least 80 years old, and for two of the accounts the customers were deceased. For example, Strohman used her supervisory override function on the bank’s electronic banking system to facilitate unauthorized transfers between the victim customers’ accounts to accounts associated with Strohman; forged the signature of one victim customer in order to complete an unauthorized transaction from that person’s bank account to an American Express account associated with Strohman; and caused unauthorized transfers of funds between the victim customers’ accounts to replace the monies Strohman stole and to conceal those thefts, (via DOJ).


Judge pleads guilty for playing key role in a more than half a billion-dollar disability fraud scheme

A former administrative law judge for the Social Security Administration (SSA) pleaded guilty in federal court for fraudulently obtaining more than $550 million in federal disability payments from the SSA for thousands of claimants. David Black Daugherty, 81, of Myrtle Beach, South Carolina, pleaded guilty before U.S. District Judge Danny C. Reeves of the Eastern District of Kentucky to an information charging him with two counts of receiving illegal gratuities. Sentencing is set for Aug. 25, 2017. Daugherty was an administrative law judge at the Social Security hearing office in Huntington, West Virginia (Huntington Hearing Office) for more than 20 years, where his primary responsibility was to adjudicate disability claims on behalf of the SSA.

But from November 2004 to April 2011, Daugherty accepted more than $609,000 in cash payments, total, in more than 3,100 cases from Social Security disability lawyer, Eric Christopher Conn, of Pikeville, Kentucky, for awarding disability benefits to claimants represented by Conn. To conceal the source of these cash payments, Daugherty divided cash deposits into various bank branches and accounts, he admitted. Daugherty admitted that he sought out Conn’s cases pending with the Huntington Hearing Office, contacted Conn and told him what type of medical evidence to submit in support of disability findings and then awarded benefits to claimants represented by Conn without holding hearings. As a result, Conn ultimately received at least $7.1 million in representative fees from the SSA, and Daugherty further obligated the SSA to pay more than $550 million in lifetime benefits to claimants, according to the plea, (via the U.S. DOJ).


Under U.S. Justice Department foreign corruption self-reporting program, more companies willing to come clean for deep penalty discounts

The U.S. Foreign Corrupt Practices Act is not dead yet, and is actually seeing a resurgence in self-reporting, a trend that, while potentially bringing down individualy penalties due to transparency discounts, could actually increase overall enforcement figures. In fact, the Justice Department pilot program offering leniency to companies that self-report violations of a federal foreign bribery law has led to more of them coming forward, a top DOJ official said May 12. In the program’s first year, 22 companies voluntarily disclosed violations, up from 13 the year before, Andrew Weissmann, chief of DOJ’s Fraud Division, said during a Practising Law Institute panel in New York that was also webcast. The program kicked off in April 2016 and was originally scheduled for a year, but the Justice Department announced in March that it will continue indefinitely.

Companies that self-disclosed violations of the Foreign Corrupt Practices Act either weren’t prosecuted or entered into nonprosecution agreements, Weissmann said. They didn’t face deferred prosecution agreements, guilty pleas or monitors, unlike the large majority of companies that didn’t proactively disclose violations. President Donald Trump has called the FCPA a “horrible law,” which has led some attorneys to speculate that his administration’s crime-fighting officials would dial back Obama administration efforts to build cases around indirect hiring and other practices that aren’t fully in line with the law’s core prohibitions. In the meantime, however, FCPA investigations are continuing. Jay Clayton, the new chairman of the Securities and Exchange Commission, has indicated support for the law during his confirmation process, calling it a “powerful and effective tool.” Similarly, Attorney General Jeff Sessions said in a speech April 24 the Justice Department will “strongly enforce the FCPA and other anti-corruption laws,” (via Bloomberg BNA).

CFT/Virtual currency

Congress looking at intersection of terror financing, virtual currency

The U.S. Congress is planning to study how terror groups, their financiers and facilitators use virtual currency to carry out global attacks and potential intersections with the real world and the United States, (via Coin Desk).

Money laundering

EU still hemming, hawing over AML blacklist, with parliament again putting kibosh on initative

The European Union Parliament is still wrestling with the publication of an anti-money laundering blacklist, again rejecting the publication of such a list – that currently relies heavily on the findings of global watchdog body, the Paris-based Financial Action Task Force, until the bloc can find a more independent, autonomous way to create such a risk-weighted list, (via the EU Reporter).


U.S. trading self-regulatory body nears more guidance on AML penalty ranges

Lack of Finra guidance on AML penalty ranges makes it harder for firms to determine appropriate program focal points, fine exposure for failures, says one analyst, (via Lexology).

Virtual currency

Blockchain could put a major dent in fraud, but won’t be the proverbial silver bullet

Will blockchain finally end fraud as we know it, with its potential to have an immutable, transparent ledger of everything from financial transactions to intellectual property? While the tech underlying Bitcoin can help, it won’t be a “silver bullet,” says one analyst, (via Banking Tech).


Historic ransomware attack puts more scrutiny, heaps more criticism onto U.S. spy agency that unwittingly potentially provided tools for attack

An unprecedented global cyber attack that infected computers in at least 150 countries beginning on Friday has unleashed a new wave of criticism of the U.S. National Security Agency, which, unwittingly, may have given scammers the tools for the attack after getting hacked themselves. The attack was made possible by a flaw in Microsoft's Windows software that the NSA used to build a hacking tool for its own use - only to have that tool and others end up in the hands of a mysterious group called the Shadow Brokers, which then published them online. Microsoft Corp President Brad Smith sharply criticized the U.S. government on Sunday for "stockpiling" software flaws that it often cannot protect, citing recent leaks of both NSA and CIA hacking tools.

"Repeatedly, exploits in the hands of governments have leaked into the public domain and caused widespread damage," Smith wrote in a blog post. "An equivalent scenario with conventional weapons would be the U.S. military having some of its Tomahawk missiles stolen." Some other technology industry executives said privately that it reflected a widely held view in Silicon Valley that the U.S. government is too willing to jeopardize internet security in order to preserve offensive cyber capabilities, (via Reuters).

The Wannacry ransomware attack could be the final straw that prods banks, fintech firms to bolster cyber defenses

The global WannaCry ransomware attack could be the clarion call the financial sector needed to take these and other cyber threats more seriously, as some institutions still have networks with unpatched systems or have not sufficiently trained their staff about phishing and other attacks – the critical human element where most virtual incursions originate. The WannaCry ransomware was a backdoor attack on Microsoft Office, through a vulnerability that was fixed with a patch back in March - but many hadn’t yet installed the update. That will continue to be a communication challenge for businesses, but an even greater risk lies in ‘zero-day’ vulnerabilities which are previously unknown - meaning they are, in a way, unpreventable. That’s a huge risk to banks and fintech entrants, and importantly the global financial system itself.

This is an ongoing threat for major banks. And yet, they have been warned. Last year, the US Federal Financial Institutions Examination Council pointed out a sharp rise in ransomware attacks, and the implications for financial services - ransomware attacks on businesses increased three-fold last year, from an attack every two minutes to one every 40 seconds. These types of attacks have seen hackers convince those affected that the attack is because of an official government sanction, using official government logos and demanding fines for ‘noncompliance’. It’s one of a range of techniques that cybercriminals are now using to extort financial institutions. And of course, a tough end to last week for Barclays' Jes Staley showed that even the most senior bankers are not immune to cyber threats and hoaxes, (via City AM).

Savvy cyber researchers in U.S., U.K. uncover, cripple global ransomware attack

A global ransomware attack over the weekend hit healthcare, banks and government facilities in the United States, United Kingdom, Russian and other countries, but could have been much worse were it not for cyber quick thinking by U.S. and U.K. cyber experts, according to reports. The cyberattack that spread malicious software around the world was stemmed by a young British researcher and an inexpensive domain registration, with help from another 20-something security engineer in the U.S.

Britain's National Cyber Security Center and others were hailing the cybersecurity researcher, a 22-year-old identified online only as MalwareTech, who — unintentionally at first — discovered a "kill switch" that halted the unprecedented outbreak. By then, the "ransomware" attack had hobbled Britain's hospital network and computer systems in several countries, in an effort to extort money from computer users. But the researcher's actions may have saved companies and governments millions of dollars and slowed the outbreak before computers in the U.S. were more widely affected, (via the Associated Press).

Just a few weeks before global ransomware attack, FBI releases BEC red flags, in recent years hits $5 billion in losses

The U.S. Federal Bureau of Investigations (FBI) is warning companies anew – ironically just weeks before the largest global ransomware attack in history – about the surging scourge of business email compromise fraud, a devious attack technique that can bypass the most sophisticated cyber defenses because it relies on simple human error, such as someone answering an email that seems to come from a boss to send a wire to a new address for a longtime supplier. Business E-mail Compromise (BEC) is defined as a sophisticated scam targeting businesses working with foreign suppliers and/or businesses that regularly perform wire transfer payments. The E-mail Account Compromise (EAC) component of BEC targets individuals that perform wire transfer payments.

Most victims report using wire transfers as a common method of transferring funds for business purposes; however, some victims report using checks as a common method of payment. The fraudsters will use the method most commonly associated with their victim’s normal business practices. The scam has evolved to include the compromising of legitimate business e-mail accounts and requesting Personally Identifiable Information (PII) or Wage and Tax Statement (W-2) forms for employees, and may not always be associated with a request for transfer of funds. Some individuals reported being a victim of various Scareware or Ransomware cyber intrusions immediately preceding a BEC incident. These intrusions can initially be facilitated through a phishing scam in which a victim receives an e-mail from a seemingly legitimate source that contains a malicious link. The victim clicks on the link, and it downloads malware, allowing the subject(s) unfettered access to the victim’s data, including passwords or financial account information. The following BEC/EAC statistics were reported to the IC3 and are derived from multiple sources, including IC3 and international law enforcement complaint data and filings from financial institutions between October 2013 and December 2016:

Domestic and international incidents:


Domestic and international exposed dollar loss:


Total U.S. victims:


Total U.S. exposed dollar loss:


Total non-U.S. victims:


Total non-U.S. exposed dollar loss:


Banks are also a prime target. The following statistics were reported in victim complaints to theIC3fromJune 2016 to December 2016:

Total U.S. financial recipients:


Total U.S. financial recipient exposed dollar loss:


Total non-U.S. financial recipients:


Total non-U.S. financial recipient exposed dollar loss:


The attacks put banks under even more pressure for cyber countermeasures and compliance convergence, (via FBI).


Analysis and opinion – Are banks unfairly burdened with responsibility to ferret out trade-based money laundering schemes?

Banks are in a tough position when it comes to uncovering trade-based money laundering (TBML) schemes. They are under more pressure from regulators to uncover all types of financial crime, including laundering through trade, even though they don’t always have access to all of the pieces of the puzzle, or must make special requests in trade deals to uncover instances of potential under or over-invoicing – the hallmark of illicit activity in that sector. TBML has received an increasing amount of attention from the media and lawmakers in the past couple of years, uses international trade to disguise and transfer the fruits of illegal activity.

Trade misinvoicing, for example, helps fund up to $2.2 trillion a year, according to a March 2017 study by Global Financial Integrity (GFI). Banks are a crucial link in the physical and financial supply chain that handles illicit trade – but they are only one component. Exporters, importers, freight forwarders, shippers, ports and customs authorities are all interlinked parts of this ecosystem, all contributing to trade in one way or another. Why, then, does it seem like regulators are placing the burden of combatting TBML solely on banks? (via Global Trade Review).

Compliance/Info sharing

Can U.S. banks follow Aussie pals in sharing real time data on illicit actions?

An anti-money laundering partnership between Australia’s big four banks and the continent’s government designed to share more information in real time is getting good reviews but probably isn’t exportable to the U.S., several lawyers and consultants said, (via Bloomberg BNA).


AI could help make AML analysts more effective, rather than dispensable

In the inescapable intersection of AML and robotics, fear not, as the new technology could enhance your stable of analysts, not replace them wholesale, says one expert, (via FinExtra).

Tax evasion/fraud

U.S penalizes real estate firm nearly $6 million for laundering proceeds tied to Magnitsky Russian tax fraud

The U.S. Department of Justice (DOJ) fined real estate corporation Prevezon Holdings $5.9 million, which is actually triple the amount of proceeds directly traceable to the firm, for being part of a group of companies that laundered the fruits of a $230 million tax refund fraud scheme orchestrated by corrupt Russian officials. The case was uncovered by Russian lawyer Sergei Magnitsky, who later died in pretrial detention – ironically accused by the graft-gilt officials of being behind the fraud – in Moscow under suspicious circumstances. In a final act of ignoble infamy, and likely in a bid to tarnish the standup attorney’s good name, the Russian government posthumously prosecuted Magnitsky.  In 2007, a Russian criminal organization engaged in an elaborate tax refund fraud scheme resulting in a fraudulently obtained tax refund of approximately $230 million from the Russian treasury. As part of the fraud scheme, members of the organization stole the corporate identities of portfolio companies of the Hermitage Fund, a foreign investment fund operating in Russia. The organization’s members then used these stolen identities to make fraudulent claims for tax refunds.

In order to procure the refunds, the criminal organization fraudulently re-registered the Hermitage companies in the names of members of the organization, and then orchestrated sham lawsuits against these companies. These sham lawsuits involved members of the organization as both the plaintiffs (representing sham commercial counterparties suing the Hermitage companies) and the defendants (purporting to represent the Hermitage companies). In each case, the members of the organization purporting to represent the Hermitage companies confessed full liability in court, leading the courts to award large money judgments to the plaintiffs. The purpose of the sham lawsuits was to fraudulently generate money judgments against the Hermitage companies. Members of the organization purporting to represent the Hermitage companies then used those money judgments to seek tax refunds. The basis of these refund requests was that the money judgments constituted losses eliminating the profits the Hermitage companies had earned, and thus the Hermitage companies were entitled to a refund of the taxes that had been paid on these profits. The requested refunds totaled 5.4 billion rubles, or approximately $230 million. Members of the organization who were officials at two Russian tax offices corruptly approved the requests within one business day, and approximately $230 million was disbursed to members of the organization, purportedly on behalf of the Hermitage companies, two days later, (via the U.S. Justice Department).

Cybersecurity/virtual currency

How to manage Bitcoin, the hackers’ currency of the realm?

In the wake of global hack attack Wannacry, should Bitcoin be banned or, at the very least, become a beacon of transparency, rather than a den of iniquity through anonymity, (via Pymnts).


Will BVI bank catering to de-risked entities be savior or pariah in AML ecosystem?

A former acquisitions lawyer is attempting to create a bank in the British Virgin Islands that will service offshore companies, many of them from China, currently locked out of the global banking system by large U.S. and international banks due to blanket de-risking by these operations to shed clients that could bring too much regulatory scrutiny, (via Bloomberg).

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