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Scams and hot topics in money laundering

By Jeniffer Morrison, VP, Senior Risk Manager

This month, I’d like to share a couple of topical scams and money laundering themes you might pass along to your credit union team. Some of the following will be familiar while some of these topics, schemes and scams may be new to you and your team.

Fantasy sports and money laundering

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I “bet” many of you participate in an office pool or even engage in fantasy football, basketball or baseball leagues, among other sports, throughout the year. Daily fantasy sports’ (DFS) largest competitors are DraftKings and FanDuel, both of which came under recent scrutiny by some states as to their legality.

DFS companies are generally allowed to operate because DFS competitions are labeled “games of skill” versus “games of chance.” The latter is considered gambling and subject to federal, state and local law prohibitions, while “games of skill” are generally permissible. DFS companies have the support of professional sports and other well-respected companies, including direct investment by Major League Baseball, the NBA, various television and cable networks, and Google, among others.

Because DFS companies are not gambling establishments, they are excluded from FinCEN oversight. While this might one day change, it means financial institutions must provide anti-money laundering oversight, especially due to the large volume of funds moved through the DFS companies.

The money-laundering typologies for DFS follow:

  • High-value transactions
  • The ability to quickly receive payments from many users
  • Use of fake names and the creation of unverified accounts
  • Quick intake of funds and payment (FanDuel advertises same-day payments)
  • Option to set up head-to-head matchups where the outcome can be easily rigged
  • The ability to easily use and repeat the same money laundering scheme
  • Worldwide reach via the Internet

The DFS websites allow entry into multiple, high-dollar-value, single-day, head-to-head contests against only one other player, who can be specifically selected, for example.

DFS “red flags” are similar to those seen in illegal gambling. These red flags include:

  • Large funds flowing in and out of accounts deemed as inconsistent with the member’s stated profession or job
  • Internet-based transfers of funds (ACH via WEB, RCC’s, credit and debit card payments).
  • Sports betting can also be identified by transactions in advance of “big games,” relative to sports schedules, etc. Internet gaming is illegal, including off-shore transfers and activities.

Keeping in mind that recreational, fantasy sports wagers are generally legal, ensure your credit union has the tools and monitoring necessary to identify transactions coming from DFS companies, as well as the ability to identify money laundering conducted via MFS companies that should result in a SAR filing. This requires credit unions to aggregate transactions, perhaps involving a number of members and their accounts. Investigate any consistent or routine winning as possible money laundering.

When you identify payments to or from a DFS company, you should institute enhanced due diligence (EDD) on the member. Is it legal in your state for the member to engage in fantasy sports? If not, update your controls to block transactions associated with these sites, and file the SAR (and notify law enforcement).

Also ensure that you are not unwittingly serving a company engaged in MFS. If you choose to serve a company engaged in MFS, make sure that it is consistent with your risk appetite, that you understand the laws where MFS is prohibited, and that you conduct EDD on an ongoing basis.

Domestic PEPs

BSA/AML professionals should already be well-acquainted with the risks and EDD required when conducting business with foreign, politically exposed persons (PEPs), but what about domestic PEPs?

Crimes associated with political corruption come in many forms and may reveal themselves through specific transactions or an aggregate of all activity. Examples include blackmail, bribery, collusion, conflict of interest, embezzlement, extortion, fraud, larceny, and patronage, among others.

Unfortunately, the news is full of those who violate the public trust, from a series of former Illinois governors (Ryan, Blagojevich), a former NY state attorney general (Spitzer), a former Speaker of the House (Hastert), and US and state congresspersons (Calderon, Renzi, Grimm, Schock). The breaches can be at the local level too, such as former Illinois Comptroller Rita Crundwell, who was ultimately found guilty of embezzling more than $54 million over a 20-year period from the town’s treasury to establish her lavish lifestyle.

The BSA/AML challenges are two-fold.

  • First, you must identify the PEPs among your membership. Public records searches are key, noting what was previously stated here: You cannot conduct new account due diligence and stop there. Regularly review your membership with public records searches, perhaps following elections in May and November each year.
  • Second, consider that domestic PEPs arguably merit the same degree of due diligence as foreign PEPs. Although these individuals are trusted members of your membership and community, causing you to want to deem these persons to be “lower risk,” domestic PEPs cannot be excluded from your risk assessment practices applied on your higher- risk members. Politicians operate (generally) in full public view; however, politicians’ inherent exposure to opportunities for potential abuse of their position and illicit influence from outside parties cannot be overlooked. These facts alone may warrant the designation of domestic PEPs in your membership as “higher risk,” requiring EDD.

    Relatives and close associates of foreign officials are themselves also deemed to be PEPs.

Similarly, be aware of new and existing relationships within your membership tied to domestic PEPs, including named beneficiaries, associated parties, and entities. News media and Web searches can be helpful in identifying associates of domestic PEPs. Also, consider addressing PEPs in your Member Identification Program (MIP) at account opening with a question for your new member (i.e. Are you a public official, a family member of a public official, or an associate of a public official?)

The U.S. government and law enforcement officials rely on financial institutions like ours to be that “first line of defense” to alert the U.S. Treasury of potential misuse and abuse of the financial system.