How Organized Crime Uses Banks

Institutions Can Cut Money Supply with Stronger Controls

New sanctions from the U.S. Treasury aimed at organized crime will affect how banks and credit unions monitor and thwart fraudulent financial transactions.

In fact, fraud and anti-money-laundering experts at Ernst & Young say the President's Executive Order 13581 will affect a number of financial monitoring practices, especially those involving international transactions.

"There's opportunity for banks to think creatively in terms of really looking at transactions that might create a hit on some sort of watch list," says David Nussenbaum, who leads E&Y's fraud control advisory and implementation practice.

Order 13581, signed in July 2011, highlights the connection between financial services and international crime [See 4 Crime Rings to Watch].

Banks and credit unions also have to remember that international crime goes beyond mere money laundering. "These people are committing fraud," says Nussenbaum in an interview with BankInfoSecurity's Tracy Kitten [transcript below]. "A hit on a sanctions list could lead to a variety of different reactions and counter measures."

Nussenbaum says, as an example, that fraud departments can adjust their detection engines to look for payments that are connected to suspected organized crime rings.

"The message is that we in the financial community have to have similar and, frankly, better levels of coordination, communication and technological innovation in order to comply and put a stop to some of the activity that's going on," Nussenbaum says.

During this interview, Nussenbaum, along with Brian Grant, formerly of the Department of Treasury, discuss:

  • What the President' Order means for banks and credit unions;
  • Four international crime groups sanctioned by the president; and
  • Why the integration of AML practices and fraud detection will become increasingly significant for banking institutions of all sizes.

Grant is a senior manager in E&Y's Fraud Investigation & Dispute Services practice, where he specializes in economic sanctions and anti-money laundering investigations and compliance. Before joining E&Y, he spent more than 10 years with the Department of the Treasury. While at the Treasury, Grant led a team of policy advisors who worked to implement strategies and policies to combat illicit financing. Before joining Treasury, he served as an International Trade Specialist at the U.S. Department of Commerce.

Nussenbaum is a subject matter expert in bank payments and financial crime management technology who has worked for major institutions in the global banking and telecommunications industries. At E&Y, he leads development and technology delivery to support E&Y's financial-services-focused fraud control advisory and implementation practice. Before joining E&Y, Nussenbaum was vice president of the fraud management software business at ACI Worldwide.

Organized Crime, International Style

TRACY KITTEN: Ernst and Young has been reviewing international organized crime trends for some time now. What can you tell us about the research and the reason Ernst and Young has identified organized crime as an international concern that needs attention?

DAVID NUSSENBAUM: First of all, let me say that Ernst and Young has a global 1200-person strong department called Fraud Investigations and Dispute Services. This is an organization that has extensive forensic and investigative skills and has a long history of investigating particular cases of fraud on behalf of clients in the financial sector and across many different industries. Within the last year or so, I've really taken an interest in the level of technical sophistication and organization that has been displayed when these rings have been busted. It was kind of that, more recently, where we really wanted to dig deeper into what's going on in some of these recent cases of financial crime against the banking industry.

By the way, I did read something recently that says, overall, globally organized crime brings in roughly $2 trillion a year, just a very broad estimate. How much of that is really coming out of bank accounts, consumer and corporate bank accounts? How much of that is actually being laundered through bank accounts in the financial system? That number is not exactly known by any means, but we believe it's a significant component of the $2 trillion.

The Top 4 Rings to Watch

KITTEN: Brian, The Department of Treasury has identified certain crime rings as being specifically concerning for financial services companies. What can you tell us about the Treasury's interest and the international crime cells the department has identified as posing concern?

BRIAN GRANT: I can tell you that the Treasury Department is very interested in using the financial tools that it has in its tool box, tools that it's used with great effect in the context of weapons proliferation, i.e. Iran, and used to disrupt and dismantle terrorist financial networks, the variation using these tools to target the organized crime threat. Specifically, what the Treasury Department is doing right now is implementing executive order 13581, which is the centerpiece of a much broader strategy ... which is designed to identify, disrupt and dismantle the financial support networks that support four named organized crime groups. Those groups are the Yakuza, based in Japan, the Camorra, based in Italy, the Brothers' Circle, aka the Moscow Center, which has its headquarters which operates primarily in the Russian Federation, and the Los Zetas, an organization which has previously been targeted by the Treasury Department as a designated foreign narcotic kingpin, but is also now being targeted in parallel under this new program.

What I can say about these groups is that these are some of the largest organized crime groups in the world. A number of these groups are sprawling groups that are collections of different subgroups, so until the Treasury Department implements designations, lists individuals and entities on the specially designated nationals list, we're not going to have a full picture of how this program is going to go. Like I said, some of these groups are very amorphous - the Brother's Circle in particular - while others are a little bit more defined, for example the Los Zetas.

KITTEN: What can you tell us about some of the actions that the Treasury is taking?

GRANT: Right now, they're very vigorously trying to map these networks out, leveraging all sorts of information to build out their packages and support of sanctions designations. They're going out and they're meeting with the international community, sharing information with foreign governments and really trying to make this a global effort, and not just a U.S. effort, because any kind of effective strategy against organized crime, remember it's called the Transnational Organized Crime Executive Order that the Treasury Department is implementing. It's transnational. It's going to require the active cooperation of U.S. allies overseas.

The Government's Strategy

KITTEN: You've probably answered my next question, and that was, what's the government's strategy on transnational organized crime? This is a strategy that came in July.

GRANT: This is one part of a whole of government effort, and that's really the key. The current administration, the Obama administration, early on in its tenure identified organized crime as constituting not just a law enforcement challenge, which historically has been viewed as a law enforcement challenge. If you look at the May 2010 National Security Strategy, it identifies organized crime as a national security issue, and then again in the July 2011 Organized Crime Strategy, it also elevates organized crime into the national security strategy. And what does this mean? It means that all tools of national power are going to be used to identify, disrupt and dismantle these networks. In addition to the standard tools of law enforcement, the standard tools of diplomatic outreach, you're also going to be bringing to bare the financial tools. It's going to be a holistic approach and these tools that have been used so successfully in the context of isolating Iran, financially, disrupting al-Qaeda networks, these tools are now going to be used in the organized crime context.

KITTEN: David, this strategy requires more than simply addressing lists of individuals known for suspicious activity. Can you tell us how that strategy is going to impact financial institutions as well as others that touch the financial space?

NUSSENBAUM: I agree. At first, our reaction was, from a bank perspective, if Treasury eventually just adds a few additional names of entities that might be associated with organized crime, if they just add them to sanctions screening lists, what real change does that make in bank operations? It really is more than that, and I think this is actually an area where there's opportunity for banks to think creatively in terms of really looking at transactions that might create a hit on some sort of watch list where there's notification that perhaps the transaction is associated with an organized crime group, and then maybe there's an opportunity for the bank to think broadly, for the compliance people to get in touch with the fraud people and to really proactively monitor and stay on top of the activity in those accounts because, as we've been trying to say before, these people are not just laundering money. These people are committing fraud and so a hit on a sanctions list could lead to a variety of different reactions and counter measures in the fraud department, for example at a bank.

Impact on Banks and Credit Unions

KITTEN: David, how will the new sanctions program affect banks and credit unions? What do they need to do to comply?

NUSSENBAUM: Just drilling deeper on the thought that I mentioned before, we know there's a lot of card and payment fraud emanating from Russia and Eastern Europe. Brian cited one of the known organized organizations and we're seeing a lot of activity indictments around other sorts of gangs that may be in one way or another affiliated with this broader group. So again, a particular example, if there's some sort of watch list filtering that's showing transactions related to any of these Eastern European groups, my suggestion would be that the fraud department be alerted immediately and adjust their detection engines to look for any sort of payments activity that might correspond to activity of any of these organized groups.

KITTEN: Brian, why is the government taking an interest now? Why is organized crime getting attention?

GRANT: That's an excellent question, and frankly it's a question that I think has been on the mind of many in the financial services industry and more broadly. After all, it's almost 40 years after the issuance of the movie "The Godfather." I think that the reason for that is you have to sort of take a step back and look at the evolution that has been taking place over the last ten years, an evolution that was really, if not initiatively, significantly catalyzed by the tragic event of Sept. 11 and this is really an increasingly sophisticated way of looking at national security on the part of the U.S. government, and bringing more and more tools into the governmental toolbox to respond to particular threats. What you've seen in the context of terrorism and the context of weapons proliferators, international efforts to apply financial and economical pressure against Iran and other countries involved in weapons proliferation is an understanding and appreciation of the importance of finance and economics to utilize the financial system to support their activities and the power that financial tools - economic sanctions, anti-money laundering controls and things like that - the powers that these financial tools have to disrupt these organizations.

It's very interesting. When I started at the Treasury Department back in 2000, rarely was the Treasury Department involved in National Security Council meetings. Today, it's very, very standard for the Treasury Department to be playing a very important role in conversations about threats to U.S. international security. I think that's why now you see use of these tools against organized crime, a very, very old threat but a threat that I think, perhaps more than even other threats, relies on the financial system.

Financial Risks

KITTEN: Brian, what are the risks, and how are these groups exploiting the financial sector? Could you give us some specific examples?

GRANT: When you look at terrorism, the motivation there is primarily ideological. They want to make to a certain extent the same argument for weapons proliferation. But organized crime, similar to narcotics trafficking, is all about the money. It's all about engaging in criminal activity for money. Dave earlier talked about some statistics related to the volume of money that's being generated by organized criminal activities and criminals like to use the financial system for the exact same reason that legitimate businesses like to use the financial system - because it's faster, cheaper and more efficient than alternates.

Organized crime places the entire financial system at risk of exposure to illicit financial activity and I think one of the more instructive examples, and there are many - this is probably a whole subject of another conversation - a very structured example is the example of Semion Mogilevich. He's on the FBI's top ten most wanted list. He's Ukrainian born, as I believe. It's all about financial activity. It's all about security fraud. It's an international fraud. It's a fraud that involves multiple transfers through major financial institutions. It's a fraud that took place over a large period of time. It's a fraud that the U.S. government estimates costs investors over $150 million in losses. These are very sophisticated frauds. They're involved in legitimate and illegitimate activities. They're involved in large dollar amount activities. They control companies. They're in some instance very enmeshed with public corruption-type issues.

There's a convergence here of a lot of different things. There's a convergence of fraud. There's a convergence of corruption. There's a convergence of traditional crime and law enforcement-type concerns, and now with this sanctions program you have the interjection of sanction concerns into this picture. So for financial institutions this is sort of a perfect storm of illicit financial activities that banks and other financial institutions need to take account of.

Mitigating Financial Risks

KITTEN: David, I wanted to come back to you, what can financial institutions do to mitigate some of these risks?

NUSSENBAUM: We're learning how sophisticated, coordinated and technologically astute the organized crime community is. The message is that we in the financial community have to have similar, frankly better, levels of coordination, communication and technological innovation in order to comply and in order to actually put a stop or at least put a stop to some of the activity that's going on by these organizations. It's a perfect example for how communication has to be shared and the example we gave before between the AML sanctions area and the fraud area, and that really calls upon good informal relations and communication skills amongst individuals within the institutions and particularly for more sophisticated technology, for better integration of platforms, like case management platforms, so that the information flows readily between departments with or without the good informal relations amongst individuals.

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