IRS Audits - Part 4 Examining Process

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IRS Audits

Chapter 26. Anti-Money Laundering

Section 9. Examination Techniques For Bank Secrecy Act Industries (Cont. 2)

4.26.9  Examination Techniques For Bank Secrecy Act Industries (Cont. 2)

4.26.9.7 
Money Transmitter Overview

4.26.9.7.4  (01-01-2003)
Compliance Examination Procedures

  1. Enforcement of the reporting, recordkeeping and compliance program requirements is accomplished by AML program examiners conducting Bank Secrecy Act (BSA) compliance examinations. There are several steps in conducting a quality BSA compliance examination

4.26.9.7.4.1  (01-01-2003)
Preplan

  1. A quality Bank Secrecy Act (BSA) compliance examination begins with a thorough preplan. The scope and depth of the compliance examination will depend upon the facts and circumstances of each case. (Refer to IRM 4.26.6 for a discussion on scope and depth.)

  2. At a minimum, the preplan should include:

    1. Researching the Currency and Banking Retrieval System (CBRS) to determine if any Currency Transaction Reports (CTRs) have been filed by or on behalf of the financial institution and/or officers. A review of CBRS research should identify any incomplete documents filed, lack of filings, timeliness of filings and any unusual or questionable transactions. (Refer to IRM 4.26.4.)

    2. Reviewing the case file of any prior BSA compliance examination. The examiner should especially note areas of noncompliance and review any reports, letters, or referrals within the case file.

    3. Verifying the financial institution has been previously notified via Form Letter 1052 and has been included in the Area Non-Bank Financial Institution (NBFI) database.

    4. Ensuring the case has CI clearance.

     

4.26.9.7.4.2  (01-01-2003)
Initial Contact

  1. For information on contacting financial institutions refer to IRM 4.26.6 .

  2. The examiner should furnish Form 4564, Information Document Request (IDR), to the financial institution at the time the appointment is scheduled. The IDR should be comprehensive enough to ensure that all the necessary records are available to begin the BSA compliance examination. For an example of an IDR for money transmitters, refer to Exhibit 4.26.9-25.

4.26.9.7.4.3  (01-01-2003)
Interview

  1. Ask specific questions relating to the business, area, and services offered. The examiner must consider all financial services or products offered by the business, such as money remittance, check cashing, and sales of money orders. (For example, a customer could attempt to launder $15,000 by sending a wire transfer for $8,000 and purchasing $7,000 in money orders.)

  2. Interview the money transmitter to establish knowledge of the Bank Secrecy Act (BSA) recordkeeping and reporting requirements. Knowledge is one of the elements needed to prove intent for any apparent violation of the regulations.

  3. Ask the owners or management of the financial institution if they have knowledge of structuring, or if any suspicious transactions have occurred. This question also must be asked while interviewing employees who have customer contact.

  4. Interview all individuals who handle currency transactions (i.e. prepare currency reports, maintain records etc.). Determine their knowledge and amount of training received on the BSA recordkeeping and reporting requirements.

  5. Ask open-ended questions throughout the interview. Don't ask questions that require only a yes or no answer.

  6. Each interview should be documented in the case file.

  7. Ask about internal compliance programs and internal controls.

  8. Example of possible initial interview questions for a money transmitter are shown in Exhibit 4.26.9-26 . It is only a guide that should / can be expanded or contracted as each BSA compliance examination warrants.

4.26.9.7.4.4  (01-01-2003)
Review of the Records

  1. Any records the financial institution maintains for the business that are relevant to the Bank Secrecy Act (BSA) compliance examination can be requested and reviewed. The examiner will determine if the financial institution is maintaining adequate records and must document any recordkeeping violations.

  2. Ask to see the money transmission company's policy and procedures manual regarding the Bank Secrecy Act recordkeeping and reporting requirements. The examiner should determine if the agency's BSA information is correct and its procedures are adequate.

  3. Inspect all copies of Currency Transaction Reports (CTRs) filed by the financial institution to ensure they are accurate and complete. Ensure filed CTRs have been retained by the financial institution for the required five-year period. Use the Currency and Banking Retrieval System (CBRS) database to verify that the CTRs were timely filed and contain the same information as the copies maintained by the financial institution.

  4. Review monthly commission statements to detect large daily transactions or transactions conducted over a period of several days (multiple transactions) which appear to be related. (Each money transmitter receives commission statements from their respective money transmission business center or home office).

  5. Review the daily cash reports and reconcile these to the bank deposit slips. Generally, a money transmitter will deposit all monies received each day. The daily cash reports can be traced to the daily summary sheets and the deposit slips to the monthly bank statements.

  6. Review the daily summary sheets for all send and receive transactions. If the daily summary sheet has 20 transactions recorded then there should be 20 transaction documents to support them. The amounts listed on the daily summary sheet can be reconciled to the original send or receive documents. Review the original send and receive transaction forms for completeness. Determine if all the required information has been obtained and recorded on the forms. The examiner may elect to select a dollar criteria for inspection of these forms.

  7. Review the original send and receive transaction forms for completeness. Determine if all the required information has been obtained and recorded on the forms. The examiner may elect to select a dollar criteria for inspection of these forms.

  8. Look at the transaction and fee amounts recorded on the transaction forms. The total amount collected line should include both the transaction amount and fees collected. These totals can be traced to the daily summary sheets.

  9. Scan each group of records for possible structured transactions occurring on the same day or over a period of several days. (For example, a 5:00 PM transaction with the transactor sending $6,000, and again at the same location on the same day a 5:10 PM transaction with the transactor sending $5,000.) Examiners should be aware of these or similar situations and must be prepared to discuss suspicious transactions with the money transmitter.

  10. When reviewing money transmitter transactions, note the telephone numbers given. A sender may give a false name and address, but may use a correct telephone number. The reason is, if the money cannot be delivered the sender will want to be notified. Also watch for repetitive addresses, and senders and/or receivers names.

  11. Review the financial institutions records to determine if all the required information on money transmittals of $3,000 or more has been obtained and retained pursuant to the recordkeeping requirements of 31 CFR 103.33.

  12. The examiner may elect to use a database to input information from the transaction records, for purposes of detecting structuring and other money laundering schemes.

  13. Analyze database sorts of the name, address and phone number fields to detect possible structured transactions, unreported transactions, errors and/or deficiencies in the financial institution's BSA compliance system.

  14. If structured transactions or BSA violations are detected, the examiner should interview the responsible person or employee who conducted the transaction. Based on the answers given, the examiner should consider expanding the scope of the examination. (Refer to IRM 4.26.6.) All facts should be discussed with the Area anti-money laundering (AML) coordinator.

  15. Obtain copies of all source documents that support any apparent BSA violations.

  16. Consider issuing a Letter 1112 or a referral on Form 5104 for all failures to file Form 4789 and any recordkeeping violations. Prepare in accordance with the examination guidelines. (Refer to IRM 4.26.8.)

  17. Follow procedures in IRM 4.26.6 to timely conclude the BSA compliance examination.

  18. Consider preparing Form(s) 5346, Examination Information Report, when information is developed during the BSA compliance examination regarding a possible income tax examination. (Refer to IRM 4.26.6.)

  19. If warranted, extend the compliance examination to more than one business location in the area. If several money transmitters are in the same geographical area, concentrate in that area.

  20. The databases of BSA compliance examinations in the same geographical area should be consolidated and sorted to detect possible related structuring activity occurring at more than one location.

4.26.9.7.4.5  (01-01-2003)
Expanding the Compliance Examination

  1. The examiner should consider expanding the scope of the Bank Secrecy Act (BSA) compliance examination if inadequate records, poor internal control, unusual currency flows, or possible violations are found. When the examiner determines that expanding the BSA compliance examination is warranted, the examiner should:

    1. Expand the compliance examination to other periods and the prior years as warranted, and/or

    2. Expand the compliance examination to other locations/offices if applicable.

     

4.26.9.7.5  (01-01-2003)
Money Laundering Trends

  1. The financial institution and/or the customer can be involved in potential money laundering schemes. The examiner must focus on both the financial institution and the transactor(s) during the Bank Secrecy Act (BSA) compliance examination.

  2. Money laundering techniques, which could be used by the financial institution, include:

    1. Failing to maintain complete records,

    2. Failing to record specific transactions,

    3. Failing to obtain the required information to comply with the recordkeeping requirements,

    4. Failing to file CTRs on reportable transactions,

    5. Structuring a transaction by breaking one transaction into several to circumvent the reporting requirements.

     

  3. Money laundering techniques which could be used by the customer/transactor include:

    1. Using multiple locations to conduct transactions,

    2. Using several individuals at one or more locations to conduct a transaction,

    3. Using aliases when conducting transactions,

    4. Conducting numerous transactions at the same location at different times during one day.

     

  4. When evidence of a money laundering scheme is uncovered, a referral should be made on Form 5104. (Refer to IRM 4.26.8 for referral procedures.)

4.26.9.7.5.1  (01-01-2003)
Examination Techniques

  1. The following techniques can be useful in uncovering money laundering schemes:

    1. Review transmittal forms to ensure the financial institution is obtaining all the required information and verification,

    2. Review transmittal forms looking for handwriting similarities. If similarities are noted, compare signatures on the forms. (Are different names being used?)

    3. Review transmittal forms looking for similar name and addresses for both senders and recipients,

    4. Review transmittal forms for similar phone numbers. (Are different customers using the same phone number?)

    5. Conduct Bank Secrecy Act (BSA) compliance examinations of financial institutions within the same geographical area,

    6. Create a database to consolidate transactions of the financial institutions, which can be sorted to identify any related transactions.

    7. Review all financial services offered to see if customers are structuring transactions by using a variety of financial products.

     

4.26.9.8  (01-01-2003)
Traveler's Checks Overview

  1. Traveler's checks are issued by national companies such as American Express, Thomas Cook, or VISA. There are also privately issued Traveler's checks.

  2. Traveler's checks are negotiable monetary instruments. Individuals usually purchase them, when they are traveling on vacations or business trips, instead of carrying cash.

  3. Sales agents of traveler's checks usually provide other services such as check cashing, wire services, or operate a business such as a credit union or travel agency.

  4. Rather than run the risk of robbery, some businesses in high-risk areas will buy traveler's checks throughout the day instead of transporting cash to the bank.

  5. An issuer, seller or redeemer of traveler's checks is one of the five distinctive types of financial services providers known as " money services businesses" or MSBs. (Refer to IRM 4.26.5 for a discussion on MSBs.)

4.26.9.8.1  (01-01-2003)
Nationwide Traveler's Checks

  1. Financial institutions that sell traveler's checks for national companies are agents. The agent's relationship to the issuer of the traveler's checks is governed by a trust agreement.

  2. The agent is allowed to advertise that it sells the national companies' traveler's checks.

  3. Traveler's checks are drawn on the national companies' bank account and the transaction is not complete until the national company receives the face amount from the agent and the traveler's check clears the bank.

  4. The dollar value of traveler's checks, sold by an agent, can be limited by the bonding company's trust agreement or by the agent's policy, but in theory they can be in any denomination.

  5. The national company issues and the agent maintain sales records, of traveler's checks, using a sequential numbering system.

  6. An agent's summary sales report is sent to the national company daily and the correspondent bank sends a clearing report. Using these reports, the national company keeps a record of all traveler's checks sold and cashed. Agents are sent a discrepancy statement for traveler's checks cashed but not reported as sold.

  7. Money received from the sale of traveler's checks is usually deposited, by the agent, into a separate bank account. Payment is made to the national company by check, wire transfer, electronic mail or draft.

  8. National traveler's checks companies either collects their fee up front when the traveler's checks are given to the agents or have their agents remit the fee together with the face amount of the traveler's checks sold.

  9. Agents may receive commission statements or reconciliations of traveler's checks sold. The agent's commission can be accounted for this way.

  10. Identification of persons purchasing traveler's checks is left to the individual agents. In most instances, identification is requested from the purchaser, and the traveler's checks are required to be signed by the purchaser in the presence of the agent.

  11. National companies keep a copy of the front and back of all cashed and canceled traveler's checks.

4.26.9.8.1.1  (01-01-2003)
Private Traveler's Checks

  1. Generally, private companies maintain and reconcile daily records of traveler's checks sold. Like checks, traveler's checks are cleared by a correspondent bank. If adequate records are not maintained, additional information should be obtained from the correspondent bank.

  2. Traditionally, private companies do not require identification to purchase traveler's checks.

4.26.9.8.2  (01-01-2003)
Law

  1. An issuer of traveler's checks (other than a person who does not issue such checks in an amount greater than $1,000 in currency or monetary or other instruments to any person on any day in one or more transactions) is defined as a financial institution. [31 CFR 103.11(uu)(3)]

  2. A seller or redeemer of traveler's checks (other than a person who does not sell or redeem such checks in an amount greater than $1,000 in currency or monetary or other instruments to any person on any day in one or more transactions) is defined as a financial institution. [31 CFR 103.11(uu)(4)]

4.26.9.8.2.1  (01-01-2003)
Reporting Requirements

  1. Form 4789 Currency Transaction Report (CTR) must be filed for all currency transactions of more than $10,000. [31 CFR 103.22(b)(1)]

  2. Multiple currency transactions must be aggregated, and a CTR is required, if the business knows or has reason to know that the multiple transactions are by or on behalf of any person and result in either cash in or cash out totaling more than $10,000 in one business day. [31 CFR 103.22(c)(2)]

  3. The CTR must be filed within 15 calendar days following the day the reportable transaction occurs. [31 CFR 103.27(a)(1)]

  4. Form 4790 Report of International Transportation of Currency or Monetary Instruments (CMIR), must be filed by any person who transports, mails or ships or has someone else transport, mail or ship currency or monetary instruments in excess of $10,000 into or out of the country or who receives such items in the United States from abroad. [31 CFR 103.23]

4.26.9.8.2.2  (01-01-2003)
Recordkeeping Requirements

  1. For records required of all financial institutions, refer to IRM 4.26.5 .

  2. Copies of all filed Currency Transaction Reports (CTRs) must be retained by the financial institution for five years from the date of the report. [31 CFR 103.27(a)(3)]

  3. Certain records are required to be maintained for the issuance or sale of traveler's checks involving currency in amounts between $3,000 and $10,000, by or on behalf of one individual in one business day.

  4. The following information must be obtained for the records:

    1. The purchaser's name and address,

    2. The purchaser's social security number or alien identification number,

    3. The purchaser's date of birth,

    4. The date of purchase,

    5. The type of instruments purchased,

    6. The serial numbers of the instruments purchased, and

    7. The amount in dollars of each instrument purchased. [31 CFR 103.29(a)(2)(i)]

     

  5. The financial institution is required to verify the purchaser's name and address and shall record the specific identifying information (E.g. State of issuance and purchaser's drivers license number). [31 CFR 103.29(a)(2)(ii)]

  6. These records must be retained by the financial institution for five years. [31 CFR 103.29(c)]

4.26.9.8.3  (01-01-2003)
Records Commonly Found

  1. Traveler's checks agents records usually include:

    1. Inventory sheets of traveler's checks sold,

    2. Bank statements and deposit slips,

    3. Teller drawer reconciliations or summaries.

     

  2. An example of a Bank Secrecy Act (BSA) compliance examination audit trail is shown in Exhibit 4.26.9-27.

4.26.9.8.4  (01-01-2003)
Identifying Businesses for Bank Secrecy Act (BSA) Compliance Examinations

  1. The Area anti-money laundering (AML) coordinator should not directly request an agent list from the national or regional traveler's check representative. If a request for such a list is, at this time, critical to meet an Area's program needs, the request should be forwarded to the Anti-Money Laundering (AML) Program in Headquarters SB/SE Office of Reporting Enforcement, S:C:CP:RE:AML.

  2. The Area anti-money laundering (AML) coordinator should interview the national or regional traveler's check representative to get background information on the company's policy, procedures, contracts and services it provides to its agents with respect to the Bank Secrecy Act. The Area AML coordinator should obtain copies of any written information.

  3. Ask how the representative determines which are the most active agents and secure a copy of this information.

  4. The Area AML coordinator should identify financial institutions with the highest probability of noncompliance.

  5. The Currency and Banking Retrieval System (CBRS) should be used to identify financial institutions. (Refer to IRM 4.26.4.)

  6. The Area AML coordinator should identify all the financial institutions that offer additional financial services, such as wire transfers, etc., that are conducive to laundering money and could be used to structure a transaction.

  7. The Area AML coordinator should coordinate with Criminal Investigation (CI) prior to beginning the BSA compliance examination to avoid interfering with any ongoing criminal investigations.

  8. Additional identification techniques can be found in IRM 4.26.3 .

4.26.9.8.5  (01-01-2003)
Compliance Examination Procedures

  1. Enforcement of the reporting, recordkeeping and compliance program requirements is accomplished by AML examiners conducting Bank Secrecy Act (BSA) compliance examinations. There are several steps in a BSA compliance examination.

4.26.9.8.5.1  (01-01-2003)
Preplan

  1. A quality Bank Secrecy Act (BSA) compliance examination begins with a thorough preplan. The scope and depth of the compliance examination will depend upon the facts and circumstances of each case. (refer to IRM 4.26.6 for a discussion on scope and depth)

  2. At a minimum, the preplan should include:

    1. Researching the Currency and Banking Retrieval System (CBRS) to determine if any CTRs have been filed by or on behalf of the financial institution and/or officers.

    2. A review of CBRS research should identify any incomplete documents filed, lack of filings, timeliness of filings and any unusual or questionable transactions. (Refer to IRM 4.26.4.)

    3. Reviewing the case file of any prior BSA compliance examination. The examiner should especially note areas of noncompliance and review any reports, letters, or referrals within the case file.

    4. Verifying the financial institution has been previously notified via Form Letter 1052 and has been included in the Area Non-Bank Financial Institution (NBFI) database.

    5. Ensuring the case has CI clearance.

     

4.26.9.8.5.2  (01-01-2003)
Initial Contact

  1. For information on contacting financial institutions refer to IRM 4.26.6 .

  2. The AML examiner should furnish Form 4564, Information Document Request (IDR), to the financial institution at the time the appointment is scheduled. The IDR should be comprehensive enough to ensure that all the necessary records are available to begin the BSA compliance examination. For an example of an IDR for issuers, sellers or redeemers of traveler's checks, refer to Exhibit 4.26.9-28.

4.26.9.8.5.3  (01-01-2003)
Interview

  1. Interview the officers and employees to establish knowledge of the Bank Secrecy Act (BSA) and the financial institution's procedures to comply with the reporting and recordkeeping requirements. The duties and responsibilities of the officers and employees should be documented along with a description of the financial institution's records and an explanation of the flow of transactions through the records. Knowledge is one of the elements needed to prove intent for apparent violations of the regulations.

  2. Ask specific questions relating to the business, area, and services offered. The examiner must consider all services offered by the business, such as money transmitting, check cashing, and sales of money orders. (For example, a customer could attempt to launder $15,000 by sending