Defining money laundering

 

Money laundering is the creation of a series of transactions designed to disguise the source of funds. The objective is to hide the final disposition of funds, erasing the audit trail and trying to make the funds appear as coming from a legitimate source with the ultimate outcome being to avoid paying income tax.

Money laundering destabilizes the foundation of a nation’s financial system by reducing tax revenues and impeding fair competition by ultimately disrupting economic development. The long term effect can undermine both national economies and their currencies. Money laundering poses both a serious law enforcement problem as well as a threat to national security.

 

The war against money laundering

 

The Bank Secrecy Act (“BSA”) was enacted by Congress in 1970 for the purpose of requiring that insured depository institutions maintain records and report transactions. The objective was to prevent banks from being used to hide money derived from criminal activity and tax evasion. The reports culled from this requirement have become useful tools in criminal, tax, and regulatory investigations. Since then, the number of legislative and regulatory standards being introduced to help prevent money laundering and strengthen the government’s ability to combat it has grown exponentially. More recently there has been an emphasis on limiting terrorist financing activity.

 

The history of Anti-Money Laundering Legislation

 

Bank Secrecy Act - 1970
• Requires banks to report transactions in excess of $10,000 via a Currency Transaction Report (“CTR”).

Money Laundering Control Act - 1986
• Money laundering became a criminal act
• Prohibited the initiation of transactions to evade Currency Transaction Report filings
• Implemented civil and criminal proceedings for violations of the Bank Secrecy Act

Money Laundering Prosecution Improvement Act - 1988
• Expanded definition of financial institutions to include automobile dealerships, real estate personnel, making it a requirement to file large currency transactions reports
• Required identity verification of any person purchasing a monetary instrument in excess of $3,000

Bank Fraud Prosecution and Taxpayer Recovery Act of 1990 (Crime Control Act) - 1990
• Updated the FDIC Statement of Policy of the Federal Deposit Insurance Act which prohibited anyone who had been convicted or who entered a pretrial diversion in connection with a crime of dishonesty, breach of trust or money laundering, to participate in banking without prior written consent.

Annunzio-Wylie Money Laundering Suppression Act - 1992
• Added Sections to the FDIC Act which allows the rescinding of federal deposit insurance to institutions convicted of laundering money
• Required the submission of Suspicious Activity Reports (SAR) and eliminated the requirement for criminal referrals
• Required that wire transfers be verified and a record kept of each.

Money Laundering Suppression Act - 1994
• Banking agencies were required to implement anti-money laundering exam processes
• Streamlined the Currency Transaction Report exemption process

Money Laundering and Financial Crimes Strategy Act - 1998
• Banking agencies were required to develop anti-money laundering training for their examiners
• Treasury as well as other agencies were required to develop a national money laundering strategy
• The High Intensity Money Laundering and Related Financial Crime Area ("HIFCA") Task Forces was created

Uniting and Strengthening America by Providing Appropriate Tools to Restrict, Intercept and Obstruct Terrorism Act (USA PATRIOT Act) - 2001
• Financial institutions were required to share both government-institution as well as voluntary information among themselves
• Introduced the verification of customer identity programs
• Introduced enhanced due diligence programs
• Introduced anti-money laundering programs to the financial services industry

 

Bank Secrecy Act Examination Program Overview

 

The FDIC has prescribed in its regulations that depository institutions establish and maintain procedures designed to ensure and monitor compliance with the BSA. The FDIC monitors compliance with BSA related regulations by implementing on site examinations of all FDIC regulated institutions. Civil money penalties and regulatory enforcement actions can be levied for noncompliance which can endanger and institutions capital and earnings. Banks can be prosecuted for violations of money laundering regulations which could ultimately lead to termination of FDIC insurance.

 

Reporting Terrorist Activity

 

Financial institutions are encouraged to cooperate with law enforcement investigating terrorist activity. In September of 2001, banking institutions were asked to report suspicious transactions related to terrorist activity using the Financial Crimes Enforcement Network's (FINCEN).

Financial Action Task Force ("FATF") on Money Laundering

 

Since their inception in 1990, the FATF 40 recommendations have been repeatedly revised. It was originally intended to reduce money laundering activity related to drug trafficking. In 1996, it was expanded and the focus broadened to strengthen its powers to combat money laundering. 130 countries accepted and used its classifications as the basis for their anti-money laundering initiatives.

In October 2001, the FATF 40 recommendations were expanded once again, focusing on fighting terrorism. Eight recommendations added to the FATF 40 and accepted as the international standard by both the World Bank and the International Monetary Fund. The premise of the expanded guidelines was designed to ensure that financial institutions reduce their exposure to terrorist funds.

The FATF sighted that it was improbable that financial institutions would be able to detect terrorist financing. The only clear cut instance where a financial institution was able to identify and clearly distinguish terrorist financing from other criminal activity, would be if said terrorist organization had opened an account. In this case, the financial institution should focus on identifying whether the transaction is suspicious, out of the ordinary and or indicative of criminal or terrorist activity.

The FATF was expanded in 2004, placing even greater focus on fighting terrorism, money laundering and corruption. In 2007, the FATF recommended using a risk based approach to further the task forces power.

 

Office of Foreign Asset Control (OFAC)

 

OFAC oversees laws designed to impose economic sanctions against countries that are hostile to U.S. foreign policy and its national security. It is also responsible for implementing regulations restricting transactions by U.S. citizens or entities with certain foreign countries, their citizens, or specially designated nationals. Violating these laws will expose financial institutions to substantial penalties.

Banks are encouraged to implement compliance programs that include:
• A compliance officer responsible for ensuring compliance
• Internal controls and processes to screen transactions and accounts versus the OFAC SDN list
• Employee training
• Compliance testing by third parties

For further information concerning tax havens, their definition as prescribed by the Organization for Economic Cooperation and Development (OECD) and a list of tax havens; go to:

http://www.taxjustice.net/cms/upload/pdf/Identifying_Tax_Havens_Jul_07.pdf