Chapter 7: Money Laundering and Transactional Financial Flows

To combat money laundering, the Bank Secrecy Act of 1970 (BSA) requires _____ to assist U.S. government agencies in detecting and preventing money laundering.

financial institutions

Also known as the Currency and Foreign Transactions Reporting Act, the BSA required financial institutions in the U.S. to keep records of cash purchases of negotiable instruments and report if the daily total exceeds _____. Further, they must report suspicious activities that may indicate ___, ___, and ___.

$10,000; money laundering, tax evasion, and other criminal activities.

BSA authorizes the Treasury Department to issue regulations requiring banks and other financial institutions to take a number of precautions against financial crime, including the establishment of _____ and the filing of reports that have a high degree of usefulness in criminal, tax, and regulatory investigations and proceedings, and certain intelligence and counter-terrorism matters.

anti-money laundering (AML) programs

The Secretary of the Treasury has delegated to the _____ the authority to implement, administer, and enforce compliance with the BSA and associated regulations.

Director of FinCEN

_____ is a bureau of the U.S. Department of the Treasury, and the Director is appointed by the Secretary of the Treasury and reports to the Treasury Under Secretary for Terrorism and Financial Intelligence.

FinCEN

FinCEN’s mission is to

safeguard the financial systems from illicit use, combat money laundering, and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities.

traditional money laundering process can be divided into three steps

placement

layering the transactions

integration

Placement

The money is deposited in a bank or financial institution

layering the transactions

a set of complex transfers is made to disguise the original source of the money and to hide the audit trail.

integration

when the money is integrated back into the legitimate money supply and made available to the money launder.

The United Nations Office on Drugs and Crime estimates the amount of money laundered globally each year to be 2% to 5% of global GDP, or ___ to ___.

$800 billion to $2 trillion

The PwC 2016 Global Economic Crime survey found only ___ of money laundering or terrorists' financing incidents were detected by the company systems.

50%

Money Laundering definition (from textbook)

A definition of money laundering that covers both legal and illegal contexts is to take money that comes from one source, hide that source, and make the funds available in another setting so that the funds can be used without incurring legal restrictions or penalties.

Money Laundering definition (from professor)

Any

1.) financial or monetary transaction involving

2.) illegal funds or proceeds (dirty $)

The primary purpose for money laundering is to

make the funds spendable in a context that would have been unavailable otherwise.

To fulfill its responsibilities for detection and deterrence of financial crime, such as money laundering, FinCEN:

• Issues and interprets regulations authorized by statute;

• Supports and enforces compliance with those regulations;

• Supports, coordinates, and analyzes data regarding compliance examination functions delegated to other federal regulators;

• Manages the collection, processing, storage, dissemination, and protection of data filed under FinCEN’s reporting requirements;

• Maintains a government-wide access service to FinCEN’s data, and networks users with overlapping interests;

• Supports law enforcement investigations and prosecutions;

• Synthesizes data to recommend internal and external allocation of resources to areas of greatest financial crime risk;

• Shares information and coordinates with foreign financial intelligence unit (FIU) counterparts on AML/CFT efforts; and

• Conducts analyses to support policymakers, law enforcement, regulatory, and intelligence agencies; FIUs; and the financial industry.

FinCEN’s basic concept underlying their core activities is to

“follow the money.”

Financial Industry Regulatory Authority (FINRA) is not a government agency, but is a

not-for-profit organization authorized by Congress in 2003 to protect U.S. investors by making sure the broker-dealer industry operates fairly.

___ transactions are taking place without the need for third parties and the consequential scrutiny that might otherwise exist. Furthermore, ___ transfers can be structured so that they originate in jurisdictions where such activities are not considered illegal.

cybercash

There are two ways a digital exchange works

Uses an exchange middleman to convert money into digital currency.

Or

The platform creates its own digital currency, so no exchanger is needed.

e-Voucher

A special code used to fund an account. A member transfers or sells this code to any other person who uses the code to fund his/her account. Thus, cash transfers are not officially recorded within the national banking system.

______ is controlled by online, privately owned payment systems that allow members to transfer large amounts of digital currency from one account to another anywhere in the world.

Digital currency

Some digital currencies are backed by precious metals or national currencies, meaning their value fluctuates based on the _____. When digital currency is backed by a metal or national currency, gains or losses in a member’s account depend on changes in the value of the _____.

underlying asset

When a _____ issues digital currency, it acts in a role similar to a national government by creating and controlling its own currency.

private provider

blockchain

The system provides for anonymous transactions to take place, as it does not report who is on each side of a transaction other than with a digital code

Universities sometimes use techniques resembling money laundering to convert restricted federal grant or endowment funds into -

discretionary spending funds.

Chain of custody

the chronological documentation or paper trail that records the sequence of custody, control, transfer, analysis, and disposition of materials, including physical or electronic evidence. idea is to establish that the alleged evidence is in fact related to the alleged crime, rather than having, for example, been "planted" fraudulently to make someone appear guilty.

Correspondent banking

occurs when one bank provides services to another bank, usually smaller bank, to move funds, exchange currencies, and access investment services such as money market accounts, overnight investment accounts, CDs, trading accounts, and computer software for making wire transfers and instant updates on account balances.

payable-through account

enables the respondent bank’s clients within the country where the bank is registered to write checks that are drawn directly on the respondent bank’s correspondent account in the U.S. Thus, U.S. correspondent banks provide all their foreign clients with direct access to the U.S. banking system.

Patriot Act requires that U.S. banks establish -

stronger due diligence programs, such as know-your-customer rules, for all correspondent accounts and private banking accounts belonging to non-U.S. citizens and foreign banks.[3]

The U.S. Department of the Treasury requires banks to file Currency Transaction Reports (CTRs) about transactions above a specified dollar amount—currently $10,000—and __________ for transactions as noticed by bank personnel.

Suspicious Activity Reports (SARs)

FinCEN

U.S. Treasury's Financial Crimes Enforcement Network

Bankers use a policy of ______ guidelines for identifying suspicious activities

know-your-customer (KYC)

businesses must file ___________________, with the Internal Revenue Service (IRS) for business sales that result in the receipt of more than $10,000 in cash. The cash may have been received in a single transaction or a series of related transactions in the seller’s business operations.

Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business

CTRs and SARs: There are two interesting exceptions to the reporting requirements. First, ___ and ___ are not considered to be cash under the reporting guidelines, and second, although universities are filing Form 8300 for normal operations, most nonprofit organizations are largely exempted from the reporting requirements.

personal checks and wire transfers

Money Laundering Control Act, enacted in 1986, was the first U.S. law that made money laundering a ___. The law makes it a crime for an individual to engage in a financial transaction that involves the proceeds from ____.

separate crime; illegal activities

______ are generally high-risk banks that exist without any physical presence in any legal jurisdiction. These banks have a banking license in a specific country, but they are not likely to have a staff and may be operated as part of another business or operated out of an individual’s personal residence.

Are a link for people in foreign countries to have access to the U.S. banking system.

Shell banks

Offshore banks

These bank operations solely exist within international financial transactions, and they are set up, in many cases, to avoid taxes in the U.S. The customers of these banks have access to many different world currencies.

Nested services

occur when a second or third foreign bank has a correspondent relationship with the first foreign bank without the knowledge of the U.S. bank.

foreign shell banks

have private bank clients who are very exclusive customers with large deposits and consequently receive VIP bank services not available to regular customers. Bank secrecy laws in most of these countries, until recently, would not permit the disclosure of information about such client transactions.

An _______ does not need to have the normal bank physical facilities anywhere, because all transactions occur over the web. Consequently, a PC in a room is adequate to conduct banking activities. These banks are difficult to regulate because they can be located anywhere in the world. It becomes difficult for bank officials to monitor unusual activity in these accounts.

Internet bank

The Internet, combined with offshore and shell banks, provides money launderers with the opportunity to layer cash transactions among numerous virtual entities in such a way that the transactions are almost impossible to trace; the _____ is nonexistent or completely falsified.

audit trail

currency exchange - the large amounts of cash flowing through in ______ provides an easy means to convert criminal proceeds into legitimate money. All documentation can be falsified, making it difficult to prove that these operations are not legitimate business transactions.

wire transfers

online auction

provides another good way to launder money into legitimate cash when items are overpaid for in an auction sale. Overpaying for the item, listed on the auction site by confederates shuts out other buyers except for the launderer

Money received in criminal activities through online gambling has been prosecuted under the _____ which was passed in 1961 to control organized crime activities and betting activities where wire communication was used.

Federal Wire Act

Unlawful Internet Gambling Enforcement Act of 2006 (“Act”).

illegalized payment processing for Internet gambling operations. It is illegal for a bank or financial institution to engage in transferring money to an online gambling website. Prior to the passage of the Act, large amounts of money could be transferred to accounts at businesses that operated Internet gambling websites. Transfers from these accounts to other nongambling accounts would legitimize the money flows. Prohibits gambling companies from “knowingly accepting payments in connection with the participation of another person in a bet or wager that involves the use of the internet and that is unlawful under any federal or state law.”

Federal Wire Act of 1961

prohibits gambling over state lines.

_____ is a money laundering technique in which confederates of the money launderer deposit random amounts of less than $10,000 into variously named accounts at a number of different banks. Due diligence procedures such as CTR and SAR filings usually are not triggered by such transactions. Thus, _____ is most often used to launder smaller amounts of money.

Smurfing

A _____ can be used to transfer cash internationally by either taking a cash advance or obtaining a refund of a prepaid balance, and online banking makes this process easy to execute from any location.

credit card

Keyloggers

can be placed on a PC to keep a record of all the keystrokes made on a specific keyboard and then sent to a third party.

criminal activity taking place through ______ can go unreported if the transfer amount is less than $10,000, but banks become suspicious when a large number of ______ are made to unrelated third parties and they are under the $10,000 criteria. ______s occur between U.S. banks and their correspondent banks. These correspondent banks may act as intermediaries between the sender and final recipient of the cash thus possibly creating unclear documentation issues.

wire transfers

Underground banking systems -

work with two agents located in two geographical locations (e.g.,, the U.S. and Colombia). If money needs to be used in Colombia, the agent in the U.S. collects the money and sends a fax or encrypted e-mail to the agent in Colombia. The money is made available from funds held by the coconspirator in Colombia based on that communication. The system is sometimes called “hawala” and can involve more than two co-conspirators as untraceable monies are transferred around the world.

The Fedwire system

operated by Federal Reserve Banks for the international transfer of large deposits among its members. Wire transfer rules provide more information about the origin and destination of money in a wire transfer. These rules are intended to provide a trail of the parties involved in a wire transfer.

electronic fund transfers (EFTs)

made directly by a business using the PCs within that business to another organization, such as a bank, and prior authorization may be needed for the transfer. EFTs occur when salaries and wages are directly deposited into an employee’s bank account, for example.

suspense account

a temporary ledger account that can be used to “store” dollar amounts until the organization decides how to record the transaction. The balance in the account is closed prior to preparing the financial statements and its use is never disclosed.

concentration account

a suspense account that banks use to temporarily commingle their funds until they are transferred out or otherwise assigned

Money launderers may be interested in purchasing or obtaining a partnership in a legitimate business to show that their funds come from ____

legal sources

“bearer” shares

the bearer (i.e., custodian) of the shares is the recognized owner. The underlying ownership of the shares is not identified with the true owner’s name.

Trust

generally a legal relationship that is established by one person when assets have been placed under the control of another person for the benefit of the beneficiary.

Due diligence procedures include obtaining copies of the original ____ and any subsidiary trust deed regarding the appointment of the trustees. Confirming identities is important because the trustee may be yet another trust, and the beneficiaries also may be trusts.

trust deed

Letters of confirmation should be obtained from the trustee to prove that the trustee is aware of the true identity of the underlying _____ in the trust and that there are no anonymous principals in the trust.

beneficiaries

International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001 (MLAA).

increases the penalties for money laundering as well as extends the power of the Federal government in controlling money laundering activities.

MLAA requires that -

bank and nonbank financial institutions have AML policies and programs in place.

Nonbank financial institutions include-

broker/dealers, insurance companies, mutual funds, casinos and card clubs, loan and finance companies, money service business, travel agencies, dealers in precious metals, investment advisors, pawn shops, and operators of credit card systems.

MLAA significantly increases the _____ for U.S. banks and their correspondent banks.

disclosure requirements

The information required to be disclosed under _____ includes a complete description of a specified transaction, the identity and address of participants, the relationship of the participants involved in the transaction, and the beneficial owner of the monies involved in the transactions.

MLAA

Payable-through checking or pass-through accounts

allow U.S. banks to provide check writing privileges in the U.S. to foreign banks and their customers. This practice allows non-U.S. citizens, who have not been scrutinized as well as U.S. citizens, to use the U.S. banking system.

MLAA statutes require that due diligence be used to enhance the scrutiny of funds that are deposited for ______ or their immediate family members or close associates as these funds may have been obtained from the proceeds of corrupt activities.

senior foreign political officials

MLAA eliminates _____ so that financial institutions can share information about account activities and business transactions among themselves. The law specifically does away with notifications to the parties about whom the banks are collecting information. The jurisdiction of the Act applies to foreign persons and foreign institutions in the U.S.

legal liabilities

Anti-Money Laundering Act (AMLA) of 2021

requires millions of corporations in the U.S. to report the true owners of anonymous shell companies to the federal government for inspection by law enforcement and compliance officers.

A ____ is any individual who (1) exercises substantial control over an entity, or (2) owns or controls 25% or more of the ownership interest of an entity.

beneficial owner

Under the Anti-Money Laundering Act (AMLA) of 2021, Corporations, LLCs, and similar companies (along with foreign entities that register to do business in the U.S.) are required to submit at formation or at the registration process a report to FinCEN specific identification information for each ____.

beneficial owner

Explain how money laundering might be used in a bribe situation.

Illicit bribe payments are disguised as legitimate business transactions (e.g., fake invoices and shell companies), deposited into business accounts, and transferred—often overseas—to make the money appear lawful and hide its criminal origin.

Explain how money laundering might be used in a tax evasion scheme.

Illegally saved taxes (e.g., from underreporting costs using fake invoices) are funneled through business accounts and transferred to personal accounts, disguising tax savings as legitimate business income to hide the evasion.

What does it mean if a bank is described as a “virtual” bank?

one that does not have to have a physical presence in any geographical location. Such a bank would be exemplified by a bank operating with a set of PCs and one employee in a bedroom. A virtual bank is not monitored by any government agency for compliance with banking regulations.

Why is money laundering considered a serious criminal activity if it only involves the transfer of money from one location to another?

it supports and conceals other underlying crimes (e.g., drug trafficking, tax evasion, fraud), making those crimes profitable and harder to detect—so it is not a victimless or minor offense.

Name some techniques that can be used by money launderers to break the audit trail.

• Many money transfers going from country to country.

• Use of falsified paper documents.

• Setting up false business operations.

• Use of bank concentration accounts.

• Using offshore or shell banks.

• Keeping cash transfers below $10,000.

• Wash sales

• Cryptocurrencies

• Synthetic identities