Investigations: Money Laundering
Money laundering is the process criminals use to conceal and disguise the source, destination, or ownership of money and property earned through criminal activity.
Money laundering investigation is the process of identifying money laundering activity for the purpose of stopping it, reporting it to government, or prosecuting it.
Money laundering exists because there are successful criminals. Many individuals and organizations commit crime for the purpose of making money, and a considerable amount of criminal activity is conducted for financial gain (OECD 2016). Some criminals are successful in this activity, which means they have the ability to accumulate profits and wealth from their illicit activity. With the prosecution of Al Capone in the 1920s, government realized that one method to identify and prosecute these successful criminal individuals and enterprises was by “following the money.” After that, criminals learned they needed to hide and disguise this illegitimate income. The cat-and-mouse investigative game of money laundering – and the investigation of it – was born. Both the government and private sector play significant roles in this investigative process.
In 1986, government realized existing laws were inadequate to address the concealment of illicit income and assets, so criminal money laundering statutes were enacted. Government recognized that it alone could not monitor and investigate financial activity adequately, so duties and responsibilities were placed upon the private sector to detect and combat money laundering. Government created a regulatory and licensing framework to try ensure that only licensed and supervised financial institutions and money service businesses (MSBs) conducted financial transactions on behalf of customers. If individuals seeking to transfer or store funds use banks and money transmitters who are complying with government regulations, then their transactions and activities are being monitored. Government effectively deputized financial institutions to monitor their customers and transactions for suspicious activity that is indicative of money laundering, terrorist financing, or other criminal activity. Entities who fall short on their anti-money laundering (AML) monitoring and reporting can face significant governmental consequences, to include civil fines, loss of license, and even criminal prosecution. If a financial institution loses its license, it cannot continue in business.
In the United States, the Financial Crimes Enforcement Network (FinCEN) is an arm of the Treasury that has responsibility for AML, counter terrorist financing (CTF), and sanctions programs. Sanctions are administered through the Treasury’s Office of Foreign Assets Control (OFAC). The anti-money laundering arena overlaps with other areas designed to monitor and restrict the flow of funds. CTF programs seek to restrict and trace the flow of funds to and from terrorists and their organizations. Sanctions programs seek to restrict the ability of individuals, organizations, and nation states who are the subject of sanctions to move and hold funds.
The investigation of money laundering has been, and continues to be, an evolution of laws, regulations, techniques, methods, and technology. On one side are individuals and entities seeking to conceal and disguise funds – criminals, terrorists, sanctioned individuals and countries, or just individuals trying to avoid paying taxes. On the other side are the investigators, regulators, and prosecutors trying to detect this activity. This includes the government and also financial institutions who have invested in AML programs and personnel.
What Is Money Laundering?
As the definition indicated, money laundering is the process of concealing and disguising information about funds earned through criminal activity. It concerns hiding information about one or more aspects of property, such as how it was earned, where it came from, who owns it, and where it is going. It is what prosperous criminals must do in order to maintain their ill-gotten gains and escape punishment. If society wishes to effectively fight the many financial crimes that victimize law abiding citizens, then it needs to address money laundering. Typically, money laundering is described as a three stage process: placement, layering, and integration (UNODC website, Department of the Treasury, National Money Laundering Risk Assessment 2015).
Placement occurs after criminal activity generates profits, which needs to be placed into the financial system. If the illicit income is cash, then depositing the cash into a bank might constitute placement. Today, large quantities of cash attract unacceptable attention, so cash placement must be done unobtrusively. The criminal could mix the cash with legitimate income from a business that is cash intensive, such as a restaurant, barber shop, pizza parlor, car wash, or other business. Placement could be accomplished through “smurfing,” where large amounts of cash are distributed to many individuals (“smurfs”), and all of the individuals deposit small amounts of cash into their respective bank accounts.
Layering is a money laundering process that attempts to disguise and obfuscate the initial placement and true source of the funds. Think of layers of a rotting onion, with each layer concealing the rot within the core. Each layer helps to conceal what is beneath it, so that corrupt income can appear legitimate. One way to layer funds would be to repeatedly transfer money through several shell corporations and countries, another would be to disguise illicit income as the result of a sham transaction, loan, or investment.
Integration is the final money laundering stage where the criminal reaps the illegal reward, such as through the purchase of a home, business, or other investment or asset with funds that appear to be legitimate, untainted by criminal activity. The criminal is now the lawful owner of an asset, with all the accompanying rights.
These three stages are not rigid steps, since the creativity of the criminal is not restricted by definitions and typologies. Further, these stages are well suited for many cash money laundering situations, but with cybercrime and virtual currency new dynamics present themselves. When analyzing money laundering as a criminal offense, remember that terms are specifically defined within the relevant federal or state statute. To commit the crime of money laundering, a person needs to perform specific acts with the appropriate mental state as defined in the particular statute. Generally, someone has committed the crime of money laundering if he or she know funds are criminal proceeds, and conducts financial transactions with these funds for the purpose of concealing or disguising their source, destination, or ownership. (See for example, §§ 18 U.S.C. 1956, 1957). Additional information on criminal statutes appears in the subsequent section “Money Laundering Criminal Statutes.”
Who Investigates Money Laundering?
Many different types of organizations investigate money laundering, financial transactions, or the ownership of assets, where facts are not readily apparent or are concealed. Examples include law enforcement, intelligence agencies, regulators, financial institutions, private individuals, journalists, and non-profit organizations. The Treasury Department’s Bureau of Financial Crimes Enforcement Network (FinCEN) is a clearing house for financial data and analysis, which is used for both criminal enforcement, regulatory, and intelligence purposes. It is the financial intelligence arm of the US Government, with a mission to keep the financial system from being used for illegal purposes and to promote national security.
Law enforcement investigates suspected violations of criminal money laundering statutes. These investigations are typically complex, so federal law enforcement plays a predominant role in this area. Federal agencies that investigate money laundering include the Federal Bureau of Investigation (FBI), Drug Enforcement Administration (DEA), Internal Revenue Service (IRS), Department of Homeland Security (DHS), and United States Secret Service (USSS). Violations of federal law are ultimately prosecuted by United States Attorneys (federal prosecutors). State and local law enforcement can also investigate violations of state money laundering laws. The offices of the Attorney General of each state may have the resources to conduct investigations of this type. Some local prosecutors’ offices also conduct significant money laundering investigations and prosecutions, such as the New York County District Attorney’s Office. Agencies with a role in protecting the country’s national security also analyze financial transactions, including the Central Intelligence Agency (CIA), FBI, DHS, and others. Financial transactions might help reveal nation state espionage, participants in a terrorist cell, or that a nation is evading sanctions.
Financial institutions investigate money laundering. They are required to have anti-money laundering programs which include a compliance officer, policies, procedures, staffing, and tools (see subsequent section on regulation). They need to have adequate ability to detect and investigate suspicious financial transactions, report upon them as required, and properly document their actions. This duty has created the AML profession, designed to keep the institution in compliance with laws and regulation, and to keep the institution from being used as a tool by criminals and money launderers. As a part of these requirements, financial institutions must continually search for and identify money laundering activity, and where found report it to regulators and law enforcement via suspicious activity reports (“SARs”) as discussed in the subsequent section. Law enforcement can then investigate – and where warranted and their limited resources allow – bring criminal prosecutions. Financial institutions can terminate relationships with customers whose activity is illegal or suspicious. Government regulators also investigate money laundering and monitor the financial institutions that they supervise to ensure that they are properly investigating money laundering. Financial institutions have been deputized by the government to monitor their customers, and regulators are watching the watchers to ensure this is done properly.
Private individuals sometimes probe money laundering. Consider a victim who suffers millions of dollars of damage or losses due to a wrongdoer’s theft, misconduct, or negligence. That victim may hire an attorney or otherwise seek a court order directing the wrongdoer to return the funds. The wrongdoer may attempt to hide assets in order to keep them from being seized and may use money laundering techniques. The victim or attorney may hire investigators to try trace and recover funds, to try locate and seize the assets. This investigative process seeks to locate the hidden assets, establish facts that would allow an appropriate court to freeze the assets, and ultimately direct their delivery to the victim. Similarly, journalists scrutinize financial relationships and transactions which may be obscured using money laundering techniques. The phrase “follow the money” was associated with the Washington Post’s investigation of President Nixon’s Watergate scandal in the early 1970s (All The President’s Men 1976). Investigation of financial transactions surrounding Watergate helped piece together who was involved and the breadth of their activities. Many investigative journalists realize the value of financial analysis to uncover facts, motivations, or connections. Examples of nonprofits conducting this type of investigative journalism include Global Witness, the International Consortium of Investigative Journalists, and the Organized Crime and Corruption Reporting Project.
Criminalization, Regulation, and Investigation of Money Laundering
Money laundering has a relatively recent origin as a distinct crime – it was not until 1986 that the first money laundering criminal statute was enacted in the United States, The Money Laundering Control Act, 18 U.S.C. §1956 and §1957. However, the underlying conduct was occurring long before it was explicitly criminalized. Ever since governments have taxed their citizens, some have responded by hiding their money and wealth. Consider Al Capone, the notorious crime boss who settled in Chicago and led the “Outfit” in the 1920s. He led a criminal enterprise that profited handsomely from illegal alcohol transportation and sales (bootlegging), prostitution, and extortion during the prohibition era. To keep his illegal businesses in operation, a host of other crimes were committed, including bribery of public officials, intimidation, assault, and murder. The most serious of these crimes were never successfully prosecuted, perhaps due to witness intimidation, lack of cooperation, corruption, or an absence of legal tools necessary to hold the crime boss responsible for the physical acts of his employees. Instead, it was tax fraud that ultimately caused Capone’s downfall. He did not report his income to authorities, and neither did he sufficiently conceal it, living extravagantly with his riches. Prosecutors proved his failure to report income, and he was sentenced to 11 years prison.
The lesson of Al Capone was not lost on organized crime – unreported income can give rise to prosecution for tax fraud which can mean prison. Further, government might not be content with charging tax fraud. Tracing funds between source and destination might demonstrate the full criminal conduct of the defendant, a leader and profiteer of a criminal operation. To avoid arrest, smart criminals had to disguise some of their illicit criminal proceeds as legitimate income and report this income on their tax returns. Without documented income, they cannot explain expenditures for dinners, cars, boats, and homes. The income must have an appearance of legitimacy, because if the stated activity is truthful they would convict themselves. The tactic of money laundering allowed criminals to earn seemingly legitimate profits, while keeping law enforcement from tracing its true origin. However, it would take more time until government realized this practice needed to be criminalized.
To make criminal profits seem legitimate, “dirty cash” needs to be introduced into the financial system. Dirty cash is inconvenient for many reasons: it is bulky, attracts attention and risk of theft, is hard to store long term, and cannot be used to purchase expensive items such as businesses, houses, cars, and boats. Depositing cash into a bank account allows the criminal to use the financial system to store and transfer funds. Before enactment and proper enforcement of AML laws, criminals might bring tens of thousands of dollars of cash to the bank, deposit it, have their accounts credited, and then funds could be sent by check or wire. Few questions were asked, no reports were filed, and bank employees might have had knowledge about the criminal origin of the funds.
The Bank Secrecy Act of 1970 (BSA) introduced controls to stem this activity, and required financial institutions to detect and report money laundering activity. No longer could a duffel bag of cash be brought to the bank branch and deposited without questions being asked, and without reports being filed. Through the BSA, as it has been periodically amended, banks and many businesses are now required to report cash transactions of $10,000 or more through currency transaction reports (CTRs). They also must detect and report activity indicative of money laundering or other criminal activity through suspicious activity reports (SARs). Failure to make these reports could result in civil and criminal penalties for the bank.
The Money Laundering Control Act of 1986 was another important milestone, marking the first time that the federal government criminalized money laundering. It created new statutes: 18 U.S.C. §1956 and §1957 which made it a federal crime to conduct financial transactions with known criminal proceeds. Many states soon followed with their own money laundering statutes. These laws applied not just to criminals who launder their own ill-gotten gains but to third parties who perform money laundering services for them.
Over the years, there have been various amendments to these laws, including the USA PATRIOT Act of 2001, enacted in response to the terrorist attacks of 9/11. This statute strengthened financial monitoring and penalties, required banks to establish AML and CTF programs, designate a responsible compliance officer, create written policies and procedures, train employees, and obtain an independent audit. Despite the development of laws and regulations, they did not stop money laundering. Instead, criminals continue to seek and develop methods to disguise their activity and evade detection. Investigators need to keep up with emerging trends in order to detect and prosecute offenders.
Virtual currencies – also called digital currencies and sometimes called cryptocurrencies – present new money laundering investigative and regulatory challenges. Most readers have heard of the popular virtual currency Bitcoin. Virtual currency laundering methods are quite different from cash laundering, since virtual currency is earned, stored, and spent very differently. Criminals, including cybercriminals and identity thieves, have recognized the benefits of virtual currencies for paying each other and for laundering funds. From the creation of the first virtual currency in 1996 until 2013, it was ambiguous as to whether regulation applied to virtual currencies (Bandler, Cybercrime and Digital Currency 2016, p. 9). In 2013 FinCEN made clear that AML and registration regulations did indeed apply to virtual currency issuers and exchangers. However, the effect of this regulatory requirement was limited with the invention of and rising popularity of decentralized cryptocurrencies such as Bitcoin. Virtual currencies can be categorized as centralized or decentralized, where centralized currencies are administered by an entity, and decentralized currencies are typically cryptocurrencies, since it is the blockchain technology pioneered by cryptocurrencies that allows transactions to take place without a central administrator (Bandler, Cybercrime and Digital Currency 2016, p. 3, and ACAMS CAMS Certification Exam Study Guide sixth Ed. 2016, p. 65). With decentralized virtual currencies, there is no central currency administrator to implement an AML program or be held accountable for failing to do so. Thus a review of exchangers and users becomes all the more important. All virtual currencies present money laundering risks because of user anonymity, cross-border value transfer, and limited compliance with regulations and laws. Although virtual currency presents many crime and money laundering risks, investigators should remember that all conventional financial systems and methods also present these risks.
Money Laundering Laws and Regulations
Money Laundering Criminal Statutes
Federal and state criminal statutes prohibit money laundering activity. The applicable federal statutes arose from the Money Laundering Control Act of 1986 as 18 U.S. Code § 1956 (Laundering of Monetary Instruments) and 18 U.S. Code § 1957 (Engaging in monetary transactions in property derived from specified unlawful activity).
18 U.S.C. §1956 provides for penalties of up 20 years federal prison and fines of up to one half million dollars or twice the value of the funds. There are three subdivisions of the crime. Subdivision one sets forth that a person commits money laundering when they have knowledge that property is proceeds of unlawful activity, they conduct financial transactions with these illicit proceeds, and they (i) intend to promote or further more illicit activity, (ii) intend to commit tax fraud, (iii) are trying to conceal or disguise the location, source, ownership, or control of the property, or (iv) are trying to avoid a reporting requirement about the transaction. The transaction “reporting requirements” the statute refers to include the filing of CTRs and SARs, so someone who makes daily cash deposits of $9,000 in criminal proceeds to avoid the $10,000 threshold for the filing of a CTR would have committed money laundering.
Subdivision two of 18 U.S.C. §1956 criminalizes transfer of funds across US boundaries with knowledge that the funds are criminal proceeds, if the transfer is with the intent to avoid a transaction reporting requirement or to conceal or disguise the nature, location, source, ownership, or control of the funds. Bulk smuggling of cash criminal proceeds across the border, or sending a bank wire to disguise the criminal proceeds would be examples of this.
Subdivision three of 18. U.S.C. §1956 is designed for undercover law enforcement “sting” operations. This subsection does not require that the funds actually be criminal proceeds, but rather that they were “believed to be” or “represented to be” criminal proceeds. The undercover agent pretending to be a drug dealer who delivers $100,000 in cash to a corrupt businessman or financial advisor may be laying the foundation for a prosecution under this section.
States have statutes that criminalize money laundering. For example, New York State criminalizes money laundering within Article 470 of the state Penal Law. In essence, it is similar to the federal money laundering statute, but it is broken down into four distinct degrees, distinguished by the amount of funds laundered. Then each degree has multiple subdivisions. Critical aspects include whether the property is the proceeds of criminal conduct, the defendant’s intent to promote the carrying on of criminal conduct or engage in tax fraud, and the defendant’s knowledge as to whether transactions are designed to conceal or disguise the nature, location, source, ownership or control of criminal proceeds, or avoid reporting requirements.
Money Transmitting Regulations and Criminal Statutes
Every state in the United States except for Montana requires money transmitters within their borders to be licensed by the state. This means that companies within the state in the business of transmitting funds on behalf of customers must submit to state licensure and regulation requirements. Examples of money transmitters include Western Union, MoneyGram, and PayPal.
Consider New York State’s Banking Law § 650 (Unlicensed Money Transmitter), which holds that a person or entity who is in the business of sending or receiving money without a license is guilty of a misdemeanor. If the funds exceed certain thresholds – such as $25,000 per month or $250,000 per year – are criminal proceeds – then the offense rises to a felony. With the license come responsibilities to create and maintain records and have an AML program.
Federal law bootstraps upon state money transmitting laws. The federal government can prosecute individuals or entities under federal law if they violate a state money transmitting law. 18 U.S. Code § 1960 (Prohibition of unlicensed money transmitting businesses) criminalizes anyone who knowingly conducts, controls, manages, supervises, directs, or owns all or part of an “unlicensed money transmitting business.” An “unlicensed money transmitting business” is one that transfers funds on behalf of customers by any means and either (i) lacks a state money transmitting license where such license is required or (ii) fails to register with the Treasury Department as a money transmitter. See 18 U.S.C. § 1960. The registration requirement is set forth in 31 U.S.C. § 5330 (registration of money transmitting businesses).
Thus, compliance with various money transmitting laws requires obtaining a state license, registering with the federal government as a money service business (MSB), creating and maintaining records about the business, customers, and transactions, maintaining an anti-money laundering (AML) program, and reporting required events to FinCEN.
Licensing and Regulation of Financial Institutions
Banks and other financial institutions are common mechanisms for people to store and transmit funds. Like money transmitters, Banks are regulated and licensed. Financial institutions need to be licensed by the state in which they operate, register with the federal government, and are subject to state and federal oversight. They may be supervised by one or more federal organizations, such as the Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of Currency (OCC), National Credit Union Administration (NCUA), Federal Reserve Board (FRB), the Consumer Financial Protection Bureau (CFPB), and FinCEN. State authorities may regulate the bank as well, such as New York’s Department of Financial Services.
This licensing and oversight has many purposes, including consumer protection, ensuring the stability of the bank and the financial system, and also anti-money laundering controls (CFPB website, FDIC website, and FinCEN website). Regulations require the institution to have an AML program, which basically means that the bank has policies, people, and systems watching for suspicious transactions and activity indicating criminal activity, money laundering, or terrorist financing.
FinCEN and their Role in AML and Regulation
As mentioned earlier, FinCEN is the bureau within the Treasury Department charged with keeping criminals, money launderers, and terrorists from using the financial system, and with obtaining intelligence from financial transactions. Under the Bank Secrecy Act (BSA) and USA PATRIOT Act, banks and money transmitters are required to look for suspicious activity and large cash transactions and report it to FinCEN through SARs and CTRs. Every financial institution, money transmitter, and money service business in the USA must comply with regulations, and this includes having an AML program and filing these reports when required. These regulations apply to not only financial institutions but to car and boat dealers, casinos, and art and jewelry dealers. Any business that receives over $10,000 in cash in connection with a transaction needs to file IRS form 8300 with FinCEN or the IRS. All of this information that FinCEN keeps is tightly controlled, and unauthorized disclosure is a serious criminal offense. FinCEN’s information is used by criminal investigators and prosecutors at the federal and state level, and by our national security apparatus.
The AML Program
The laws and regulations designed to keep the financial system clean requires that financial institutions and money transmitters have an AML program (Bank Secrecy Act). This means they must create policies, procedures, systems, and employ people to monitor customers, the funds they store and transmit, and investigate potential money laundering activity. It also means that if they fall short of their responsibilities, there can be serious consequences, to include civil fines, criminal prosecution, and loss of license.
The AML program starts with learning who the customer is and what their business is. This is known as “know your customer” (KYC) and customer due diligence (CDD). It requires training employees such as bank tellers and relationship managers to look for signs of money laundering, and it means monitoring all transactions, which might require using special software designed to detect patterns and relationships.
When customers make large cash transactions, such as over $10,000, a currency transaction report (CTR) needs to be filed with the government that includes customer information. The bank would need to evaluate if this cash transaction is in accord with the customer’s expected legitimate banking activity. When customers behave suspiciously, or in a manner to indicate criminal activity, the bank has a duty to investigate, and report this suspicious activity to FinCEN as a suspicious activity report (SAR).
For example, suppose a customer tells the bank he is unemployed, yet he regularly deposits large amounts of cash into his account. The bank would be required to investigate this, and probably report it via a SAR. If the customer deposits $9,999 in cash on two separate days, that might not require the filing of a CTR, but it might require the filing of a SAR, because the customer appears to be structuring deposits to try avoid having a CTR filed. If the customer states that he is involved with selling merchandise on eBay, but deposits large volumes of cash, or receives high dollar bank wires, that would be worthy of further investigation. If a customer is a victim of a fraud, or is a participant in a fraud, the bank’s AML personnel need to investigate, and probably file a SAR.
All of these CTRs and SARs go to FinCEN and are accessible to certain law enforcement throughout the country. As indicated previously, the information filed with FinCEN is secret, and unauthorized disclosure is a serious criminal offense. Government and bank employees are not allowed to disclose their filings, nor even the fact that a filing was made. Thus, while it is well known that SARs need to be filed, it is a crime to disclose the filing of a particular SAR. Thus it would be improper to ask someone to disclose this information.
Money Laundering Typologies and Examples
The money laundering investigator should be aware of various typologies, some of which are summarized here, keeping in mind that the criminal’s creativity is unbounded by existing frameworks. After all, typologies are merely criminal conduct that has been discovered and written about. Imagine the criminal conduct that has not yet been identified.
Structuring is the process of breaking up one payment into smaller, less-recognized payments to avoid reporting requirements. (31 U.S.C. § 5324, Dept. Treasury National Money Laundering Risk Assessment 2015, ACAMS Study Guide p. 20). If the drug dealer desires to deposit $50,000 in cash into the bank, he might chose to do that $5,000 per week, for 10 weeks, thus structuring the deposits to avoid reporting requirements.
Smurfing is similar to structuring, but it involves using many people to disguise the transaction (FATF Report on Money Laundering Typologies 1998, ACAMS Study Guide p. 20). If the drug dealer desires to deposit $50,000 in cash to a bank, he could give $5,000 to ten of his employees or associates, who deposit it into their own bank account. Then they each make a payment to the drug dealer by check or wire.
Bulk cash smuggling is used to avoid cash reporting requirements at the border. (31 U.S.C. § 5332, Dept. Treasury National Money Laundering Risk Assessment 2015, p. 27, ACAMS Study Guide). The USA requires individuals transporting over $10,000 across the border to report this, but criminals cannot declare their cash, so it is hidden on their person, in their luggage, or in the vehicle. Drug traffickers who smuggle drugs into a country may use similar techniques to smuggle cash profits out of the country.
Trade-based money laundering uses the ruse of an international transaction to transfer value secretly from one place to another (Dept. Treasury National Money Laundering Risk Assessment 2015, p. 29, ACAMS Study Guide p. 55). This can be done through fictitious invoicing, over-invoicing, and under-invoicing. With a fictitious invoice, Company A provides an invoice to Company B, but no goods or services were really provided. Company A receives payment from Company B, and the funds appear legitimate. With over- or under-invoicing, Company A provides goods or services to Company B, but the invoice is either much higher or lower than the value provided. When Company B pays Company A, net value is transferred but the amount and direction of transfer is disguised.
Shell companies disguise the true ownership and control of the company (Dept. Treasury National Money Laundering Risk Assessment 2015, ACAMS Study Guide). The criminal uses a shell corporation, ABC Corp, so that the account is not in his true name. It is hard to identify the owners and directors of ABC Corp, because it, in turn, is owned by XYZ Corp. Where incorporation documents were filed with the government, they were filed by a business that protects the confidentiality of its clients. Shell corporations may be incorporated on one country, but use bank accounts in another country, picking countries that provide confidentiality. Front companies are a variation on this theme, where an ostensibly legitimate business is merely a disguise for money laundering or other nefarious activity.
Salaries can be used to launder funds (ACAMS Study Guide p. 70). A criminal may be on the payroll of a company and is paid a salary as if he works there, but in fact does not. Or, companies might pay employees in cash derived from criminal proceeds.
Attorneys and accountants may be used by money launderers, wittingly or not, to launder funds (Dept. Treasury National Money Laundering Risk Assessment 2015, ACAMS Study Guide p. 148). A tiny percentage of these professionals use their expertise unlawfully by actively assisting criminals with the commission of crimes such as money laundering and tax evasion, by giving advice on how to commit crimes and escape detection. Some may inadvertently provide services that assist criminals with shielding assets or transactions from government view. Of course, the vast majority of attorneys and accountants are honest, giving ethical advice to law abiding clients including about how to comply with laws and regulations.
Real estate can be used as a vehicle for money laundering (Dept. Treasury National Money Laundering Risk Assessment 2015, ACAMS Study Guide). Where funds are sent or received from shell companies, property is owned by a shell company, or attorneys are used to send or receive funds on behalf of the client; there is the ability to disguise the true ownership, source, or destination of funds.
Cybercrime has created new money laundering typologies (Dept. Treasury National Money Laundering Risk Assessment 2015, Bandler, Stemming the Flow of Cybercrime Payments, ACAMS TODAY, June 9, 2017). Cybercrime is conducted through the internet, making cash an inconvenient payment mechanism. Virtual currencies (e.g. Egold, Liberty Reserve, or Bitcoin) have become a payment method of choice between criminal participants. Cybercrime is tied to identity theft and also involves theft of funds in a variety of formats, including through bank wire, forged checks, and credit or debit accounts.
Money mules are recruited by cybercriminals to move money on their behalf (Dept. Treasury National Money Laundering Risk Assessment 2015, Bandler, Stemming the Flow of Cybercrime Payments, ACAMS TODAY, June 9, 2017). These money mules, wittingly or not, receive forged checks and misdirected bank wires, and send the funds to the next destination on behalf of criminals. Cybercriminals are constantly recruiting these money mules, through work-at-home scams, romance scams, or sophisticated schemes that purportedly involve collecting a debt or otherwise receiving a payment.
Traditional business can be created or coopted for the purpose of receiving criminal proceeds, for making payments which appear to be legitimate, and which can even be reported on taxes (Dept. Treasury National Money Laundering Risk Assessment 2015). Suppose the drug kingpin earns over a million dollars in cash per year – more cash than he can use or store himself. He reaches an agreement with a restaurant owner, and he gives the restaurant owner $20,000 in cash every month. The restaurant owner makes regular bank deposits for the day’s cash receipts and includes a portion of the drug dealer’s cash with each deposit. The bank and tax authorities are told this is restaurant income, though it is mostly drug dealing income. The restaurant’s bank balance swells each month, and the drug dealer receives a monthly check for $10,000 under the guise he is a part owner, a salaried employee, or a vendor of supplies or services to the restaurant. Ultimately, the drug dealer might want to launder more funds, so he could buy – or create – businesses to use as front companies to do this.
The money laundering investigator should consider how the criminal profits are earned, how criminals pay each other, do business, and reap the benefits. In other words, think like the criminal. The investigator should not only “follow the money” but also “follow the product,” because this will give insight about where the money is going. Monetary transactions accompany transfer of contraband and criminal services (Bandler, Lawyers, Drugs and Money, AML in Popular Media 2018). After all, criminals do not provide goods or services for free, they are doing it to get paid. For example, suppose drugs are grown and manufactured in South America, and delivered to various cities in the United States, and then sold on the streets for cash. The drugs follow a path through farming, processing, shipment, repackaging, and sale, and many people play a role at each stage of this process. The drug “kingpins” within the United States and South America are reaping significant profits, and beneath them are a wide spectrum of employees, workers, and contractors, some of whom earn handsomely while others earn a pittance. The sale of the drugs on the street is done for cash, the street dealer and team are paid, give cash to their boss, and so on up the chain. Much of that profit needs to ultimately make its way back to the country of drug origin to pay the kingpin, traffickers, and laborers. Perhaps cash is smuggled to South America, or perhaps funds are sent via bank wire of virtual currency. Funds need to be transferred in a manner that is cost efficient, safe, and hidden from government detection.
Cybercrime Money Laundering
Cybercrime has altered the traditional money laundering models, since illicit profits are often earned in virtual currency rather than cash, presenting different money laundering challenges for the criminal, and a different typology for law enforcement, regulators, and private investigators (Bandler, Stemming the Flow of Cybercrime Payments 2017). Law enforcement is still learning how to effectively address cybercrime and how it launders funds. Here is an example of cybercrime money laundering: A hacker from another country hacks into a US-based company and steals millions of records, such as credit card account information, credit report information, internet usernames and passwords, or other victim information. The hacker sells this information to a “vendor” of stolen data, who pays for the data in virtual currency. Next, the vendor sells this hacked data to identity thieves in the USA, who also pay with virtual currency. The identity thieves work with their associates to commit identity theft, to create forged identification and credit cards, to assume the identity of the victims, use their credit to purchase merchandise or otherwise steal. These participants never meet each other, never learn each other’s true name, but still need to pay each other. Cash is of little use, but virtual currency works perfectly. The cybercriminals earn prodigious profits in virtual currency and need to launder those funds.
Since the creation of money laundering criminal laws, there have been many prosecutions of those who hid their own illegal profits, as well as those who facilitated their activity. Financial institutions can be held liable both criminally and civilly for their customers’ activity. In the early 1990s, it was discovered that the Bank of Credit and Commerce International (BCCI) was involved with massive money laundering and fraud and were charged federally in Florida and with state charges by the New York County District Attorney’s Office. BCCI ultimately pleaded guilty in state and federal court and forfeited over a half a billion dollars and went out of business. In 2014, BNP Paribas pleaded guilty to falsifying business records in a scheme to illegally move funds on behalf of sanctioned individuals and entities, and paid nearly nine billion dollars in penalties but remained in operation. In 2012, HSBC entered into a deferred prosecution agreement with state and federal authorities and paid nearly two billion dollars in fines for falsifying records, laundering funds on behalf of drug traffickers, and transmitting funds for sanctioned entities. Other banks have been fined by federal and state regulators for falling short with their AML requirements.
As mentioned, cybercrime launched a new era in crime and money laundering, including through virtual currency. Egold was the first virtual currency, invented in the mid-1990s, and became popular with cybercriminals and identity thieves. In 2007, Egold was charged by federal authorities of money laundering and illegal money transmitting and was convicted by guilty plea in 2008.
Western Express International, Inc. was a virtual currency exchanger based in Manhattan which facilitated cybercrime and identity theft related conduct, and laundered funds for its customers. In an investigation that spanned from 2005 to 2013, the New York County District Attorney’s Office investigated the exchanger, followed the money (digital currency), and ultimately identified many of the exchanger’s clients. Cybercriminals were extradited from Eastern Europe, identity thieves were arrested across the USA, and the exchanger and its owners were also charged. Most defendants admitted their responsibility through guilty plea, and the remaining three were convicted after a trial that lasted over 2 months. This case provided a window into the global nature of cybercrime, virtual currency, and money laundering techniques through digital currency, money remittances, bank wires, and shell corporations.
Liberty Reserve was a virtual currency based in Costa Rica, which also catered to criminal conduct by cybercriminals, identity thieves, and others. In May 2013 the business and owners were indicted by federal authorities, and they were ultimately convicted by guilty plea of money laundering. The prosecution of Silk Road mastermind Ross Ulbricht marked another successful cybercrime money laundering case. Ulbricht had created and operated an online marketplace for drugs and other contraband, where participants paid each other with Bitcoin virtual currency. The public is interested in crime stories, so money laundering investigation has found its way into television and movies, including the television series The Wire, Breaking Bad, Ozark, and more (Bandler, Lawyers, Drugs and Money, AML in Popular Media, March 20, 2018).
Anti-Money Laundering Organizations
There are a number of organizations that address or focus on anti-money laundering issues, including international, governmental, non-profit, and for-profit trade organizations. Every country’s financial intelligence agency (e.g., FinCEN) can join with the international Egmont Group of Financial Intelligence Units, which promotes cross-border cooperation with financial investigations. The Financial Action Task Force on Money Laundering (FATF) is an inter-governmental organization devoted to combating money laundering, terrorist financing, and other threats to the international financial system. The United Nations has devoted resources toward anti-money laundering, established the Office on Drugs and Crime, and offers model legislation that countries may choose to adopt. The Association of Certified Anti-Money Laundering Specialists (ACAMS) is the largest international membership organization dedicated to anti-money laundering and administers a professional certification. There are also other professional organizations for AML professionals. Other organizations and resources are listed in the additional reading section.
Money laundering investigation is conducted by many participants from the government, financial, private, legal, and journalism sectors. Through proper investigative techniques, criminal activity and profits can be identified and minimized. Legal and regulatory requirements may impose a duty to adequately detect and investigate money laundering activity.
- ACAMS Study Guide for the Certified Anti Money Laundering Specialist (CAMS) Certification Exam. (2016). ACAMS, 6th ed., p. 65.Google Scholar
- All the President’s Men. (1976). Wildwood enterprises/Warner bros.Google Scholar
- Bandler, J. (2016). Cybercrime and digital currency, p. 9, Information Law Journal, A Publication of the Information Security and EDDE Committees, ABA Section of Science & Technology Law, 7 (4), Autumn. https://www.americanbar.org/content/dam/aba/administrative/science_technology/2016/ilj_volume7_issue4.authcheckdam.pdf
- Bandler, J, Lawyers Drugs, and Money, AML in Popular Media, ACAMS TODAY, 20 Mar 2018. https://www.acamstoday.org/lawyers-drugs-and-money-aml-in-popular-media/
- Bandler, J. Stemming the flow of cybercrime payments, ACAMS TODAY, 9 June 2017. https://www.acamstoday.org/stemming-the-flow-of-cybercrime-payments/
- CFPB (Consumer Financial Protection Bureau). https://www.consumerfinance.gov/about-us/. Last accessed 26 Apr 2018.
- Department of the Treasury. (2015). National Money Laundering Risk Assessment, 2015). https://www.treasury.gov/resource-center/terrorist-illicit-finance/Documents/National%20Money%20Laundering%20Risk%20Assessment%20%E2%80%93%2006-12-2015.pdf
- FATF (Financial Action Task Force) Report on money laundering typologies, 1998.Google Scholar
- FDIC (Federal Deposit Insurance Corporation). https://www.fdic.gov/about/strategic/strategic/mission.html. Last accessed 26 Apr 2018.
- FinCEN, (U.S. Department of the Treasury, Financial Crimes Enforcement Network) (FinCEN). https://www.fincen.gov/about/mission. Last accessed 26 Apr 2018.
- UNODC (United Nations Office on Drugs and Crime) website. The Money-Laundering Cycle. https://www.unodc.org/unodc/en/money-laundering/laundrycycle.html. Last visited 26 Apr 2018.
General References and Further Reading
- Egmont Group of Financial Intelligence Units. https://egmontgroup.org/en
- Financial Action Task Force on Money Laundering (FATF). http://www.fatf-gafi.org
- U.S. Department of the Treasury, Office of Foreign Assets Control (OFAC). https://www.treasury.gov/about/organizational-structure/offices/Pages/Office-of-Foreign-Assets-Control.aspx
- U.S. Department of the Treasury. Financial Crimes Enforcement Network (FinCEN). https://www.fincen.gov
- U.S. Federal Financial Institutions Examination Council (FFIEC). Bank Secrecy Act/Anti-Money Laundering Information Base, http://www.ffiec.gov/bsa_aml_infobase/default.htm
- United Nations Office on Drugs and Crime. http://www.unodc.org
- American Bankers Association. https://www.aba.com
- Association of Certified Anti-Money Laundering Specialists (ACAMS). http://www.acams.org
- Florida International Bankers Association (FIBA). http://www.fiba.net
- International Money Laundering Information Network. http://www.imolin.org/imolin/en
- The Anti-Money Laundering Association (AMLA). https://theamla.com
- Wolfsberg Group. www.wolfsberg-principles.com
- USA PATRIOT Act. For a summary see https://www.justice.gov/archive/ll/highlights.htm
- 31 U.S.C. §5311 et seq. Bank Secrecy Act (BSA).Google Scholar
- 18 U.S.C. § 1956 Laundering of monetary instruments.Google Scholar
- 18 U.S.C. § 1957 Engaging in monetary transactions in property derived from specified unlawful activity.Google Scholar
- 18 U.S.C. § 1960 Unlicensed money transmitting.Google Scholar
- 31 U.S.C. § 5330 Registration of money transmitting businesses.Google Scholar
- NYS Penal Law § 470.00 et seq., Money laundering.Google Scholar
- NYS Banking Law § 650, Unlicensed money transmitting.Google Scholar
Journalist and Non-profit AML Investigation
AML News Sites, Guides, and Articles
- ACAMS MoneyLaundering.com. www.moneylaundering.com
- ACAMS Study Guide for the Certified Anti Money Laundering Specialist (CAMS) Certification Exam. (2016). ACAMS, 6th ed.Google Scholar
- Bandler, J. Cybercrime and digital currency. ABA Information Law Journal (Autumn 2016). https://www.americanbar.org/content/dam/aba/administrative/science_technology/2016/ilj_volume7_issue4.authcheckdam.pdf
- Bandler, J. Dirty digital dollars, Fraud Magazine (July/August 2016). http://www.fraud-magazine.com/article.aspx?id=4294993652
- Bandler, J. (2017). Stemming the flow of cybercrime payments and money laundering. ACAMS TODAY, 16 (3). http://www.acamstoday.org/stemming-the-flow-of-cybercrime-payments/
- Money Laundering Bulletin. https://www.moneylaunderingbulletin.com