Money Laundering

A Publication from Alan D. Lasko & Associates, P.C.                                         Summer 2017

Money laundering is no longer just the concern of mobsters and drug kingpins. Following the attacks of September 11, 2001, new laws have tasked legitimate businesses with understanding and following anti-money laundering laws, designed mainly to thwart the financing of terrorism.

This white paper provides an overview of money laundering basics, common ways in which money is laundered, and a look at anti-money laundering laws that can affect any business or financial institution.

What it is

Money laundering is "the process by which criminals attempt to disguise illegal assets as legitimate assets that they have the right to possess and spend."  It's a common element in many corruption, fraud and terrorist-financing cases and affects the economics of many government entities and businesses.

The term may have roots in real laundering. Al Capone got his start in the laundromat business, and went on to launder some $1 billion over the course of his criminal career; that's one theory of how the term originated.

Money laundering has become much more complex in recent years, thanks to electronic banking and globalization. It's also more difficult to detect and prevent. Money laundering has expanded beyond running funds through a small, cash-based business to sophisticated operations involving transferring cash across international borders, slipping funds undetected through obscure legal loopholes, and exploiting digital pathways for moving money invisibly. 

How it works

All money laundering starts with ill-gotten gains: "Dirty" money made through criminal activity such as the sale of illegal drugs, trafficking in weapons, fraud, bribery, embezzlement, or insider trading.

Criminals can't safely stash truckloads of cash in the basement or backyard. Money deposited into a bank leaves a footprint which can trigger suspicion and investigation.  Instead of physically hiding cash, criminals turn to money laundering techniques to disguise the source – to make the money "clean," so that it appears to originate from a legal, legitimate business. 

There are no exact statistics measuring the quantity of money laundered annually. Criminals constantly seek new ways to move money around without leaving tracks, and by definition, money laundering cases tend to be complex and many go undetected.

However, it's clearly a huge figure.  The United Nations Office of Drugs and Crime estimated that criminal proceeds amounted to 3.6% of global GDP in 2009, with three quarters of that – $1.6 trillion – being laundered.  The FBI and the American Association of Fraud Examiners estimates that white collar crime in the U.S. amounts to between $300 and $600 billion a year, far more than the total losses from crimes against property, including burglary and bank robbery. 

As Peter Henning wrote in a 2015 New York Times story, detecting and preventing money laundering "is a battle that requires constant vigilance, and is not so much a matter of winning or losing, but of just trying to stay current with the latest tactics."

How money gets laundered

Typically, money laundering involves three steps: "placement" – introducing cash into the financial system by some method; "layering" – moving the money around in a way that creates confusion and camouflages the illegal source; and finally, "integration" – transferring the wealth into the legitimate financial system.

A few key avenues of money laundering: 

Cash intensive businesses provide a common avenue for criminals to launder money. Typically, these are service businesses operating largely on a cash basis, such as parking lots, strip clubs, tanning beds, car washes and casinos. The businesses may legitimately earn money, but also serve to camouflage "dirty" money generated through criminal activity. 

Smurfing, or structuring, is a method of placement in which a sum of cash is broken into smaller quantities, small enough to avoid anti-money laundering reporting requirements. Banks must report deposits of more than $10,000 to the federal government; it's a crime to duck those requirements even if the money comes from a legal source. 

 Bulk cash smuggling involves physically moving cash into another jurisdiction and depositing it into a financial institution there -- typically, an offshore bank with less rigorous money laundering enforcement.

Trade-based money laundering (TBML) involves over or undervaluing invoices to disguise the movement of cash through a business.  It typically involves falsifying documents to misrepresent financial transactions.

Round-tripping involves depositing "dirty" money into a foreign corporation offshore, preferably a tax haven. The money is then shipped back to the U.S. in the form of a foreign direct investment that's exempt from taxation. 

Black salaries – in this strategy, unregistered employees are paid in cash, often with "dirty" money.

Old needle, new haystack

As more and more commerce goes global, money launderers can exploit legal and knowledge gaps between jurisdictions. One example that has drawn the attention of the U.S. government in recent decades is the hawala system. 

An ancient, informal remittance system originating in South Asia, hawala transfers money overseas through a trusted network of people. It's often used by immigrants with no nefarious intent. A cab driver in New York, for example, might use a hawala broker to send legitimately-earned money home to a relative in Pakistan. Hawala is less expensive than a wire transfer through the U.S. banking system and typically involves no paper trail; but that also makes it ideal for moving and laundering money for the drug trade and for terrorist activity.

Digital currency provides a new avenue for money laundering activities. While investigating Silk Road – a site on the "dark web" that trafficked in illegal drugs – Secret Service Agent Shaun Bridges hacked into the site and stole 20,000 bitcoins, changed them into U.S. currency, and transferred the $820,000 in his bank account. That triggered an IRS investigation, and he was arrested and convicted.

Gift cards and prepaid cards also offer a new way to move money without financial fingerprints. Many fraudsters that prey on senior citizens, posing as IRS agents or law enforcement officials, will demand payment in the form of iTunes, Target or other gift cards, a relatively untraceable means of moving money. 

How it's detected and prevented

Because they're the first line of defense against money laundering, banks, credit unions and money-transmission businesses are required by law to keep track of their customers and to report suspicious transactions.  

Following the attacks of September 11, 2001, the Patriot Act enacted several money laundering provisions which impact legitimate business operations.  Namely, any trade or business must report any receipt of over $10,000 or more in currency to the U.S. Treasury's Financial Crimes Enforcement Network (FinCEN).

Other provisions of the Patriot Act include:

• Requiring all financial institutions to establish anti-money laundering pro-grams;
• Prohibiting shell banks from having accounts in U.S. financial institu-tions;
• Instituting due diligence procedures to detect and report money launder-ing in non-U.S. citizen accounts;
• Making bulk smuggling of cash over $10,000 a criminal offense.

These laws have placed a bigger burden on financial institutions, and in some cases resulted in significant fines levied against major banks by the U.S. government for non-compliance. A few examples include the $1.9 billion fine against HSBC in December 2012 and the $8.9 billion fine in 2014 against BNP Paribas.  

Even with these laws in place, it's still difficult for government to police the tidal waves of cash through the banking system. 

Business owners should be aware of red flags that may indicate that a client or vendor is laundering money, to protect themselves against the possibility of participating in an illegal transaction. 

As the Wall Street Journal's Henning wrote, "The potential for money laundering is always present. Anywhere money can flow, there is the danger that the proceeds of financial crimes will be washing through the financial system."

For example, a real estate agent should question a client that's in an undue hurry to complete a purchase, or is prepared to make a purchase without anyone viewing the property or at a sale price that is abnormally high or low. Similarly, any 100 percent cash deal – where the buyer brings a paper bag full of cash to the closing – is a big red flag. Ditto if the client is not able to account for the source of payment from his or her income or assets, or if the client says that funds are coming from one source, and at the last minute the source changes.

Any business owner who's worked in an industry long enough will know what is considered usual and customary and what is not – and should consider whether any unusual activity could signal money laundering.

Business owners may report suspicious activity to local law enforcement or the FBI, or may file a suspicious activity report (SAR), which is sent to the U.S. Treasury's Financial Crimes Enforcement Network (FinCEN). (For further information or assistance regarding how to file an SAR, call FinCEN's Regulatory Helpline: 1-800-949-2732.)

Monika Witek, Director

Alan D. Lasko

Alan D. Lasko & Associates, P.C.

Certified Public Accountants

205 West Randolph Street, Suite 1150

Chicago, Illinois 60606

Email: [email protected]

Email:  [email protected]

Website:  www.adlassoc.com