What is money laundering?
The most simple definition of money laundering is “taking illegal proceeds and conducting a series of financial transactions with those proceeds to make them appear to have come from legal means.” Sounds simple enough, right? Well, when it comes to unintentionally committing a money-laundering violation and being prosecuted for it, it’s not that simple. Basically, taking the money from just about any federal crime and doing virtually anything with it—buying something, depositing it, even placing into a safe-deposit box—could be a money-laundering violation, and you could be prosecuted for it, even if you didn’t know it was a crime.
The process of intentionally laundering money, of course, is not so simple.
Most people have no idea exactly what money laundering is or how it is accomplished. Many who conduct illegal acts or financial transactions with illegal funds, do so without realizing they’ve violated a money-laundering statute—until they are visited by federal agents or are indicted by a Federal Grand Jury. Whether they truly didn’t realize they were committing a crime or they thought they were committing a little small-scale fraud for some extra cash, they find out very quickly that they’ve committed a very big crime indeed: money laundering.
Law-enforcement and other individuals will tell you that laundering money is a simple, three-step process:
- converting illegal cash to assets (houses, automobiles, etc.),
- selling those assets, and
- using the proceeds to buy another asset
This is referred to as domestic money laundering in a nutshell, and it’s rarely ever successful. Law enforcement, especially IRS Criminal Investigation (CI) special agents, are very good at following the paper trail, and most of them always like a good challenge. With the power of a grand jury subpoena, they can easily access financial records and trace assets back to their original source. One can sell an asset hundreds of times, but the paper trail will always be there and will always lead the investigator back to the original purchase—and thus to the original source of the illegal proceeds.
For money laundering to succeed, the paper trail must be completely eliminated, thus disguising the source and ownership of the money. Some say the paper trail could be made complex enough within the U.S. to separate the three steps of money laundering, but this is rarely effective and would likely be traced by IRS Special Agents. No other agency can follow the paper trail like IRS.
All money launderers have three major objectives:
- To conceal the current ownership of the illegal cash,
- To conceal the source of the illegal cash, and
- To conceal or obscure the paper trail—i.e., to get the money into a financial institution or business while avoiding any reporting requirements (CTR or Form 8300)
To meet their objectives, they have to succeed in three crucial tasks:
- Placement—The process of getting the money into one or more financial institutions.
- Layering—The process of spreading that money over numerous financial institutions, or of spreading it out via the purchase of merchandise, real estate, stocks and bonds, life insurance, etc. Once this is done, the launderer can move the assets around, open other accounts, purchase more gold or securities, etc. and eventually getting the money out of the U.S.
- Integration—The process by which the illegal funds are integrated back into the U.S. financial system
Regardless of what type of financial institution (bank or non-bank) you have, your employees must be adequately trained to detect the type of illegal activity and financial transactions they will likely encounter while conducting their job. Most important, they should also know what will likely happen to them should they get involved with money launderers.
What does “anti–money laundering” have to do with my company?
Section 352 of the USA PATRIOT Act requires the use of AML Programs across virtually the entire financial-services industry. If your business is defined by Title 31 § 5312(a)(2) as a financial institution, this includes you—and even if your industry as a whole is not required to comply with these rules, you could still run into trouble (see “Special Rules,” below). To be in compliance, you are required to establish an AML Program, comprising (at minimum) the following four elements:
- Written and implemented policies, procedures, and internal controls based on the company’s risk;
- A designated compliance officer responsible for ensuring the AML Program is effectively implemented;
- Periodic ongoing (i.e., annual) training of personnel concerning their responsibilities under the program; and
- An independent, annual audit/review process to monitor and maintain an adequate program
If your business does not have an AML Policies and Procedures manual, you obviously have not had an independent audit/review of your AML Program. If that defines your business, you are taking a chance with your financial future and have not even begun the process to become compliant. If your business is not compliant, when it should be, the future of your company and your livelihood may be in jeopardy and at serious risk. You are placing your financial future in the hands of employees and others who have nothing to lose by conducting an illegal sale and/or will do whatever is needed to close a deal.
Some of the rules differ slightly across industries; two examples are MSBs and auto dealerships. MSBs must register with FinCEN (Financial Crimes Enforcement Network) every two years. For automobile dealerships, only an advance notice of proposed rule-making has been issued , so auto dealers aren’t compelled to meet the minimum legal requirements at this time. However, the auto industry, like many others, should have been complying since January 1985, when Form 8300 was first released. If you don’t have an AML Policies & Procedures manual, you should have one prepared for your company, so your employees know what they can and cannot do.