Anti-Money Laundering: The Basics
This post is the first part of a three part series that discusses Anti-Money Laundering.
- The Basics (this article!)
- The Financial Industry
- Real Life Examples
What is Money Laundering?
Money laundering is the process of making money gained from illegal activities (dirty money) look like money gained from legitimate activities (clean money). An easy way to think about the money laundering process is to break it down into three stages:
- Placement is getting the illegal funds into the financial system. This can be the most difficult stage for a criminal due to the regulations of financial institutions regarding the reporting of suspicious activity. If an account were to receive a large amount of cash deposits, this would be a huge red flag. To get around the red flags, the money is broken up into smaller transactions.
- Layering is moving the money around in an attempt to hide the origins. This can include transferring money between different banks, or offshore accounts.
- Integration is using the money for legitimate purchases to make the money look clean. For example, purchasing real estate or high value items like art, or luxury vehicles.
Once the money has been reunited with the criminal, there is little evidence of a crime.
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Brief Timeline of US Laws (a brief, non-comprehensive list)
The Bank Secrecy Act in 1970 established recordkeeping and reporting requirements. It required banks to:
- Report cash transactions over $10,000 cash with the Currency Transaction Report
- Identify persons conducting transactions.
- Maintain a paper trail by keeping records of financial transactions.
The Money Laundering Control Act in 1986 established money laundering as a federal crime. It prohibited structuring transactions to evade the CTR filings and required financial institutions to report any activity known to evade the CTR filing with a Criminal Referral Form.
The Anti-Drug Abuse Act in 1988 expanded the definition of financial institutions to include car dealers and real estate closing personnel which required them to file CTR reports. It also required the verification of identity information for monetary instruments over $3,000.
The Annunzio-Wylie Anti-Money Laundering Act in 1992 required a standard Suspicious Activity Report to be used to report activity and eliminated the Criminal Referral Form. It also provided a safe harbor for financial institutions and its employees from civil liability for reporting suspicious activity.
The Money Laundering Suppression Act in 1994 required Money Service Businesses to be registered and to maintain a list of businesses authorized as agents. It also it a federal crime to operate an unregistered Money Service Business. A money service business is anyone who offers services like check cashing; foreign currency exchange services; or selling money orders, travelers’ checks, or pre-paid access products.
The USA PATRIOT ACT in 2001 was the biggest expansion to regulations the financial industry must comply with.
- required financial institutions to have an Anti-Money laundering program with minimum requirements. (more in Part 2 on this)
- standards for financial institutions to verify and maintain an account. This means verifying names, addresses, date of birth, etc. at account opening and checking against a known or suspected terrorist list.
- expanded the existing BSA framework to strengthen the customer identification process and criminalized the financing of terrorism.
For more information about the history of Anti-Money Laundering laws in the US, see
https://www.fincen.gov/history-anti-money-laundering-laws
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