A PSA ABOUT BSA: MONEY LAUNDERING
Abstract
This paper will take an in-depth look at the crime of money laundering. It will begin by defining a Title 31 and the Bank Secrecy Act and then also identify the stages behind the crime and some red flags that make the practice more easily identifiable. It will conclude with an explanation on why money laundering is bad and who is negatively affected by it.
Introduction
A quick Google search of the term money laundering brings up movies such as Lethal Weapon 2, The Infiltrator, and The Firm. The films glamorize the crime with Colombian drug kingpin alliances, gun shootouts, and mob associations yet understate how a crime that initially seems so victimless affects the economy of the United States. Money laundering is defined by the United States Department of the Treasury as “financial transactions in which criminals, including terrorist organizations, attempt to disguise the proceeds, sources or nature of their illicit activities” (“Money Laundering,” 2019). It released the National Money Laundering Risk Assessment 2018 on December 20th of last year which thoroughly covered all the potential avenues for money laundering. “The United States continues to estimate that domestic financial crime, excluding tax evasion, generates approximately $300 billion of proceeds for potential laundering. The crimes that generate the bulk of illicit proceeds in the United States are fraud, drug trafficking, human smuggling, human trafficking, organized crime, and corruption,” (“National Money Laundering Risk Assessment 2018, 2018).
In order to fully comprehend the ramifications of money laundering, it is crucial to understand the history of the crime, its identifiers, and steps that have been taken to stop it.
The Bank Secrecy Act
According to the International Revenue Service (IRS), the Bank Secrecy Act (also referred to as the Currency and Foreign Transactions Reporting Act) was passed by Congress in 1970 as the first laws of its kind to fight money laundering in the United States requiring businesses to keep financial records, file reports for payments received over $10,000 in one day, and alert law enforcement to suspicious activities (“Bank Secrecy Act”, 2018). The IRS was and still is working in collaboration with the U.S. National Money Laundering Strategy in an effort to stop money laundering.
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The law was not perfect during its initial passing nor has it remained unchanged. The constitutionality of the Bank Secrecy Act was questioned as opponents felt it violated the Fourth Amendment which protects against unwanted search and seizure- this was the basis of United States v. Miller in 1976. Miller was found guilty of illegally selling whiskey and not paying taxes. He appealed this conviction on the basis on illegal seizure as his bank records were subpoenaed by the U.S. Attorney and not the court (Krcatovich, 2017). Ultimately, Miller’s conviction was upheld.
What specifically does the Bank Secrecy Act require? The IRS website is clear on the law and its expectations, but the two main takeaways are Reports of Cash Payments Over $10,000 Received in a Trade or Business and Reports of Foreign Bank and Financial Accounts. To be in compliance with the former, Form 8300 must be filled out in the event $10,000 or more is received in a single transaction or related transactions (“Bank Secrecy Act”, 2018). In addition to the report, there is also a requirement to have written statements readily available for those involved in the transactions. Such statements must include identifiable information such as their names, addresses, persons of contact, and phone numbers as well as the total amount of cash the business was required to report to the IRS and proof that all of the aforementioned information was provided (“Bank Secrecy Act”, 2018). The purpose of this requirement is to create a paper trail to ensure that all transactions over $10,000 can be easily traced and explained.
Furthermore, the Act also includes the Report of Foreign Bank and Financial Accounts (FBAR) which requires owners of offshore accounts, brokerage accounts and the like to report them yearly to the IRS.
Title 31 and BSA/AML Compliance
Title 31, or 31 CFR Chapter X, falls under the Bank Secrecy Act although it applies more specifically to casinos. Just as the Bank Secrecy Act requires that companies report transactions of $10,000 or more, Title 31 requires that casinos obtain photo identification and Social Security numbers of casino-goers who process in some way $10,000 or more within a 24-hour period. The reasoning behind this casino-specific regulation is the fact that casinos present a higher risk for money laundering due to the high amount of cash transactions done through wagers (Maddocks, 2010).
AML Compliance (Anti Money Laundering) is a requirement of the Bank Secrecy Act (BSA) “ to help detect and report suspicious activity including the predicate offenses to money laundering and terrorist financing, such as securities fraud and market manipulation” (Crane, 2019). The rules state that a company must implement an independently-tested program with a Customer Identification Program (CIP) to know the true identity of all customers (Crane, 2019). This is in-line with BSA compliance requiring Form 8300 for $10,000 and up transactions as company-identifying information such as name, address, contact person, and phone number were required for BSA compliance as well. This consistency is crucial to spearheading the fight against money laundering across all fronts; by having independent companies implement their own tested programs against the crime, enforcement agencies are even more likely to stop the crime before it happens as no criminal would be willing to self-identify before the crime.
In effect, the Bank Secrecy Act and Title 31 try to get ahead of money laundering before it occurs, granting “authorities the ability to more easily reconstruct the nature of the transactions (Kenton, 2018) by preventing banks for being unknowing middle men to financial and terrorist crimes through money hiding, transfers, and deposits. (Gianni, 2004). The Bank Secrecy Act calls for a proactive approach: identifying red flags and reporting suspicious activity to law enforcement before it becomes a larger issue.
Money Laundering: Definition, Process, Examples and Red Flags
A fictional and equally impractical example of money laundering would be the software program created by three engineers in the film Office Space, with the algorithm depositing fractions of pennies into a bank account so the fraud would remain undetected. More formally, it is defined as funneling money obtained through illegal means “into the financial system in ways designed to avoid drawing the attention of banks, financial institutions or law enforcement agencies” (McCoy, 2017). It is an effort to legitimize the money by placing, layering and then integrating it.
Placing the money into the financial system carries the most risk due to the Bank Secrecy Act and reporting requirements. Criminals holding large amounts of illegally-obtained cash would not want to make large deposits; instead, they would make small deposits over large stretches of time to avoid detection or arouse suspicion. Layering refers to shifting the money through numerous transactions to make the money more difficult to follow and, thus, more complicated for investigators. This can wiring and transferring into numerous local and offshore accounts (McCoy, 2017). Integration, the final step of the process, refers more specifically to real estate; criminals will purchase and resell such assets as real estate and other securities (McCoy, 2017).
With regards to red flags, the Federal Financial Institutions Examination Council Bank Secrecy Act/Anti-Money Laundering InfoBase provides the following as suspicious:
● Insufficient or suspicious information provided by the customer
● Efforts to avoid recordkeeping requirements
● Funds transfers
● Activity inconsistent with the customer’s business
● Lending activity
● Changes in bank-to-bank transactions
● Cross-border financial institution transactions
● Bulk currency shipments
● Privately owned automated teller machines (ATMs)
● Embassy, foreign consulate, and foreign mission accounts
● Other unusual or suspicious activity (Appendix F: Money Laundering and Terrorist Financing “Red Flags”, n.d.).
Examples and Effects
The IRS released criminal investigation updates in their fiscal year reports. The most recent, 2016, provides several examples of money laundering. In September of 2016, Rafia Feghi who is from Iran but was living in Newton, Massachusetts was found guilty of conspiracy to defraud the United States and to obstruct justice (“Examples of International Investigations Fiscal Year 2016”, 2019) after she hid nearly a million dollars from forfeiture, created numerous fake international accounts, and lied to the courts.
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In January 2016, international money launderer Miguel Amaris-Caviedes was found guilty of knowingly conducting financial transactions that involved purported drug proceeds (“Examples of International Investigations Fiscal Year 2016”, 2019) after he agreed to and laundered over $100,000 of drug profits to Puerto Rico with the intention of purchasing more drugs. The key to both of the aforementioned crimes is the fact that money laundering is very intentional; while some incidents could be viewed as accidental or being done without proper knowledge such as underpaying taxes, money laundering shows clear intent to hide and misuse funds.
Simply stated, money laundering is bad because it is stealing; the money that is being laundered is obtained through illegal means and, due to this fact, it usually finds its way back to fund more illegal actions. There are economic repercussions, such as the relation to small businesses in the private sector. A common, and somewhat cliché, example of money laundering is the underperforming food establishment that somehow remains open and prospers regardless of lack of business. Most recently, there were connections made between pizza parlors in the United States and heroin trafficking (McDowell & Novis, 2001). The pizza business would launder drug funds and, as a result, would have access to exorbitant amounts of funding that would be nonsensical given their lack of business. Regardless, they would funnel that money back into their business and use it to buy products and services that would have otherwise been out of reach for them. Economically, this makes for an unbalanced playing field as underperforming establishments (whether it be due to quality of products, service, etc.) would prosper in the competitive restaurant business due to illicit activities while honest establishments would be at a disadvantage and more susceptible to recessions, slow seasons, and other lulls in income streams due to no fault of their own. Money laundering creates an unfair playing field and undermines the concept of having a competitive advantage in a market.
There are also social consequences such as a need to spend more on law enforcement or even “health care expenditures (for example, for treatment of drug addicts)” (McDowell & Novis, 2001) that would result with the expansion of criminals in drug organizations laundering their money and remaining undetected. As has been seen and documented in recent years, there has been an increase in drug-related deaths as well as a need for more treatment facilities to assist those with addiction problems. It is a twisted cycle in which money laundering fosters increases in drug supply which, in turn, results in increase drug sales. As crime and overdoses increase, so will the need for increases police patrols and healthcare efforts to combat it- this is a strain on the limited budgets of cities and small towns.
Conclusion
Money laundering is not a victimless crime as it is sometimes portrayed by popular media and has both social and economic implications. Fortunately, the Bank Secrecy Act has implemented rules and regulations to combat the illegal practice and make red flags more easily identifiable. Title 31 and BSA/AML compliance requirements as well as vigilance from those who regularly encounter money laundering suspicious activities have been making the crime more difficult to commit and, as seen in IRS reports, many people are caught every year and suffer the consequences.
References
- Appendix F: Money Laundering and Terrorist Financing “Red Flags”. (n.d.). Retrieved from https://www.ffiec.gov/bsa_aml_infobase/pages_manual/OLM_106.htm
- Bank Secrecy Act. (2018, July 18). Retrieved from https://www.irs.gov/businesses/small-businesses-self-employed/bank-secrecy-act
- Crane, V. (2019, May 06). Anti-Money Laundering (AML). Retrieved from https://www.finra.org/industry/anti-money-laundering
- Examples of International Investigations Fiscal Year 2016 | Internal Revenue Service. (2019, May 03). Retrieved from https://www.irs.gov/compliance/criminal-investigation/examples-of-international-investigations-fiscal-year-2016
- Gianni, G. L. (2004, June 03). Hearing on Bank Secrecy Act Compliance and Enforcement before the Senate Committee on Banking, Housing and Urban Affairs. Retrieved from https://www.fdicoig.gov/publications/hearing-bank-secrecy-act-compliance-and-enforcement-senate-committee-banking-housing
- Krcatovich, E. (2017, June). United States v. Miller: Summary. Retrieved from https://study.com/academy/lesson/united-states-v-miller-summary.html
- Kenton, W. (2018, March 12). Bank Secrecy Act (BSA). Retrieved from https://www.investopedia.com/terms/b/bank_secrecy_act.asp
- Maddocks, S. (September 2010). Clarifying Title 31 Compliance. Indian Gaming,34-35. Retrieved from http://www.indiangaming.com/istore/Sep10_Maddocks.pdf
- McCoy, K. (2017, October 30). Follow the Money: Here’s How Money Laundering Works. Retrieved from https://www.usatoday.com/story/money/2017/10/30/follow-money-heres-how-money-laundering-works/813379001/
- McDowell, J., & Novis, G. (2001). The Consequences of Money Laundering and Financial Crime. Economic Perspectives • An Electronic Journal of the U.S. Department of State,6(2), 6-8. Retrieved from http://usinfo.state.gov/journals/ites/0501/ijee/ijee0501.pdf
- Money Laundering. (2019). Retrieved from https://home.treasury.gov/policy-issues/terrorism-and-illicit-finance/money-laundering
- National Money Laundering Risk Assessment 2018. (2018, December 20). Retrieved from https://home.treasury.gov/system/files/136/2018NMLRA_12-18.pdf
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