Money Laundering the First Against

Money Laundering

The First against Money Laundering: Who's Winning?

The same forces that have been driving the globalization process have also made it easier for criminals to transfer enormous sums of money from one financial institution to another until it becomes "clean" in a process known as money laundering. Furthermore, an increasing number of observers are cautioning that terrorist organizations are using money laundering techniques to avoid international sanctions on their assets, and to help finance their nefarious plots against the United States and its interests abroad. Even if the proceeds of money laundering are not used by terrorists groups, the criminal elements involved are avoiding paying taxes on their ill-gotten gains in whatever jurisdictions are involved, and the practice appears to be on the increase in spite of numerous laws designed to combat the problem. Clearly, then, the fight against money laundering has assumed a new level of importance in recent years, and this paper provides a review of the relevant peer-reviewed and scholarly literature to identify what money laundering is, what controlling legislation exists, and what types of investigatory processes are used to uncover it. An analysis of how cases are built against money launderers is followed by a summary of the research and salient findings in the conclusion.

Review and Discussion

What is Money Laundering, Anyway?

There are several definitions of money laundering. In general terms, "money laundering" can be defined as "The doing of a number of acts concerned with concealing, disguising or transferring out of the jurisdiction funds derived from drug trafficking, terrorism or criminal conduct" (Birks, 1995, p. 93). According to April and Grasso (2001), "Money laundering is the process by which one conceals the existence, illegal source, or illegal application of income, and disguises that income to make it appear legitimate" (p. 1051). In this regard, the Money Laundering Control Act of 1986 defined money laundering "as a broad range of activities used to conceal the proceeds of illegal activity and make the funds appear legitimate" (cited by April & Grasso at p. 1051). More specifically, according to Black's Law Dictionary (1990), money laundering is the term used to describe "investment or other transfer of money flowing from racketeering, drug transactions, and other illegal sources into legitimate channels so that its original source cannot be traced" (p. 884). Today, the laundering of proceeds from national and international criminal activities has become a lucrative and increasingly sophisticated enterprise in the United States and abroad and represents an essential element of organized criminal activities (April & Grasso, 2001). Indeed, the ability to move and conceal the existence of enormous amounts of money means that the practice also provides large scale criminal organizations with a flexibility and scope that would not otherwise be possible (April & Grasso, 2001). Money laundering is also a federal crime under 18 U.S.C.A. Section 1956 (Black's, 1990), but besides 18 USCA Section 1956, a wide range of international and domestic laws can be used in the fight against money laundering, and these are discussed further below.

Controlling Legislation.

Complex problems require complex solutions and the international community and United States alike have all developed a wide range of initiatives designed to combat money laundering. While the provisions and scope of these international and domestic laws differ, they share one fundamental commonality: "The fight against money laundering aims at a more effective enforcement of the criminal law in relation to profit-oriented crime" (Stessens, 2000, p. 3). The international and national guidelines, regulations and laws that have been developed in recent years for fighting money laundering are discussed further below.

International Standards. The international community has enacted a number of substantive measures in the recent years to combat money laundering, including the following initiatives:

Multilateral organizations have been created to develop anti-money laundering standards, mechanisms, and institutions;

The United Nations pioneered the 1988 Vienna Convention Against the Trafficking in Illegal Narcotic and Psychotropic Substances contains the requirements to criminalize money laundering and immobilize the assets of persons involved in illegal narcotics trafficking;

In 1989, the G-7 Economic Summit Group established the Financial Action Task Force (FATF), operates from the Office of Economic Cooperation and Development (OECD) headquarters in Paris and has issued a set of forty recommendations that concern legal requirements, financial and banking controls, and external affairs and issues an annual report that provides an overview of progress and problems in international anti-money laundering;

The G-10 Basle Group of Central Banks has provided timely guidelines for central bank supervisors and regulatory controls and on September 23, 1997, issued guidelines on supervision;

Regionally, the Council of Europe's 1991 Convention on Laundering, Search, Seizure and Confiscation of Assets has become the major international convention that requires signatory governments to cooperate against anti-money laundering;

The European Union, as a signatory to the 1988 Vienna Drug Convention and based on its own initiatives to address financial crimes against the Communities, issued a 1991 Anti-Money Laundering Directive and recently issued another initiative targeting cybercrimes (Zagaris, 1999).

Domestic Legislation. Like the international community, the United States has enacted a number of laws that can be used to address illegal offshore banking activities that affect U.S. interests, depending on the circumstances. The primary provisions of anti-money laundering in the United States can be found in Titles 12, 18 and 31 of the U.S. Code (Zagaris, 1999). A list and description of other controlling legislation in the United States are provided in Table 1 below.

Table 1.

Controlling Anti-Money Laundering Legislation in the United States.

Legislation

Description/Goal

The Bank Secrecy Act of 1970 (BSA).

This law was a precursor to anti-money laundering and was intended to deter laundering and the use of secret foreign bank accounts; the law established an investigative "paper trail" for large currency transactions by establishing regulatory reporting standards and requirements, such as the Currency Transaction Report requirement (CTR Form 4789). This requirement distinguished the U.S. from other nation's approaches to anti-money laundering early on; for instance, the BSA imposed civil and criminal penalties for noncompliance with its reporting requirements; the legislation was also designed to improved the detection and investigation of criminal, tax, and regulatory violations. A unique aspect of U.S. anti-money laundering laws that other countries are starting to emulate is the simultaneous use of anti-money laundering, tax, regulatory, and even criminal, --especially organized crime -- goals.

The Money Laundering Control Act of 1986.

This law was part of the Anti-Drug Abuse Act of 1986 and created three new criminal offenses for money laundering activities by, through, or to a financial institution: (a) knowingly helping launder money; (b) knowingly engaging -- including by being willfully blind -- in a transaction of more than $10,000 that involves property from criminal activity; and - structuring transactions to avoid the reporting requirements of BSA.

The Anti-Drug Abuse Act of 1988.

This Act strengthened anti-money laundering laws by: (a) significantly increasing civil, criminal and forfeiture sanctions for laundering crimes and BSA violations, including forfeiture of "any property, real or personal, involved in a transaction or attempted transaction in violation of laws" relating to the filing of Currency Transaction Reports, money laundering, or structuring transactions; (b) requiring stronger and more precise identification and recording of cash purchases of certain monetary instruments; - allowing the Treasury Department to require financial institutions to file additional, geographically targeted reports; requiring the Treasury Department to negotiate bilateral international agreements covering the recording of large U.S. currency transactions and the sharing of such information; and (d) increasing the criminal sanction for tax evasion when money from criminal activity is involved.

The Housing and Community Development Act of 1992.

This Act made changes in anti-money laundering laws; the law strengthened penalties for financial institutions violating anti-money laundering laws, and allows regulators to now close or seize institutions by appointing a conservator or receiver or terminating the institution's charges. Federal regulators can also suspend or remove institution-affiliated parties who have violated the BSA or been indicted for money laundering or criminal activity under the BSA. It forbids any individual convicted of money laundering from unauthorized participation in any federally insured institutions.

Annuzio-Wylie Act Anti-Money Launder Act, Pub. L. No. 102-550, 106 Stat. 4044 (codified as amended in various sections of the U.S.C.).

Under the Annunzio-Wylie Act, the Treasury must issue regulations requiring national banks and other depository institutions to identify which of their account holders -- other than other depository institutions or regulated broker dealers -- are non-bank financial institutions, such as money transmitters or check cashing services. Treasury, together with the Federal Reserve, are responsible for issuing regulations that require financial institutions and other entities that cash checks, transmit money, or perform similar services to maintain records of domestic and international wire transfers that are useful in law enforcement investigations. Under the Act, the U.S. Government has established a BSA Advisory Group that includes representatives from the Departments of Treasury as well as Justice, and the Office of National Drug Control Policy and other interested persons and financial institutions. The group was created for the purpose of developing harmonious private-public cooperation on anti-money laundering. Under the Annunzio-Wylie Act, the U.S. Treasury is authorized to require financial institutions to adopt anti-money laundering programs that include: (a) internal policies, procedures, and controls; (b) designation of a compliance officer; - continuation of an ongoing employee training program; and (d) an independent audit function to test the adequacy of the program.

Source: Zagaris, 1999, p. 1023.

Therefore, building a case against sophisticated money-laundering schemes begins with recognizing when a violation of one more of the controlling laws have been violated, and understanding which law enforcement organization is the most appropriate for handling it and these issues are discussed further below.

How a Case is Built against Money Launderers.

While any of the foregoing current laws could be used in building a case against money laundering operations, the Money Laundering Control Act's ("the Act") expanded definition of "money laundering" activities has provided investigators with the ability to reach the proceeds of a broader range of illegal activities; for example, Lahey (2005) reports that the Act encompasses the proceeds of conduct that is characteristic of organized crime, such as narcotics trafficking, certain state offenses, and predicate offenses under the Racketeer Influenced and Corrupt Organizations Act ("RICO"). Furthermore, the Act addresses proceeds from a wide range of additional criminal offenses including copyright infringement, environmental offenses, espionage, trading with the enemy, and conducting financial transactions with intent to engage in violations of the Internal Revenue Code (Lahey, 2005).

The Money Laundering Control Act is comprised of two sections: (a) Section 1956 and (b) Section 1957; Section 1956 addresses the knowing and intentional transportation or transfer of monetary funds that are derived from specified unlawful activities and Section 1957 addresses transactions that involve property exceeding $10,000 in value that are derived from the specified unlawful activities (April & Grasso, 2001). A further description of how Section 1956 can be used to build a case against money launders is provided in Table 2 below.

Table 2.

Application of Sections 1956 of the Money Laundering Act.

Section 1956

Description

Section 1956(a) has three subdivisions a) Subsection 1956(a)(1) concerns domestic money laundering and prohibits knowingly participating in transactions with criminal proceeds; Subsection 1956(a)(2) deals with international money laundering and prohibits knowingly transporting criminally derived monetary instruments in foreign commerce; and Subsection 1956(a)(3) explicitly authorizes the use of government sting operations to expose criminal activity.

Transaction Money Laundering

Offenses referred to in [sections] 1956(a)(1) fall under the rubric of "transaction money laundering" because the prohibited action is the financial transaction itself. An offense occurs when an individual conducts or attempts to conduct a financial transaction with criminally derived money. The four prohibited transactions are: (1) a financial transaction with the intent to promote specified unlawful activity, (2) a financial transaction with the intent to engage in 26 U.S.C. [subsections] 7201, 7206(28) tax evasion violations, (3) a financial transaction designed to conceal or disguise the nature, location, source, ownership, or control of the proceeds of specified unlawful activity, and (4) a financial transaction designed to avoid a state or federal reporting requirement.

Transportation Money Laundering

Section 1956(a)(2) contains three separate offenses relating to the transportation, transmission, or transfer of criminally derived proceeds into or out of the United States. The three possible crimes involve: (1) the intent to promote the carrying on of a specified unlawful activity; (2) the transportation of a monetary instrument that represents the proceeds of some form of unlawful activity, designed to conceal or disguise that instrument; and (3) the transportation of the monetary instrument that represents the proceeds of some form of unlawful activity, designed to avoid a state or federal transaction reporting requirement.(35)

Sting Operations

Section 1956(a)(3) authorizes the government to utilize sting operations. Under the sting provisions of [sections] 1956, it is illegal to conduct, or attempt to conduct, a financial transaction involving property that a law enforcement officer represents to be the proceeds of a specified unlawful activity with the intent to: (1) promote specified unlawful activity; (2) conceal or disguise the nature, location, source, ownership, or control of the proceeds of specified unlawful activity; or (3) avoid a state or federal transaction reporting requirement.

Source: April & Grasso, 2001, p. 1051.

Since the passage of the U.S.A. PATRIOT Act, the U.S. Treasury Department has been tasked with the responsibility for developing regulations for implementation of its money-laundering provisions and for financial services businesses, including mutual funds, credit card companies, and securities brokers and dealers registered with the Securities and Exchange Commission (Connolly, 2003). According to Ronczkowski (2004), "The U.S.A. PATRIOT Act of 2001, formally known as the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 from the 107th Congress, HR 3162, was established to deter and punish terrorist acts in the U.S. And around the world, and to enhance law enforcement investigatory tools" (p. 60). Some of the provisions included in the Act enhancing surveillance procedures and the International Money Laundering Abatement and Antiterrorist Financing Act of 2001 (Ronczkowski, 2004).

In addition, the U.S.A. Patriot Act also requires banks and large financial services centers, as well as brokers and dealers outside of banks, credit unions and money-transmitting businesses, to be aware of and report any suspicious financial activity (Carlson, 2003). In this regard, Birks (1995) suggests that, while the positive requirement to notify law enforcement authorities arises only once the financial institution actually knows or suspects that a person or organization is involved in money laundering, the author also emphasizes that, "It is difficult to avoid the conclusion that the precautionary procedures required by these new regulations will affect significantly the financial community's perception of what inquiries are necessary in the context of significant financial transactions" (p. 93). Nevertheless, Ronczkowski (2004) insists that the PATRIOT Act will provide law enforcement and regulatory authorities with a number of additional tools needed to address this complex problem: "Beyond the immediate benefit of the act, which is enhanced surveillance procedures, law enforcement at all levels will reap the greatest investigative rewards from the money-laundering and financial tracking capabilities as well as the increased information sharing among agencies. The act is geared toward the one thing that no terrorist organization can do without, finances" (emphasis added) (p. 61).

The goal of building a case against money laundering is to disrupt laundering in its many forms; this goal is particularly relevant concerning what is done by third-party money launderers and the masterminds of the criminal organizations that support them. In the process, the fight is supposed to undermine the process of financing and profiting from crimes ranging from drug trafficking to terrorism; however, the ongoing battle against money laundering has not provided policymakers with the effective tools they need to develop viable cases against them (Cuellar, 2003). According to this author, just as with a number of other enforcement issues, the fight against money laundering involves three major components: (a) statutes with criminal penalties charged by prosecutors, (b) rules administered by regulators, and - detection systems primarily operated by investigators (Cuellar, 2003). A critical examination of these three fundamental components indicates the ability to build cases against money launderers continue to have a number of constraints, including:

The disproportionate imposition of severe penalties on predicate offenders who are easily detected;