PrintAnti-Money Laundering
Frequently Asked Questions - General
1. What is money laundering? Money laundering is the term used to describe the process by which criminals attempt to conceal the true origin and ownership of the proceeds derived from their illicit activities (such as fraud, drug trafficking, embezzlement, insider trading, computer fraud and theft) or attempt to use legally derived funds for illicit activities (such as terrorist financing). Legally, money laundering has been defined as "the movement of illicit cash or cash equivalent proceeds into, out of, or through the United States [or] ... United States financial institutions."1 The money laundering process is commonly described as involving a three-phase process of: placement, layering and integration. Placement involves the introduction of funds (which can be currency or equivalents, such as checks, money orders and wire transfers) acquired through criminal activities into the legal financial system. Layering involves the concealment or disguising of the source of the ownership of those funds through the creation of complex layers of financial transactions designed to disguise the audit trail. In the integration phase, criminals seek to re-integrate the illicit funds back into the legitimate financial system. Money laundering is a process that is critical importance to the criminal enterprise because it enables the criminal element to enjoy the profits of their activities without jeopardizing their illegal source of funds. If the process is successful, the laundered money can lose its criminal identity and appear legitimate.
1 31 U.S.C. § 5340(2).
Terrorist financing is the term used to describe the process by which criminals raise money through either legal or illegal means to fund terrorist activities. It is important to note that terrorists often use legal enterprises to conduct their business and raise finances. The primary difference between terrorist financing and money laundering is intent. While most criminals strive for an ultimate goal of achieving monetary gain, terrorists do not maintain monetary gain as their end objective. Instead, terrorists typically seek as their ultimate goals political power, influence and publicity for their predicate causes. While terrorist financing transactions may appear similar to those undertaken by money launderers, terrorist financing transactions tend to be smaller and much less observable than the typical money laundering transactions. A large amount of terrorist financing comes from fundraisers whose contributors may or may not be aware of the actual intended purpose of their fundraising activities. Moreover, the primary objective of terrorist financing investigations is to identify, disrupt and interrupt the flow of funds to terrorists, whether or not this leads to prosecution. Nevertheless, terrorist financing and money laundering share many of the same methods to conceal their respective activities. Both terrorist financers and money launderers rely upon a fundamental lack of transparency of the targeted financial system to channel their funds. They both exploit poorly regulated banking structures and utilize an wide variety of underground financial networks to evade detection. Due to the similarities in the methods of concealment used by terrorists and money launderers, law enforcement and prosecution programs utilize a variety of similar methods to combat both forms of illicit financing.
By its nature, money laundering is a concealed activity that occurs outside of the normal range of economic statistics. Nevertheless, rough estimates have been put forward by various government agencies that provide some sense of scale to the problem. The International Monetary Fund (IMF), for example, has stated that the aggregate size of money laundering in the world could be somewhere between two (2%) and five (5%) percent of the world’s gross domestic product. Using 2003 statistics published by the IMF, these percentages would indicate that money laundering range between $725 billion and $1.8 trillion. While this data is general, it is clear that money laundering PricewaterhouseCoopers, in its Economic Crime Survey 2003, indicated that one in six banks reported having uncovered money laundering during the previous two years and that 216 financial services organizations had reported suspicious transactions during the previous two years, with one in five reporting more than 10 suspicious transactions.
Money laundering has been defined as "the movement of illicit cash or cash equivalent proceeds into, out of, or through the United States [or] ... United States financial institutions."2 Anti-money laundering laws also apply to terrorist financing, including any funds that are legally obtained if they are intended for use in the planning, committing, or concealing a terrorist act.3 History has shown that financing has a critical role in terrorism, corruption, and other criminal acts. Money launderers and terrorists want to be able to transfer funds across international lines, move money quickly, and minimize inquiries into their finances and activities. U.S. anti-money laundering laws are designed to prevent terrorists and other criminals from utilizing U.S. financial institutions to commit their crimes. Three key laws lay out the basic anti-money laundering obligations of U.S. financial institutions, the Bank Secrecy Act of 1970, the Money Laundering Control Act of 1986, and the USA PATRIOT Act of 2001, which amended both prior laws.4 The aim of these laws and other related laws is to enlist U.S. financial institutions in the fight against money laundering. Together, they require financial institutions to refuse to engage in financial transactions involving criminal proceeds, to monitor transactions and report suspicious activity, and to operate active anti-money laundering programs.
2 31 U.S.C. § 5340(2).
Enacted in 1970, Bank Secrecy Act of 1970 (the "BSA") was the U.S. government's pioneering effort to combat money laundering in the United States. Congress ratified the BSA to prevent financial institutions from being used as intermediaries for, or to hide the deposits that derived from, criminal activity. Under Title I of the BSA, financial institutions and securities brokers and dealers are required to keep extensive records of the transactions of their customers and provide law enforcement agencies with information of certain transactions that might be of "particular interest." In 1986, the BSA was greatly augmented by the passage of the Money Laundering Control Act (MLCA), which classified money laundering as a crime for the first time ever. The strengthened BSA includes powerful anti-money laundering laws with "extraterritorial reach" and stiff violation penalties. The BSA was further amended by the USA PATRIOT Act of 2001. Pursuant to the BSA's expanded regulations, financial institutions operating in the United States are required to undertake a number of anti-money laundering efforts to ensure they do not become conduits for terrorist financing or criminal proceeds, or facilitators of money laundering. Key provisions include requirements for financial institutions to: (1) establish anti-money laundering programs with explicit policies and procedures, a BSA officer, employee training, and an internal audit function;5 (2) verify the identity of persons seeking to open and maintain accounts;6 and (3) exercise appropriate due diligence when opening and administering accounts for foreign financial institutions or wealthy foreign individuals, including senior foreign political figures.7 In addition, the BSA authorizes the U.S. Department of Treasury to require financial institutions and other businesses to file reports on large currency transactions and suspicious activities to guard against money laundering.8
5 31 U.S.C. § 5318(h).
The Money Laundering Control Act of 1986 (the "MCLA") was the first law in the world to make money laundering a crime. The MLCA prohibits any person from knowingly engaging in a financial transaction which involves the proceeds of a "specified unlawful activity."9 The law provides a long list of specified unlawful activities, including, for example, terrorism, drug trafficking and fraud. Most listed activities are crimes under U.S. law; however, in 2002, the USA PATRIOT Act expanded the list to include, among other items, foreign crimes involving corruption such as bribery and misappropriation of funds. The purpose of this addition was to make it illegal for a bank in the United States knowingly to accept funds that were the proceeds of foreign corruption. The addition of foreign corruption crimes to the list of specified unlawful activities was based primarily on previous government investigations into private banking activities which established that senior foreign political figures were using U.S. bank accounts to hide and profit from misappropriated funds looted from their home countries.
9 18 U.S.C. §§ 1956-57.
On October 26, 2001, President Bush signed into law the USA PATRIOT Act of 2001 (the "Patriot Act") – Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 – as a reaction to the terrorist attacks of September 11. The broadly reaching law was designed to further enable the government and its various agencies to prevent, detect and prosecute international money launders, terrorists and the financing of terrorism. In an effort to accomplish these goals, the law contains provisions on the search and seizure of assets, money laundering, foreign asset control and immigration. The Patriot Act’s main instrument to battle money laundering is the International Money Laundering Abatement and Anti-Terrorist Funding Act (the "IMLA Act") found under Title III. This significant provision enhances previously enacted anti-money laundering laws in effort to make it more difficult for criminals to use U.S. financial institutions as a conduit for terrorist financing. The IMLA Act requires U.S. financial institutions to establish a comprehensive anti-money laundering program that must at a minimum include: internal policies, procedures and controls, designate a compliance officer, provide employee training and include an independent audit. Notably, among these requirements is that domestic institutions must now perform "enhanced due diligence" for certain bank accounts, implement "know your customer" procedures for new accounts and regularly report "suspicious activity" to governmental authorities. Moreover, foreign financial institutions are required by the IMLA Act to be subject to U.S. anti-money laundering laws and oversight in exchange for doing business in the United States.
The Secretary of the Treasury (the "Secretary") is the primary Federal regulator charged with enforcing the key federal anti-money laundering laws. In 2003, the Secretary established a new internal office, the Executive Office for Terrorist Financing and Financial Crime ("EOTF/FC"), headed by a Deputy Assistant Secretary. The EOTF/FC oversees the operation of the Financial Crimes Enforcement Network ("FinCEN"), a Treasury bureau which, among other duties, develops BSA regulations and guidance, analyzes currency transaction reports and suspicious activity reports filed by financial institutions, and interacts with local, state, Federal, and international law enforcement as well as other financial intelligence units around the world. The EOTF/FC also oversees the Office of Financial Asset Control ("OFAC") which, among other duties, is primarily responsible for identifying countries, terrorists and drug traffickers subject to sanction under U.S. law, and administering the statutory regime for freezing their financial assets and blocking them from using the U.S. financial system. Also within the Treasury Department is the Office of the Comptroller of the Currency (the "OCC") which, among other duties, is responsible for overseeing the operation of banks that hold a national banking charter. Like other financial regulators, including the Federal Reserve Board (the "Fed"), the Federal Deposit Insurance Corporation (the "FDIC"), the Office of Thrift Supervision (the "OTS"), and the National Credit Union Administration (the "NCUA"), the OCC routinely examines financial institutions under its jurisdiction to ensure their safety and soundness and compliance with all statutes and regulations, including anti-money laundering requirements. For large and mid-size banks within its jurisdiction, the OCC examines their operations on a continual basis, looking at routine issues as well as particular areas of concern. On approximately an annual basis, the OCC presents a Report on Examination to the bank’s Board of Directors and meets with the Board to explain its findings and any concerns. The OCC analysis includes an overall safety and soundness rating for the bank using the CAMELS rating system.11 CAMELS ratings are on a scale of 1 to 5, in which 1 signifies a safe and secure bank with no cause for supervisory concern, 3 signifies an institution with supervisory concerns in one or more areas; and 5 signifies an unsafe and unsound bank with severe supervisory concerns. The OCC also has the authority to label a bank as a "troubled institution" under 12 C.F.R. § 5.51 Subpart (d). Should the OCC determine that a bank is engaging in an unsafe or unsound practice or has violated any law, rule, regulation, or other requirement placed on the bank, the agency can undertake a variety of informal and formal enforcement actions. Informal actions can include requiring a safety and soundness plan, memorandum of understanding, Board resolution, or commitment letter pledging to take specific corrective actions by a date certain, or issuing a supervisory letter to the bank listing specific "matters requiring attention." These informal enforcement actions are generally not made public and are not enforceable in court. Formal enforcement actions include issuing a cease and desist order requiring the bank to stop the unsafe practice or violation or take affirmative action to correct identified problems;12 imposing a civil monetary penalty on the bank;13 suspending or removing one or more individuals from the bank;14 or referring misconduct for criminal prosecution.15 In addition, if the OCC determines that a bank "has failed to establish and maintain" an AML program or "failed to correct" any previously identified AML problems, the law requires the OCC to issue an order directing the bank "to cease and desist from its violation" of Federal AML law.16 In 1998, Federal bank regulators issued revised examination manuals to guide examiners conducting anti-money laundering reviews of financial institutions. Many elements in this guidance were the result of joint consultations among the banking regulators. In September 2000, the OCC issued a revised "Bank Secrecy Act/Anti-Money Laundering Handbook" to provide additional, updated guidance to financial institutions about effective anti-money laundering policies and procedures and areas of concern. Although the Patriot Act made numerous changes in the law, the AML examination manual used by the OCC has not been fully updated to include, for example, the new due diligence requirements.
11 CAMELS is the commonly-used acronym for the Uniform Financial Ratings System employed by the Federal Financial Institutions Examination Council, an interagency body that issues uniform standards for the federal examination of financial institutions. Each letter in CAMELS refers to a key component of financial performance rated by federal examiners. The six key components are referred to as Capital, Asset Quality, Management, Earnings, Liquidity, and Sensitivity to Market Risk.
In 1977, Congress enacted the Foreign Corrupt Practices Act (the "FCPA") to criminalize illicit payments to foreign public officials by U.S. businesses and individuals.17 The FCPA has two basic sets of provisions: (a) the anti-bribery provisions, which prohibit domestic and foreign companies and U.S. citizens and aliens from paying anything of value to any foreign official, government employee, officers of a public international organization, foreign political party or candidate, or any agent of those entities, if the purpose is to cause the payee to act, or refrain for acting, in a way to assist the company in obtaining or retaining business; and (b) the accounting provisions, which impose certain accounting and record-keeping requirements on publicly traded companies.18 Based on guidelines issued by the U.S. Sentencing Commission, federal courts are required to take into account the existence or absence of effective corporate compliance programs when handing down criminal sanctions with respect to violations of the FCPA.19 The presence of an effective compliance program can significantly reduce a corporation’s sentence as well as prevent a breach of fiduciary duty by the company’s board of directors.
17 See 15 U.S.C. § 78dd-1 et seq.
The Office of Foreign Assets Control ("OFAC") of the U.S. Department of the Treasury administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign countries, terrorists, international narcotics traffickers, and those engaged in activities related to the proliferation of weapons of mass destruction. OFAC acts under Presidential wartime and national emergency powers, as well as authority granted by specific legislation, to impose controls on transactions and freeze foreign assets under U.S. jurisdiction. Many of the sanctions are based upon United Nations and other international mandates, are multilateral in scope, and involve close cooperation with allied governments.
Banks are considered to be an important conduit through which criminals attempt to launder their illicitly derived monetary proceeds. However, unlike the days during which money launderers attempted to deposit large amounts of cash into bank accounts, money launderers today typically employ far more sophisticated schemes in order to avoid detection by bank officials and law enforcement. These schemes, which are often structured with the professional assistance of specialized intermediaries and counsel, may involve nominee accounts, shell corporations established in offshore and/or secretive jurisdictions and a variety of sophisticated monetary transfer techniques such as the "starburst," the "ricochet" or the "boomerang." There are several types of banking and related financial services that are considered to have greater vulnerability to money laundering schemes. These higher risk services include, but are not limited to, private banking, correspondent banking and payable through accounts, debit cards and online banking. Non-bank financial institutions that are viewed as potentially attractive vehicles for money launderers include money exchangers, money remitters, insurance companies and securities broker-dealers. In addition, certain non-financial businesses, such as dealers in high value goods (e.g., precious metals, jewelry) and automobile, boat and plane dealers, are also considered to be industries that are at risk for money laundering schemes.
Private banking is generally considered to be at higher risk for exposure to money laundering because this business line typically involves the provision of a wide range of personalized banking services to high net worth clients who favor the discretion, sophistication and personalized relationship associated with private banking activities. The elements of an effective anti-money laundering program in private banking are well established, and Federal bank examiners have been reviewing banks’ anti-money laundering efforts for nearly a decade. For example, in 1997, the Federal Reserve published detailed guidance on anti-money laundering safeguards for private banking operations.20 Among other elements, this guidance urges "senior management’s active oversight of private banking activities and the creation of an appropriate corporate culture" to ensure a "sound risk management and control environment." It recommends that banks develop written anti-money laundering procedures, including "know-your-customer" (KYC) policies and procedures.21 It directs banks to perform careful due diligence reviews before accepting new clients and to compile "basic background information" on each client for whom an account is opened, including the client’s name, address, form of identification, business, source of wealth, and the type and volume of transactions expected to be passing through the clients’ accounts.22 At private banks that maintain and manage accounts for clients’ offshore corporations, the guidance recommends that the bank keep careful records of the corporation’s beneficial owners. Once accounts are opened, the guidance stresses the importance of management information systems that can compile comprehensive information on all accounts and financial services related to a particular client and can be used to monitor account activity to detect suspicious transactions. The guidance repeatedly stresses the need to monitor account transactions, including wire transfer activity, and report suspicious activity to law enforcement. The guidance also stresses the importance of internal bank supervision of account managers, stating: "Institutions should not rely exclusively on any individual relationship manager or immediate supervisor to, for example, waive documentation required to open an account, approve the client profile, authorize a new client relationship, fully identify (or ‘know’) the client, and monitor client accounts for unusual transactions." It recommends instead that independent personnel such as compliance officers, risk management officers, or senior management also exercise anti-money laundering oversight. The guidance stresses, in addition, the importance of internal audit reviews to test the effectiveness of a bank’s anti-money laundering policies and procedures. The Federal Reserve guidance is just one of many alternatives that provide extensive information about operating an effective anti-money laundering program. In 2000, for example, the OCC issued a "Comptroller’s Handbook on Bank Secrecy Act/Anti-Money Laundering" to provide detailed guidance to financial institutions about effective anti-money laundering policies and procedures.23
20 "Guidance on Sound Risk Management Practices Governing Private Banking Activities," (Federal Reserve Bank of New York, July 1997).
As it relates to the fight against money laundering and terrorist financing, the primary role of Federal, state and local law enforcement agencies and their officers and agents is focused on the investigation of suspected criminal violations and the punishment of individual and institutional violators pursuant to Federal and local laws and regulations. The law enforcement mission is considered to be primarily reactive in nature and does not provide private sector interests with all of the tools necessary to proactively manage money laundering and terrorist financing risk.
IPSA International, Inc. ("IPSA") provides a broad range of investigative consulting and related professional services to assist a wide variety of regulated and non-regulated financial institutions and money services businesses to implement appropriate anti-money laundering programs, undertake customized KYC services, conduct enhanced due diligence, conduct investigations of suspicious activities, perform assessments of an institution’s anti-money laundering programs and training. To review a complete list of the services IPSA’s anti-money laundering experts provide, please click here.
IPSA International, Inc. is a premier global provider of investigative consulting services in the areas of fraud, anti-money laundering, due diligence, asset location and recovery and intellectual property. IPSA provides professional services to institutional clients in the corporate, legal and financial communities. IPSA provides value-added services that are designed to assist its clients in mitigating risks and making better decisions that may affect their businesses, have corporate consequences or influence corporate litigation strategy. IPSA was founded in 1993 as the investigative and consulting division of a large contract security company, American Protective Services (APS), which was founded in 1946. IPSA was originally established through two offices – one in San Francisco and one in Los Angeles – and a charter to assist clients with their investigative, security consulting and asset protection needs. As of January 1, 2000, IPSA became IPSA International, Inc., a stand-alone entity, following the sale of APS by its original founders. Presently, IPSA has 12 offices throughout the U.S., Canada and Mexico and resources in over 75 countries and IPSA continues to be owned by its original founders. In its history, IPSA has served the U.S. and international financial services community since the early 1990s. IPSA’s AML professionals provide professional services to international as well as regional and local commercial banks, securities broker-dealers, hedge funds, venture capital firms, government agencies as well as a wide variety of other non-bank financial institutions. Through its 12 North American offices and global network of experienced specialists, IPSA is able to deliver effective, value-added risk mitigation solutions related to regulatory compliance and AML programs. IPSA’s AML services comprise a coordinated and highly effective program designed to not only achieve regulatory compliance, but more importantly, to protect and enhance the value of an institution’s most valuable asset – its reputation in the marketplace. IPSA International, Inc. is a privately-held company that was registered as a C corporation in the state of Nevada in November, 1999. IPSA’s principal officers include: James M. Keating, President and Secretary, and Kendra C. Keating, Treasurer. IPSA’s principal business address is: 1411 Harbor Bay Parkway, Suite 200, Alameda, California, 94502. IPSA’s telephone numbers are: (510) 748-1234 (office) and (510) 748-1230 (facsimile). IPSA’s website address is: www.ipsaintl.com. IPSA also maintains two toll-free numbers: (800) 997-4772 (English) and (888) 566-4772 (Español).
IPSA employs over 50 professionals, which group includes mostly senior industry veterans with backgrounds from both the private and governmental sectors. Senior IPSA professionals include investigative researchers and analysts as well as former:
The professionals that comprise IPSA’s staff are all highly trained and experienced in the techniques and rigors of information research, sourcing, collection, analysis and interpretation and are able to prepare reports and convey information that is reliable, accurate, insightful, useful and appropriate for the institution and its particular situation or application. Most of IPSA’s professionals have received formalized, training in certain aspects of the investigative industry, and hold distinguished certifications such as Certified Fraud Examiner (CFE) and Certified Anti-Money Laundering Specialist (CAMS). In addition, IPSA’s professional staff is highly experienced, having conducted literally thousands of due diligence and investigative assignments all over the world in a variety of capacities. IPSA’s global experience is enhanced by a global network of investigative and intelligence resources who are based in over 75 countries. To view a list of the countries in which IPSA can conduct KYC and EDD services, please click here.
In addition to English, certain IPSA professionals speak Spanish, French and/or Portuguese. To support our client's international requirements, IPSA has entered into a contractual relationship with an independent provider of translation services whose language capabilities include over 20 languages. If you require any specific language capabilities or have any questions regarding IPSA’s specific language capabilities, please contact an IPSA professional. |