What is money laundering?
Money laundering is the process of making illegally-gained proceeds appear legal. Money laundering is typically conducted in three stages:
- placement – introducing illegally-gained funds into a financial system;
- layering – conducting one or more transactions within the financial system to disguise the audit trail, making it more difficult to identify the initial source of funds, and making the illegally-gained funds appear legal and legitimate; and
- integration – disbursing the funds back to the money launderer under the guise of a legitimate transaction.
The Anti-Money Laundering (AML) Legal Framework
The Bank Secrecy Act (BSA), 31 USC §§ 5311 et seq., is the foundation of the US AML regime. Secrecy, though, is a misnomer. The BSA is a disclosure statute designed to help law enforcement officials stop money laundering by requiring banks to record and report the movement of currency and monetary instruments. Although the BSA was enacted to impede criminal activity, it targeted banks, not criminals. It was not until 1986, when law enforcement sought additional weapons for the war on drugs, that Congress passed the Money Laundering Control Act (MLCA), which first established money laundering as a federal crime. The BSA was also amended to require financial institutions to develop procedures to monitor compliance with the statute.
A plethora of AML laws and regulations followed into the twentieth century, which streamlined reporting requirements and extended the BSA’s requirements to non-bank entities dealing in currency, luxury goods, and cash-intensive industries such as casinos. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (PATRIOT Act) further amended the BSA by formally requiring:
- all financial institutions to establish risk-based AML compliance policies and procedures to detect, prevent, and report money laundering and terrorist financing activities;
- certain financial institutions to establish customer identification programs (CIP); and
- certain financial institutions to conduct enhanced due diligence (EDD) on foreign correspondent accounts and private bank accounts maintained by non-US persons and senior foreign political figures, also known as politically exposed persons (PEPs).1
The PATRIOT Act also extended the BSA’s reach to require reporting by more and different kinds of companies, including broker-dealers, check cashiers, currency exchanges, and dealers in precious metals and jewels. The Act prohibited correspondent banking with foreign shell banks; and authorized regulations setting standards for customer identification by financial institutions.
In sum, the BSA, MLCA, PATRIOT Act, and their implementing regulations prohibit transactions in funds derived from certain criminal activity and impose obligations—principally on financial institutions—designed to deter, prevent, detect, and punish such activity.
The AML Enforcement Landscape
The Department of the Treasury is the principal federal regulatory agency charged with implementing and enforcing AML laws. It has delegated its authority to the Financial Crimes Enforcement Network (FinCEN), a bureau within the Department. FinCEN writes BSA regulations and guidance, reviews reports submitted by financial institutions, and interacts with law enforcement agencies.
The Department of Justice (DOJ) may pursue criminal violations of the BSA and MLCA, and FinCEN may pursue civil violations of the BSA. Penalties include fines, forfeiture, and up to 20 years’ imprisonment. There are two money laundering criminal provisions, 18 USC §§ 1956 and 1957, which were codified by the MLCA. Very few employees of financial institutions, including directors and officers, have been convicted of money laundering, absent overt collusion with money launderers. A bank or regulated financial institution has never been convicted under these provisions. Criminal cases against financial institutions proceed under the BSA.
1 See PATRIOT Act, Pub. L. No. 107-56, 115 Stat. 272, Title III, §§ 312, 326, 352 (2001).