Combating the new generation of money laundering: regulations and agencies in the battle of compliance, avoidance, and prosecution in a post-September 11 world.

• Jurisdiction: United States
• Date: 01 July 2004
• Author: Jackson, Christina
• Published date: 01 July 2004
• Author: Jackson, Christina

"[T]he first steps to reversing their recent dramatic gains must be to ... treat these conflicts not as law enforcement problems but as a new global trend that shapes the world as much as confrontations between nation-states did in the past. Customs officials, police officers, lawyers, and judges alone will never win these wars." (1)

Increasing globalization, the opening of markets, and the proliferation of both officially sanctioned and underground financial networks have contributed to an exponential growth of money laundering. (2) In the past, money laundering was often about profit-making, such as hiding and integrating drug trafficking profits. (3) In response to the attacks of September 11, 2001, a new and more sophisticated perspective on money laundering is evolving: it is no longer simply about profit for profit's sake, but is more recently about funding religious and zealous objectives--and it is no small problem. (4) While various efforts to pinpoint exact amounts have proven unsatisfactory, (5) in 2002 the International Money Fund estimated global money laundering at two to five percent of the total world gross domestic product, (6) or approximately $600 billion to $1.8 trillion U.S. Dollars. (7) The world's greater interconnectedness means all countries are at risk for money laundering and terrorism, as well as their repercussions. Money laundering is a global issue, and several players in the international arena are currently working together to fight it. (8) While the United States has addressed some aspects of money laundering by forming new organizations, bolstering existing regulations, and passing the USA PATRIOT Act of 2001 (PATRIOT Act), (9) after two years only a handful of related claims have found their way to our high courts. (10)

This note discusses the paradigm shift and the United States' position on contemporary money laundering issues in light of the events of September 11, 2001, and their aftermath. Key aspects of the money laundering battle are the definition and evolving nature of money laundering and it processes, the organizations that combat it, and the delicate international balance of government and economic trust and cooperation entwined with it. Domestically, U.S. federal court decisions also shed light on the interpretations of changes in the money laundering statutes. (11) Part I defines money laundering and discusses its processes. Parts II--IV explore the economic implications of money laundering, U.S. regulations designed to address it, and domestic and international agencies that exist to fight it. Part V addresses modern means of compliance, avoidance, and efforts to enforce the PATRIOT Act.

1. WHAT IS MONEY LAUNDERING?

   Money laundering is a multi-faceted process of disguising financial assets. (12) It can be as exceedingly simple as cash deposits and withdrawals from a bank account, or as complex as an international labyrinth of off-shore banking, shell corporations, trafficking in cash and monetary instruments, wire transfers, and informal personal networks. (13) The subversive nature of money laundering makes it difficult to characterize, (14) but it is generally bifurcated according to its source: dirty and clean. (15) Dirty money is proceeds derived from an illegal source that launderers transform into funds with a seemingly legal source. (16) Clean money is funds that are acquired legally, but criminals launder or misappropriate for the purpose of illegal activities. (17) Previously, analysts ignored clean money as a component of money laundering; part of the re-conceptualization resulting from the September 11, 2001 attacks involves the inclusion of clean money into the definition of money laundering. (18)

   Generally, regardless of its purpose, money laundering occurs in three stages: placement, layering, and integration. (19) At the placement stage, the launderer transfers the physical proceeds into a financial institution or system. (20) This transfer may occur through cash transactions, such as depositing small amounts into a bank account or purchasing monetary instruments (such as checks or money orders) and depositing them in a different location, (21) thus commingling the cash with that from a cash-based business. (22) As such, one effective means to obscure the source of illegal proceeds is to deposit them into the financial accounts of legitimate cash-based businesses, such as restaurants, laundry-mats, car washes, or convenience stores. (23) The placement stage presents the greatest logistical challenge to the launderer in developed countries, due to the increased prospect of detection by the financial service industry or government officials. (24) Financial institutions and legal authorities look for transactions that do not seem to relate to the account's business, or those that are disproportionate to the business' size, as indicators of possible money laundering. (25)

   The second stage, layering, occurs after the proceeds enter the public financial network. (26) The launderer attempts to dissociate the funds from their source by moving them, thus creating 'layers' of transactions between their origin and the completion of the laundering process. (27) The launderer could purchase and sell investment instruments, wire the funds to other global accounts, or camouflage them in exchange for goods or services. (28)

   The inherent nature of modern financial exchange creates many successful avenues to launder through layering. In one estimate, the speed, agility, and nearly untraceable nature of wire transfers enabled the movement of approximately $2 trillion through the U.S. banking system in 700,000 transfers per day, although the study estimated only 0.05% to 0.1% to be laundered funds. (29) Another nearly undetectable layering method is through international trade, by over-or under-invoicing for goods. (30) Legitimate import-export businesses over-invoice by charging more per item, or under-invoice by offering an illicit rebate to a purchasing company controlled by the launderer. (31)

   The successful incorporation of laundered funds into the legitimate marketplace constitutes the third stage of integration. (32) The launderer could acquire debit/credit cards or fake loans from offshore banks, (33) or invest in "real estate, luxury assets, or business ventures." (34) Money laundering can occur anywhere in the world, and while many countries have adopted anti-money laundering statutes, (35) areas with a lower risk of detection entice launderers. (36) Jurisdictions with developing financial centers are therefore vulnerable to this exploitation. (37) Jurisdictions with little or lax regulations create safe havens for the money laundering process, (38) which benefits their own financial systems, as seen in the Cayman Islands and Anguilla. (39)

2. INDUSTRY AND MACROECONOMICS

   Notwithstanding the successes of any particular national program or agency, money laundering undeniably exists as an international problem that requires international solutions. (40) Outside of the motivation to detect and prosecute criminal activity, there are economic reasons to pursue money laundering. It negatively affects financial institutions, which function in an industry that places a premium on an institution's reputation for integrity and the perception that each operates within high legal, professional, and ethical standards. (41) A desecration of these standards, or undermining of the faith placed in such institutions, would have deleterious consequences. Evidence of laundering could affect an institution's reputation and business with other financial intermediaries, regulatory authorities, and ordinary customers. (42) Money laundering effects more than the implicated financial institution. On a national scale, laundering may negatively impact a country's interest and exchange rates, quality of investments, and economic growth. (43) Sufficiently pervasive money laundering can advance the risk of systemic industry crisis, and force macroeconomic policy-makers to contemplate its effects. (44)

3. UNITED STATES REGULATIONS

   1. Banking Secrecy Act

      The United States, a pivotal arena for international commerce, has had anti-money laundering measures in place for years to discourage the entrenchment of laundering networks. (45) The Bank Secrecy Act (BSA) of 1970 created a record-keeping and reporting system that required financial institutions to create an audit trail of transactions and spotlight criminal, tax, and regulatory violations. (46) It also then imposed civil and criminal penalties for noncompliance. (47) As an integral part of any money laundering scheme, financial institutions create bottlenecks from which to record the identities of transactions and customers. (48) Institutions supply this information to law enforcement, to aid efforts in tracking laundering schemes and criminals. (49) The BSA requires financial institutions to file Currency Transaction Reports (CTRs) when conducting transactions with a single individual exceeding $10,000.50 Under the BSA, the Secretary of the Treasury has discretion to bring federal charges against any noncompliant institution. (51) As a consequence of non-compliance, the institution's federal depository institution charter or state depository institution insurance may be terminated. (52) Today, BSA's reporting requirements noticeably lack application to transactions of nonphysical currency transfers, leaving wire transfers and e-money transactions open for abuse. (53)

   2. Money Laundering Control Act

      Money launderers easily avoided the BSA's requirements by structuring transactions under the $10,000 limit, so Congress amended the act with the Money Laundering Control Act of 1986 (MLCA), to prevent such circumvention. (54) The MLCA criminalized the act of money laundering itself, apart from CTR reporting violations. (55) It prohibits the domestic or international transaction or transportation of funds (section 1956) and...