Anti-Money Laundering

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Anti-Money Laundering: History and Current Developments 521

Anti-Money Laundering: History and Current Developments *

Michael J. Anderson, MBA Tracey A. Anderson, JD, LLM, CPA **

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Introduction to money laundering Hollywood movies and network and cable television have glorified illegal activities for decades. Movies like Bonnie and Clyde (1967),1 the Outlaw Josey Wells (1976),2Lord of Wars (2005),3 the FX television series Sons of Anarchy (2008–2014)4 and the AMC television series Breaking Bad (2008–2013)5 are all prime examples of this glorification. Society, on the other hand, views these activities as morally, ethically, and legally reprehensible. This article focuses on the rationale behind anti-money laundering statues, the history of such statues, the success and failures of these statutes as well as current developments in the world of money laundering.

What is money laundering? Black’s Law Dictionary Free Online Legal Dictionary6 defines money laundering as “taking money gotten illegally and washing or laundering it so it appears to have been gotten legally”.7 Money laundering is typically described as a three-step process in which an individual disguises the original nature of funds in order to make

them seem legitimate.8 The first step in this process, often called “Placing” or “Placement” involves getting illegal funds into the financial system. This can be done in many ways including purchasing gambling chips from casinos, repaying loans with the illegal funds, or using currency exchanges. The second step in the process is called “Layering”. In this step, the laundered funds will be filtered through several different banking institutions in an attempt to make them as hard to trace as possible. This process often is helped by moving funds across borders into foreign jurisdictions in order to block one government from having full access to the trail. Finally, in a step called “Integration” the money is filtered back to the original owner and is able to be used for any purpose, now seeming to be fully legal tender.9 Some of the most common illegal activities where money laundering is prevalent are: • • • • • • •

illegal drug sales;10 illegal firearms sales;11 illegal gambling activities;12 smuggling human subjects across borders;13 smuggling human subjects for sale as work slaves;14 smuggling human subjects for sale as sex slaves;15 and financing terrorist activities.16

Why should society care about money laundering? Lost tax revenue One of the major concerns of society regarding the underground economy is the significant loss of tax dollars. It is estimated that the worldwide underground economy is approximately $2 trillion and that the US alone loses approximately $500 billion each year in taxes due to this underground economy.17 This loss in tax revenue is significant especially in a time when tax dollars have been reduced due to economies around the world just starting


Michael J. Anderson is a graduate of the Indiana University Kelley School of Business 3/2 program and earned his MBA in 2014. He is currently a Staff Accountant with the “Big 4” accounting firm Ernst & Young LLP in its Chicago Office. His area of expertise is fraud investigation and dispute services. ** Tracey A. Anderson has “Big 8” accounting experience having worked with Deloitte Haskins & Sells from 1983–1986. Professor Anderson earned his BS in Business from the Eller School of Business at the University of Arizona in 1979 and his JD from the James E. Rodgers College of Law at the University of Arizona in 1984. Dr Anderson went on to receive his LLM in Taxation from the University of Florida Levin School Of Law in 1985. Dr Anderson is currently employed at the Leighton School of Business at Indiana University South Bend as a Full Professor of Accounting. 1 See [Accessed July 13, 2015]. 2 See [Accessed July 13, 2015]. 3 See [Accessed July 13, 2015]. 4 See [Accessed July 13, 2015]. 5 See [Accessed July 13, 2015]. 6 Black’s Law Dictionary Free Online Legal Dictionary, 2nd edn. 7 See [Accessed July 13, 2015]. 8 See [Accessed July 13, 2015]. 9 See [Accessed July 13, 2015]. 10 See [Accessed July 13, 2015]. 11 See [Accessed July 13, 2015]. 12 See [Accessed July 13, 2015]. 13 See [Accessed July 13, 2015]. 14 See [Accessed July 13, 2015]. 15 See [Accessed July 13, 2015]. 16 See [Accessed July 13, 2015]. 17 See [Accessed July 13, 2015].

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522 Journal of International Banking Law and Regulation to emerge from the 2009 recession.18 These lost tax dollars would go a long way in helping reduce government debt, paying for entitlement programs, as well as paying for normal governmental operating expenses. These lost dollars are so significant it cannot be ignored.19

other illegal underground activities including murder. However, these illegal activities include additional horrific consequences almost unimaginable to the common man including kidnapping and incarceration of human subjects.24 Terrorist activities such as 911 speak for themselves: “2996 dead.”25

Heinous reprehensible nature of activities Society also is concerned about the underground economy because of the heinous reprehensible nature of the illegal activities involved. The illegal drug trade is an extremely violent activity perpetuating the following: • • • • •

murder of rival distributors; drug addiction; death due to drug overdose; domestic violence; and theft.20

Illegal gambling is no better, leading to the following: • • • • •

addiction; murder; domestic violence; theft; and other criminal activities such as drugs and prostitution.21

Illegal firearm sales by its very nature leads to violent activity including the extermination of entire tribes in Africa.22 In regard to smuggling illegal aliens into the US, they often face death defying conditions. The following are a few of the dangers they face: •

• •

often shaken down and family members threatened with death to secure additional fees; hazardous conditions such as extreme heat or cold crossing the desert depending on the time of year; absence of water and food during transport; and hazardous travel conditions including riding in non-ventilated vehicles (i.e. trunks of vehicles, trucks, semitrailers, and train cars).23

The last two categories of illegal underground activities, smuggling human subjects as work or sex slaves, have many of the same violent outcomes as the

Difficulty in catching top level members of organised crime One of the problems with catching the top level players in criminal organisations is the fact that they usually direct others to do the illegal activity. Since they themselves rarely carry out the illegal activity their chances of being caught and prosecuted are extremely small. During the Prohibition Era in the US the authorities could never seem to catch Alphonse Gabriel “Al” Capone engaging in illegal activity even though the authorities were well aware he was the boss of the Chicago Outfit.26 His known illegal activities included bootlegging alcohol and murder. However, the Federal Government could never acquire sufficient evidence to prove this. The Federal Government decided if it could not attack Capone’s illegal activity directly it would attempt to attack it indirectly. On May 16, 1927, the United States Supreme Court decided the case United States v Sullivan. The United States Supreme court held in this case that illegal income must be reported or the failure to do so was tax evasion.27 Subsequently in 1931 the Government was able to prosecute and convict Capone on tax evasion charges for failure to file tax returns for years 1928 and 1929 instead of charges relating to his other illegal activities.28

History of anti-money laundering statutes 29

Bank Secrecy Act (“BSA”)

In 1970, the United States Congress passed the Currency and Foreign Transaction Reporting Act more commonly known as the Bank Secrecy Act (“BSA”).30 The purpose of the Act is to make money laundering more difficult and help prevent US banks from becoming unknowing immediacies in this illegal activity.31 This Act created the Financial Crime Enforcement Network (“FinCEN”) as a bureau under the United States Department of the Treasury.32


See [Accessed July 13, 2015]. See [Accessed July 13, 2015]. 20 See [Accessed July 13, 2015]. 21 See [Accessed July 13, 2015]. 22 See [Accessed July 13, 2015]. 23 See [Accessed July 13, 2015]. 24 See [Accessed July 13, 2015]. 25 See [Accessed July 13, 2015]. 26 See [Accessed July 13, 2015]. 27 See [Accessed July 13, 2015]. 28 See [Accessed July 13, 2015]. 29 Bank Secrecy Act Pub. L. 91-508, title II, October 26, 1970, 84 Stat. 1118; 31 U.S.C. § 321 at [Accessed July 13, 2015]. 30 See [Accessed July 13, 2015]. 31 See [Accessed July 13, 2015]. 32 See [Accessed July 13, 2015]. 19

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Anti-Money Laundering: History and Current Developments 523 The Treasury by specific grant of authority under Treasury Order 180-01 assigned the following specific duties to FinCEN: “1.

take all necessary and appropriate actions to implement and administer the provisions of the Bank Secrecy Act, including provisions which are codified at 12 USC 1829b, 12 USC 1951-59, 31 USC 5311 et seq., and section 314 of P.L. 107-56, including, but not limited to, the promulgation and amendment of regulations and the assessment of penalties; 2. exercise authority for enforcement of and compliance with regulations at Title 31, Chapter X - Financial Crimes Enforcement Network with respect to the activities of agencies exercising authority thereunder that has been re-delegated to such agencies by FinCEN under paragraph 4 infra; and 3. design and implement programs of public outreach and communication to the financial community and the general public relating to the functions of the Bureau and the Department’s efforts to prevent and detect money laundering and other financial crime.”33

Domestic banks (i.e. those located in the US) are subject to the provisions of the Bank Secrecy Act. However, it is actually much broader than that. In addition to retail banks, investment banks, broker-dealers, commodities brokers, casinos, money transmitters, payment processors and mutual funds are all subject to the Bank Security Act.34 These financial institutions aid the US Government in the detection and prevention of money laundering activities in two major ways: •

reporting of daily aggregate cash transactions greater than $10,000 from one customer; and reporting any suspicious activity that might signify money laundering.35

Thus, financial institutions have to be able to properly identify their customers as well as provide a clear paper trail of their customers’ financial transactions.36

The Comprehensive Crime Control Act of 37 1984 The purpose of the Comprehensive Crime Control Act of 1984 was to enhance the Government’s arsenal in fighting drug trafficking. By including money laundering under the umbrella of the Racketeer Influenced and Corrupt Organisations (“RICO”) Statutes the Government could now seize the proceeds of illegal activity38 as well at impose significant civil and criminal penalties for each violation.39 Felonies greater than $1,000 can result in fines of up to $15,000 and/or imprisonment for up to five years.40 Two provisions of the Act drastically increased the government’s chances of catching money laundering activity: •

allowing border agents to conduct searches based on carrying too much undisclosed currency; and authorising the federal agents to pay rewards to informants for providing information.41 42

The Money Laundering Control Act of 1986

The Money Laundering Control Act of 1986 put a lot of power behind the enforcement of the anti-money laundering statutes.43 Money laundering became a Federal crime under the 1986 Act.44 Thus, Federal prosecutors could now pursue money laundering activities in Federal court. The Act also made it illegal to try to structure transactions so that they did not technically come under the parameters of the Act.45 The power behind the Act included criminal and civil penalties for failure to detect and prevent money laundering activities. This includes fines of the greater of $500,000 or twice the value of the property involved in the transaction and imprisonment for up to 20 years or both.46 Financial institutions were now required to implement and maintain procedures to ensure compliance with the provisions of the Act.47 48

The Anti-Drug Abuse Act of 1988

The Anti-Drug Abuse Act of 1988 further expanded the definition of financial institutions as well as reduced the size of transactions subject to reporting. Under this Act,


See [Accessed July 13, 2015]. See [Accessed July 13, 2015]. 35 See [Accessed July 13, 2015]. 36 See .pdf [Accessed July 13, 2015]. 37 Comprehensive Crime Control Act 1984 Pub. L. 98-473, title II, October 12, 1984, 98 Stat. 1976; 18 U.S.C. 1. 38 Comprehensive Forfeiture Act of 1984. 39 Sentencing Reform Act of 1984. 40 Amends the Labor Management Relations Act 1947 (“Taft-Hartley Act”). 41 Title IX: Currency and Foreign Transactions Reporting Act Amendments. 42 Money Laundering Control Act 1986 Pub. L. 99-570—OCT. 27, 1986; 18 U.S.C. ss.1956 and 1957. 43 See [Accessed July 13, 2015]. 44 See [Accessed July 13, 2015]. 45 See [Accessed July 13, 2015]. 46 See [Accessed July 13, 2015]. 47 See [Accessed July 13, 2015]. 48 Anti-Drug Abuse Act 1988 Pub. L. 100-690, November 18, 1988, 102 Stat. 4181; 21 U.S.C. 1501. 34

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524 Journal of International Banking Law and Regulation car dealers and real estate closing agents were now considered to be financial institutions subject to its provisions.49 In addition, the size of transaction requiring reporting was reduced to $3,000.50 Also under this statute, offenders are subject to minimum penalties for drug offenses as well as to the death penalty if someone is killed while violating the Act.51

Annunzio-Wylie Anti-Money Laundering Act 52 of 1992 The Annunzio-Wylie Anti-Money Laundering Act of 1992 continued to strengthen the Government’s power to take action against money laundering activities. This Act established the Bank Secrecy Act Advisory Group (“BSAAG”). The BSAAG is a 30-member special panel organised to provide the Department of Treasury with advice on strengthening anti-money laundering programs and simplifying currency reporting forms.53 Conspiracy to commit a money laundering offense now has the same penalty as the offense itself.54 This Act requires that verification and recordkeeping now be maintained for wire transfers.55 More extensive penalties for BSA violations were imposed under this Act.56 The law was expanded to preclude certain defenses in civil cases in regard to the forfeiture of cash and monetary instruments.57 Financial institutions are now required to prepare and file Suspicious Activity Reports which replaces the requirement to prepare and file Criminal Referral Forms.58 The Act also provided whistleblower immunity for financial institutions filing the SARs.59

Money Laundering Suppression Act of 60 1994 The Money Laundering Suppression Act of 1994 targeted Money Service Businesses (“MSB”), expanded the definition of financial institutions, and placed additional responsibilities on banking institutions. The Act requires each MSB to register a controlling person.61 If the MSB has multiple branches all branches must also be

registered.62 It is a federal crime for the MSB to operate if it is not registered. MSAs are required to keep a list of all of its agents.63MSBs are organised under state law. For that reason, the Act recommends that states adopt uniform laws. In regard to expanding the definition of financial institutions subject to the BSA this Act added tribal casinos to the list.64 The Act expanded the responsibilities of banking institutions by requiring them to provide improved internal training and compliance programs.65 On the other hand, the Act did streamline some of the CTR reporting requirements.66

Money Laundering And Financial Strategy 67 Act of 1998 The Money Laundering and Financial Strategy Act of 1998 identified non focused efforts at the federal, state and local levels as a major problem in the fight against money laundering activities. The Act therefore required that the Department of the Treasury and other agencies develop a national money laundering strategy.68 It also created the High Intensity Money Laundering and Related Financial Crime Area (“HIFCA”) Task Force to concentrate the efforts of federal, state, and local agencies in money laundering hot zones.69 The focus of these zones could be either by geographic region or by specific industry. The Act also required banking institutions to train bank examiners in how to spot money laundering activities.70

Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 71 2001 (“USA Patriot Act”) “On September 11, 2001, 19 militants associated with the Islamic extremist group al-Qaeda hijacked four airliners and carried out suicide attacks against targets in the United States. Two of the planes were flown into the towers of the World Trade Center in


See [Accessed July 13, 2015]. Treasury Regulation 31 CFR 103.29; See [Accessed July 13, 2015]. 51 21 U.S.C. 848(e)(1)(A)–(B) . 52 Annunzio-Wylie Anti-Money Laundering Act 1992 Pub. L. 102–550, title XV, §1500, October 28, 1992, 106 Stat. 4044; 12 USC 1811. 53 See [Accessed July 13, 2015]. 54 See [Accessed July 13, 2015].; 18 U.S.C. 271. 55 See [Accessed July 13, 2015]. 56 See [Accessed July 13, 2015]. 57 See [Accessed July 13, 2015]. 58 See [Accessed July 13, 2015] and [Accessed July 13, 2015]. 59 See [Accessed July 13, 2015]. 60 Money Laundering Suppression Act 1994 Pub. L. 103-325, title IV, September 23, 1994, 108 Stat. 2243; 31 USC § 5324. 61 U.S.C 5330(a). 62 U.S.C 5330(b). 63 U.S.C 5330(c). 64 See .PDF [Accessed July 13, 2015]. 65 Money Laundering Suppression Act 1994 s.404. 66 Money Laundering Suppression Act 1994 s.401. 67 Money Laundering and Financial Strategy Act 1998 Pub. L. 105–310, October 30, 1998, 112 Stat.2941; 31 U.S.C. 5340 onwards. 68 See [Accessed July 13, 2015]. 69 See [Accessed July 13, 2015] and -Investigation-%28CI%29 [Accessed July 13, 2015]. 70 See [Accessed July 13, 2015]. 71 Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act 2001 Pub. L. 107-56, October 26, 2001, 115 Stat.272; 18 U.S.C. 1. 50

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Anti-Money Laundering: History and Current Developments 525 New York City, a third plane hit the Pentagon just outside Washington DC, and the fourth plane crashed in a field in Pennsylvania. Often referred to as 9/11, the attacks resulted in extensive death and destruction, triggering major US initiatives to combat terrorism and defining the presidency of George W. Bush. Over 3,000 people were killed during the attacks in New York City and Washington DC, including more than 400 police officers and firefighters.”72 The Patriot Act was one of these initiatives thereafter put into place to combat terrorism. The Government believed that if it cannot directly stop the illegal activity (terrorism), it could track and seize the money used to fund the activity.73 Without the money to finance terrorist activities these activities should cease. So what exactly did the Patriot Act do in regard to money laundering activities? The current law already required information to be gathered on new domestic customers known as the customer identification program (“CIP”).74 Basic information such as name, address, tax identification number, as well as proof of identity is required for all new customers.75CIP and the enhanced due diligence is known as “know your customer” (“KYC”).76 Many domestic banks have correspondent banks in foreign countries. These for all practical purposes are foreign branches of the domestic banks. Under the Act it was now necessary to gather the same information on foreign customers as was already gathered on domestic customers. This also included extra due diligence in regard to private bank accounts (i.e. Wealth Management) for non-US customers.77 Domestic banks also are prohibited from having correspondent accounts with foreign shell banks.78 Financing of terrorist activity was criminalised under the Act.79 The Act also enabled the Government to issue subpoenas and seize foreign bank accounts.80 The definition of financial institution was broadened to include security brokers and underground banks.81SARs also were required for these newly added financial institutions.82 The Act amended the SAR provisions by giving extra protection to the reporting institution.83 The changes also placed some extra burdens on banks by not allowing them to inform their customers

that a SAR has been filed.84 The Government wanted to prevent banks from tipping off their customer before it could take action against the identified customer.85

Intelligence Reform and Terrorism 86 Prevention Act of 2004 The only real addition to AML statutes by this Act was the amendment of the BAS to require the Secretary of the Treasury to prescribe regulations that would require financial institutions to report cross-border electronic transmittals of funds if determined to be “reasonably necessary” to aid in the fight against money laundering and terrorist financing.

Global efforts in anti-money laundering The Bank Security Act was definitely a necessary first step in the fight against money laundering activities. Other countries like the UK and Switzerland also implemented their own anti-money laundering legislation.87 However, the Bank Secrecy Act in and of itself was not the final solution and cure all for the eradication of money laundering activities. To enhance its anti-money laundering agenda the US Government created the Bureau of International Narcotics and Law Enforcement Affairs (“INL”). The INL has the following two major responsibilities: • •

to reduce the entry of illegal drugs into the US; and to minimise the impact of international crime on the US and its citizens.88

To help the INL accomplish these goals it annually prepares an International Narcotics Control Strategy Report (“INCSR”).89 This report assesses the anti-money laundering efforts in more than 200 countries. The report organises these jurisdictions into one of three categories: • • •

jurisdictions of Primary Concern; jurisdictions of Concern; and other Jurisdictions Monitored.


See [Accessed July 13, 2015]. Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act 2001 s.302. 74 See [Accessed July 13, 2015] and /326whitepaper.pdf [Accessed July 13, 2015]. 75 Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act 2001 Title III s.311. 76 See [Accessed July 13, 2015]. 77 Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act 2001 Title III s.312. 78 Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act 2001 Title III s.313. 79 See [Accessed July 13, 2015]. 80 Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 Title III ss.316 and 319. 81 See [Accessed July 13, 2015]. 82 See [Accessed July 13, 2015]. 83 See [Accessed July 13, 2015]. 84 See [Accessed July 13, 2015]. 85 See [Accessed July 13, 2015]. 86 Intelligence Reform & Terrorism Prevention Act 2004 Pub. L. 108-458 of December 17, 2004; 118 Stat.3638 87 See [Accessed July 13, 2015] and _Regime [Accessed July 13, 2015]. 88 See [Accessed July 13, 2015]. 89 See [Accessed July 13, 2015]. 73

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526 Journal of International Banking Law and Regulation The INL looks at several factors in categorising these countries but the primary factor is the estimated size of illegal transactions occurring in these countries. The US Government has determined the best course of action is to pursue the big money illegal activities. The war against money laundering cannot be fought in isolation. No one country can fight this battle alone with any hope of winning. For this reason, a global organisation known as the Financial Action Task Force (“FATF”) was established at the G-7 Summit in Paris in 1989.90 This international organisation addresses the fight against money laundering activities with an entirely different approach from that of the INL. Its main focus is member country adoption of its anti-money laundering recommendations and monitoring country compliance with money laundering laws. FATF has issued Forty Recommendations on Money Laundering (“The Forty Recommendations”)91 and nine Special Recommendations on Terrorist Financing (“Special Recommendations”)92 as the global standards for AML/CFT. The FATF Forty Recommendations draws heavily on the United Nations Conventions held in Vienna in 1988 and Palermo in 2001.93 Other significant conventions aimed at fighting money laundering, corruption, and other illegal activities include the European Union Conventions in Strasbourg in 1990 and Warsaw in 2015.94 At last count, 38 countries have become members of FATF. Because of this group’s efforts more and more countries are adopting anti-money laundering legislation.95

“Furthermore, the Boards recognized, in July and August 2002, The Forty Recommendations on Money Laundering (The Forty Recommendations) and the eight (now nine) Special Recommendations on Terrorist Financing (Special Recommendations), issued by the Financial Action Task Force on Money Laundering (FATF), as the relevant international standards for AML/CFT.”98 The support of these influential international organisations is a tremendous boost in the fight against money laundering.

Weaknesses in the law Keeping ahead of the criminals Unfortunately the battle in the money laundering arena is not static. It is constantly changing. Once laws are implemented the criminals try to figure out how to get around the law. Criminals initially tried to get around the reporting thresholds by making sure their transactions did not exceed the filing thresholds. However, the Government made it clear that the reporting applied not to just one single transaction but to a series of related transactions. Also the mere structuring of a transaction to avoid the law is a crime. The next sections of this article will address several ways criminals have attempted to circumvent the AML laws. 99

AML activities of the World Bank (“WB”) and the International Monetary Fund (“IMF”) What role do the WB and IMF play in the money laundering fight? Both of these organisations are major players on the international financial stage. However, they both have very different purposes. The WB focuses on fighting poverty around the world (i.e. local economic focus).96 The focus of the IMF is promoting worldwide economic stability (i.e. international economic focus).97 After the events of September 11, 2001 the Executive Boards of both organisations joined the money laundering fight. These organisations grasped the destructive impact these activities have on the economic, political, and social fabric of the countries they touch:

New advancements in technology

Criminals quickly found out that there were several ways to circumvent the AML laws. One way was to not technically come within the definition of currency transaction defined in the law. Another way was to be so secretive in these transaction that no one could ever discover the transaction. The next sections will discuss these modes of circumvention.

Cyber-currencies When the first cyber-currency came on the scene many questions had to be addressed. First of course is what a cyber-currency is? A cyber-currency is a fully electronic store of value accepted as a medium of exchange.100 Prior to 2009 cyber-currencies did not exist. The first cyber-currency, Bitcoin, was first released in 2009. Bitcoin was the brainchild of Satoshi Nakamoto.101 Since 2009 over 100 cyber-currencies have been developed.102


See [Accessed July 13, 2015]. See [Accessed July 13, 2015]. 92 See [Accessed July 13, 2015]. 93 See [Accessed July 13, 2015]. 94 See [Accessed July 13, 2015]. 95 See [Accessed July 13, 2015]. 96 See [Accessed July 13, 2015]. 97 See [Accessed July 13, 2015]. 98 See [Accessed July 13, 2015]. 99 See [Accessed July 13, 2015]. 100 T. A. Anderson, “Bitcoin-Is it Just a Fad? History, Current Status and Future of the Cyber-Currency Revolution”[2014] Journal of International Banking Law and Regulation 29(7): 428–435. 101 Satoshi Nakamoto, “Bitcoin: A Peer-to-Peer Electronic Cash System” November 1, 2008. 102 See [Accessed July 13, 2015]. 91

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Anti-Money Laundering: History and Current Developments 527 Cyber-currencies have their own exchanges similar to banks. The primary questions that had to be addressed were: • •

whether a cyber-currency is a real currency subject to the AML laws; and whether a cyber-currency exchange is a MSB that requires registration under the AML laws?

For several years it was debated whether cyber-currencies were actual currencies subject to the AML laws. They were not like usual currencies that are backed by the full faith and credit of the issuing countries. Financial Icon Warren Buffet concluded that Bitcoin was not a currency.103 However, an East Texas Federal court disagreed with Buffet finding that Bitcoin was indeed a currency.104 If cyber-currencies were held not to be real currencies then they would have been beyond the reach of the AML laws. However, the statutes, regulations, and cases make it very clear that cyber-currencies are real currencies subject to the AML laws and that Bitcoin exchanges also are subject to the MSB registration requirements.105

Dark web and Silk Road Another significant problem in the fight against money laundering activity is illegal activity conducted on the “dark web.” The dark web is an underground system that intentionally promotes the transmission of highly encrypted information between anonymous users.106 The encryption software used by these sites is called Tor and was developed by the US Naval Research Laboratory.107 This software was initially used by journalists and free speech advocates to protect their anonymity.108 However, Tor is now used by criminals to conduct their anonymous illegal activities on the dark web.109 For example, Silk Road, one such underground dark web site was utilised to sell weapons, drugs, and assassins for hire.110 This site was initially launched in February of 2011 and was originally closed down by an FBI sting operation in 2013.111 However, the site reopened as Silk Road 2.0 in November the same year producing an estimated $8 million in monthly sales. 112 It is interesting to note that

Bitcoin was readily accepted in payment for these goods or services.113 As part of an international drug bust in 2014, almost a year to the date after the original Silk Road was closed, Silk Road 2.0 and 17 other dark web sites were closed by a team of international law enforcement agencies.114 Unfortunately, this is just a small portion of the illegal activity conducted on the dark web.

Illegal activity conducted by governments It is very interesting to note that some glaring problems exist in regard to the Bank Secrecy Act’s reporting exemption requirements.115 The following entities are specifically exempt from the reporting requirements of the BSA according to the statutes and regulations: •

a department or agency of the US, any state, or any political subdivision of any state; and certain other entities exercising governmental authority on behalf of the US, any state or political subdivision of any state.116

It seems abundantly clear that this reporting carve out is a clear violation of the underlying intent of the BSA. The intent of the BSA was to go after the money of illegal drug and terrorist organisations. We live in a world steeped in corruption and crime that has pervaded all levels of organisations including religious, political, and governmental. A few examples of such alleged illegal activity in these organisations include: •

• • •

Fast and Furious, the Bureau of Alcohol, Tobacco, and Firearms gun running activity;117 CIA drug running activity to fund black operations;118 Vatican Banking Scandal;119 Hamas sponsored terrorist activities;120ISIS/ISIL sponsored terrorist activities;121 and Iran sponsored terrorist activities.122


See [Accessed July 13, 2015]. See [Accessed July 13, 2015]. 105 See [Accessed July 13, 2015]. 106 See [Accessed July 13, 2015]. 107 See [Accessed July 13, 2015]. 108 See [Accessed July 13, 2015]. 109 See [Accessed July 13, 2015]. 110 See [Accessed July 13, 2015]. 111 See [Accessed July 13, 2015]. 112 See [Accessed July 13, 2015]. 113 See [Accessed July 13, 2015]. 114 See [Accessed July 13, 2015]. 115 See [Accessed July 13, 2015]. 116 See [Accessed July 13, 2015]. 117 See [Accessed July 13, 2015]. 118 See; [Accessed July 13, 2015]. 119 See [Accessed July 13, 2015]. 120 See [Accessed July 13, 2015]. 121 See [Accessed July 13, 2015]. 122 See [Accessed July 13, 2015]. 104

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528 Journal of International Banking Law and Regulation It would appear that crime endorsed, supported, or conducted by governments, government agencies, their agents, or political parties also should be covered by the BSA if there is to be any hope of eradicating these illegal activities.

Strong versus weak jurisdictions Another significant obstacle in the fight against money laundering is the level of importance placed on preventing these activities by the various jurisdictions. As mentioned earlier in this article the US, Switzerland, and the UK were the earliest adopters of anti-money laundering legislation. Israel,123 Iran,124 Russia,125 China,126 and Japan127 have more recently joined the fight to crack down on money laundering activities. These countries likely joined the battle in order to maintain credibility in the eyes of the world as well as wanting to prevent a significant loss in tax revenue related to these money laundering activities. On the other spectrum are countries like Sri Lanka which permits paramilitary groups to run kidnapping, extortion, and prostitution rackets.128 Afghanistan, Iran, Iraq, Pakistan, Syria, and Sudan allow significant numbers of terrorist to reside within their borders.129 In these countries, Islamic Banks seem to be the primary financial institutions. One might question whether these banks in countries with high levels of terrorist may somehow be involved in money laundering activities. However, at least one authority argues just the opposite is true. Mahmood Mohamed Sanusi, Ahmad Ibrahim Kulliyah of Laws, International Islamic University Malaysia, Kuala Lumpur, Malaysia, identifies the attitude of the Islamic law in monitoring and preventing the concept of money laundering, further distinguishing between illicit gains (al-Kasb al Haram) and lawful gains.130 The Jordan Islamic Bank’s Summary of Anti-Money Laundering and Combating Terrorist Financing (“AML/CTF”) Policy Manual also stresses that Islamic Sharia’, forbids illegitimate gains regardless of their origin and also forbids all forms of dealing with them.131 Continuing to move these weak jurisdictions in the direction of broader adoption of the AML seems to be a positive step in the money laundering fight.

Corporate inefficiencies in the form of compliance costs Another weakness in the AML laws is the significant cost of corporate compliance. While the effectiveness of certain AML laws is no doubt helpful to the overall economy and is helping to curb the various illegal acts that are funded by these laundered funds, businesses are finding it increasingly difficult to keep up with certain aspects of these AML laws, including KYC disclosures and other various due diligence procedures which add expenses and are often time consuming for each individual client.132 The threat of incurring sanctions from regulatory bodies by not capturing money laundering transactions also has led to an increase in corporate spending on transactions monitoring software for organisations.133 These costs could potentially force certain smaller firms out of the marketplace when partnered with the multitude of other due diligence checks like terrorist financing checks and tax evasion due diligence.134

Recent cases involving anti-money laundering statutes This section of the article reviews a few recent cases in the money laundering arena. Former US Speaker of the House, Dennis Hastert, was recently indicted for violation of the AML laws.135 Representative Hastert made 15 $50,000 withdrawals from his bank. These withdrawals subjected him to the reporting requirements of the BSA since the amounts were over $10,000. Once Representative Hastert found out about the reporting requirement he structured his future withdrawals in an attempt to circumvent the law. When asked by the FBI why he was withdrawing the money he lied and said he was keeping the money for himself. In reality, he was paying someone to be quiet about a past indiscretion. The complaint alleges two counts; one for violation of the BSA and another for lying to the FBI. These two counts are each punishable by a fine of $200,000 and a five-year prison term. Another intriguing case is pending in the Italian court system. That case deals with Vatican Monsignor Nunzio Scarano.136 Scarano was a senior accountant in the Vatican department of Administration of the Patrimony of the Apostolic See. As a senior accountant in this department he had access to the accounts dealing with the Vatican real estate holdings and stock portfolios. Monsignor Scarano devised a donation scam whereby parishioners


See [Accessed July 13, 2015]. See [Accessed July 13, 2015]. 125 See [Accessed July 13, 2015]. 126 See [Accessed July 13, 2015]. 127 See [Accessed July 13, 2015]. 128 See [Accessed July 13, 2015]. 129 See [Accessed July 13, 2015]. 130 See [Accessed July 13, 2015]. 131 See [Accessed July 13, 2015]. 132 See [Accessed July 13, 2015]. 133 See [Accessed July 13, 2015]. 134 See [Accessed July 13, 2015]. 135 See [Accessed July 13, 2015]. 136 See [Accessed July 13, 2015]. 124

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Anti-Money Laundering: History and Current Developments 529 thought they were donating to the Vatican real estate development account but were actually contributing to the payment of his personal mortgage. An Italian judge calculated Monsignor Scarano’s wealth to be in excess of $8 million that he somehow accumulated on an annual income of $41,000.137 He also is accused of trying to smuggle approximately €26,000,000 from Switzerland into Italy. The President of the Vatican Bank was dismissed for dereliction of duty in regard to this matter.138 The Vatican Bank has subsequently enhanced its own AML practices.139 Another interesting case is that of US Ocean Bank.140 US Ocean Bank based in Miami Florida intentionally failed to set up systems to prevent, monitor, and report money laundering activity. As a result of this failure the Mexican drug cartels were able to launder millions of dollars from their illegal narcotics sales. The government chose not to pursue criminal penalties but imposed a whopping $10.9 million fine against the bank for violation of the BSA. The Standard Bank of South Africa case is one of the most interesting.141 This particular case was filed against the UK arm of the South African Standard Bank by the Financial Conduct Authority. The matter resulted in a fine of £7,600,000. What is so interesting about this case is that the bank was fined for having lax AML controls in place even though no actual money laundering activity was ever proved. The Financial Conduct Authority investigated 48 of the bank’s customer files and found the each one had one or more “politically exposed persons” and the review highlighted “serious weaknesses” in the bank’s procedures. Finally, Federation Internationale de Football Association (“FIFA”), the organisation responsible for securing venues for the world cup has a pending case as of July 2015 that alleges as many as 53 separate counts of money laundering in connection to bribes.142 The 53 counts of money laundering were brought to light by “suspicious bank relations” forms filed in Switzerland, which is a due diligence step required under Swiss regulations for financial institutions. These allegations are tied to FIFA’s handling of bids from the 2018 and 2022 World Cup locations, as well as the handling of the bids for many previous World Cup matches. FIFA officials are charged with taking multiple bribes in relation to granting countries the right to host the World Cup, one such allegation being an official accepted a bribe of as much as $10 million in relation to the South African bid for the 2010 World Cup. This case has already

garnered a lot of negative media attention for the organisation, including the arrest of many of its leaders and challenges to the future locations already selected for the World Cup.143

Anti-money laundering reporting requirements A substantial level of reporting is required under the Bank Secrecy Act. The focus in this article will be exclusively US required forms. Other jurisdictions that have adopted AML laws require the filing of similar forms. This section briefly describes the requirement for filing the following forms: FinCEN Forms 114, 112, 111, 110, 107, 105, 104, 103 and IRS Forms 8300 and 3520.144 After April 1, 2013 financial institutions were required to use electronic filing for most of these forms.

FinCen Forms 103, 104, and 112 (Cash 145 Transaction Report) Each financial institution (other than a casino, which instead must file FinCEN Form 103, and the US Postal Service for which there are separate rules) must file FinCEN Form 104 (“CTR”) for each deposit, withdrawal, exchange of currency, or other payment or transfer, by, though, or to the financial institution which involves a transaction in currency of more than $10,000.146 Casinos have the same filing threshold for currency transactions of more than $10,000.147 However, casinos also must report suspicious activities of at least $5,000. These filing requirements apply both to a single transaction and to a series of related transactions that aggregate to these specified levels. The CTR must be filed by the 15th day of the month immediately following the identified transaction or transactions. The US Postal Service complies with the AML statutes by having customers file out a Funds Transaction Report (Form 8105-A) and show a government ID for purchases of $3,000 or more in postal money orders and cashing postal money orders of $10,000 or more.148 149

FinCen Form 111(SAR Report)

The filing of the Suspicious Activity Report (“SAR”) became required after the effective date of the Annunzio-Wylie Anti-Money Laundering Act of 1992. This new report replaced its predecessor the Criminal Referral Form (“CRF”). The SAR must be filed if the bank finds any suspicious activity in regard to a


See [Accessed July 13, 2015]. See [Accessed July 13, 2015]. 139 See [Accessed July 13, 2015]. 140 See [Accessed July 13, 2015]. 141 See [Accessed July 13, 2015]. 142 See [Accessed July 13, 2015]. 143 See [Accessed July 13, 2015]. 144 See [Accessed July 13, 2015]. 145 See; [Accessed July 13, 2015]. 146 See [Accessed July 13, 2015]. 147 See [Accessed July 13, 2015]. 148 See [Accessed July 13, 2015]. 149 See [Accessed July 13, 2015]. 138

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530 Journal of International Banking Law and Regulation customer’s account. A suspicious activity is defined as a known or suspected violation of Federal law or a suspicious transaction related to a money laundering activity or a violation of the Bank Secrecy Act.150 If such activity is found the SAR must be filed within 30 days of identification of the suspicious activity. A review of the situation must be conducted by day 120 to determine if the suspicious activity continues. If the suspicious activity persist then a second SAR in regard to that activity must be filed by day 150. If such activity continues a third report would be required within a 12-month period.

Foreign Bank Account Reporting-FinCEN 155 Form 214-FBAR

FinCen Form 110 (DOEP Designation of 151 Exempt Person)

The US Government requires reporting by anyone engaged in a trade or business for certain cash transactions. Each person engaged in a trade or business who, in the course of that trade or business, receives more than $10,000 in cash in one transaction or in two or more related transactions, must file Form 8300. The following cash transactions are exempt from filing IRS Form 8300:

The Bank Security Act, as mentioned above, requires banks to report currency transactions of more than $10,000. However, the regulations allow banks to exempt certain customers’ currency transaction from their reporting requirement. The regulations allow for banks to exempt the following customers from its currency transaction reporting: government agencies, listed companies, listed companies subsidiaries, certain non-listed businesses and payroll companies.152

FinCen Form 107 (RMSB Registration of 153 Money Service Business) The Money Laundering Suppression Act of 1994 required money service businesses to be registered. Form 107 is used for initial registration, renewal, and re-registration of money service businesses. This form must be filed within 180 days after the business is established. Failure to register is a violation of the Bank Secrecy Act.

Reporting for Currency and Monetary Instruments Transported Outside the 154 Country-FinCEN Form 105 Each person who physically transports, mails, or ships, or causes to be physically transported, mailed, or shipped currency or other monetary instruments in an aggregate amount exceeding $10,000 at one time from the US to any place outside the US or into the US from any place outside the US, and each person who receives in the US currency or other monetary instruments in an aggregate amount exceeding $10,000 at one time which have been transported, mailed, or shipped to the person from any place outside the US must file FinCEN Form 105.

A US person that has a financial interest in or signature authority over foreign financial accounts must file a Report of Foreign Bank and Financial Authority (“FBAR”) if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year.156

Business Cash Transaction Reporting-IRS 157 Form 8300

• •

cash received in a personal (non-business transactions); cash received by a financial institution required to file FinCEN Form 112, BSA Currency Transaction Report (“BCTR”); cash received by a casino required to file (or exempt from filing) FinCEN Report 112, if the cash is received as part of its gaming business; cash received by an agent who receives the cash from a principal, if the agent uses all of the cash within 15 days in a second transaction that is reportable on Form 8300 or on FinCEN Form 112; discloses all the information necessary to complete Pt II of Form 8300 or FinCEN Report 112 to the recipient of the cash in the second transaction; and cash received in a transaction occurring entirely outside the US.158 159

Foreign Trust Fund Reporting-Form 3520

The US Government has become very concerned about US citizens and entities having any interest in foreign trusts. The major concern of the government of course is tax avoidance discussed earlier in this article. For that reason, a US person is required to file IRS Form 3520 if the person is an owner of a foreign trust or receives a transfer, gift or bequest from a foreign trust.160


See [Accessed July 13, 2015]; 12 CFR 21.11 Suspicious Activity Report. See [Accessed July 13, 2015]. 152 31 C.F.R. 1020. 315. 153 See [Accessed July 13, 2015]. 154 See [Accessed July 13, 2015]. 155 See [Accessed July 13, 2015]. 156 See [Accessed July 13, 2015]. 157 IRS Publication 1544. 158 See [Accessed July 13, 2015]. 159 See [Accessed July 13, 2015]. 160 See [Accessed July 13, 2015]. 151

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Anti-Money Laundering: History and Current Developments 531

Conclusion The fight against money laundering has come a long way since the initial adoption of the BSA. Each successive Act has continued to expand the number of businesses subject to its provisions. The scope of the BSA also has been increased by reducing the size and aggregating transactions that require reporting. The global initiatives of the FATF in conjunction with the full support of the WB and the IMF have tremendously strengthened the adoption of AML laws around the world. High profile cases such as House Majority Leader Dennis Hastert, Monsignor Nunzio Scarano and FIFA put everyone on notice that large fines and jail time await BSA violators. The massive fines imposed on US Ocean Bank of Miami and Standard Bank of South Africa put banking institutions on notice that “no” or “sloppy” AML procedures will not be an acceptable banking practice. However, everything is not perfect in the AML world. New advents in technology such as the next cyber currency and harder to crack encryption software will continue to provide challenges to the money-laundering fight. Financial institutions will have to hire the best and brightest in the tech fields to try to keep up with the criminals. The reporting exemptions provided for government transactions seems to be one of largest


glitches in the AML system. If it is not likely that these exemptions will be repealed (i.e. too much push back from governments) then other methods have to be devised to catch money-laundering transactions of corrupt governments and/or their agencies. Some jurisdictions seem to have no current interest in improving their AML laws. These are known as weak AML jurisdictions. Global pressure can be placed on these jurisdictions to encourage them to willingly adopt the AML laws or in the alternative these jurisdictions can be forced to adopt AML laws under the threat of imposing sanctions. The reporting requirements of the BSA are producing tremendous amounts of data that are likely just being filed without being analysed.161 This information should be continuously analysed to determine potential trends in the types of activities being reported and constantly monitored for potential weaknesses in the reporting system. How much additional cost can be thrust upon financial institutions also is a concern. The cost associated with the due diligence of implementation, monitoring, and reporting under the AML laws will likely reduce the profits of strong financial institutions and may even drive smaller financial institutions completely out of business. Money-laundering is not a static activity. Those serious about winning this fight must continually adjust to an ever changing environment.

See [Accessed July 13, 2015].

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