The U.S. banking industry has a long history of supporting U.S. governmental efforts to combat illegal financial operations and money laundering. Since September 11, 2001, these efforts have increased even more. With the passage of the U.S.A. Patriot Act and new legal requirements financial institutions must follow, money laundering is fiercely being fought. This effort is not only attempting to curtail criminal activity, but is working to disarm and deter terrorist organizations.

But what does this mean for businesses and the world economy? What kind of businesses are most at risk? And how can companies protect themselves against money laundering? To answer those questions it is first necessary to understand the size and scope of money laundering and how this illegal activity occurs.

Money Laundering Is Complex

In short, money laundering occurs when individuals or organizations seek to disguise or place illegally obtained funds in the stream of legitimate commerce and finance. Most commonly associated with illegal arms sales, smuggling and the activities of organized crime, such as prostitution and drug trafficking, money laundering also often lies at the heart of embezzlement, computer fraud schemes and insider trading.

For example, when criminal activities produce large profits, those involved must look for ways to control the funds generated without drawing attention to themselves. This is usually achieved by disguising the sources, changing the form of the funds (i.e. from cash to money orders or traveler’s checks) or by moving the funds to a location where they will draw the least attention.

Traditionally, money launderers have targeted banks, since banks accept cash and facilitate domestic and international funds transfers. However, the U.S. securities market may be a growing target of criminals looking to hide and move illicit funds.

The Scope and Size

Anyway one looks at it, money laundering is a significant problem — both in terms of size and scope. According to The International Monetary Fund (IMF) money laundering could equal two to five percent of the world’s gross domestic product, and based on 1996 statistics, money laundering ranges from $590 billion to $1.5 trillion. The smaller number is roughly equivalent to the value of the total output of an economy the size of Spain!

How Is Money Laundered?

After the funds are generated, the first stage of money laundering takes place when the launderer places his illegal proceeds into the financial system. This is usually accomplished by breaking up large amounts of cash into smaller sums and then depositing those less conspicuous amounts into bank accounts. Or, the cash is used to purchase a number of smaller monetary instruments that are then, in turn, deposited into bank accounts.

The second stage of money laundering is to convert or move the funds after they have been deposited into the financial system. For instance, the launderer may choose to convert the funds to investment instruments or wire them through a series of bank accounts across the globe. Another way to move the illegal funds is to disguise them as legitimate payments for goods or services.

After the second phase is complete, the final stage occurs. Referred to as integration, this involves re-entering the funds into the legitimate economy. At this point, many criminals choose to invest the funds into real estate or business ventures.

Effect of Money Laundering on Businesses and Society

Financial institutions are leading the way in the fight against money laundering. These institutions recognize the potential macroeconomic consequences and damage that could occur in their industry. They also understand the effect money laundering can have on publicly and privately held companies, regulatory authorities, capital flows, exchange rates, and international trade, as well as on national economies and workforces.

Money laundering also has steep social and political costs. If organized crime is allowed to infiltrate financial institutions, gain control of large sectors of the economy via investment, or even bribe public officials and governments, a country’s entire society, ethics and social framework could be at risk.

How To Protect Against Money Laundering

A company’s first and most important step is to establish sound anti-money laundering policies and procedures across the board. According to Jim Christie, Global Treasury Services Executive Risk Management Officer, Bank of America, “anti-money laundering programs should place a major emphasis on the ‘Know Your Customer’ approach and include compliance with the OFAC regulations, as well.”

Imperative to the success of an anti-money laundering effort is the full support of senior management and all employees. In fact, compliance to anti-money laundering policies and procedures should be part of a company’s code of ethics or basic employment standards/expectations. In addition, non-compliance with anti-money laundering strategies could be sufficient cause for employee dismissal.

A very clear anti-money laundering training program and a commitment to on-going training are two additional necessities. All employees who have customer contact (directly or indirectly) or who have occasion to see or handle customer transactions and activity, should be required to take the training, including all new hires. Furthermore, a policy should be in place that states what form of annual “refresher training” will be given and who will take it.

“Keep in mind that there are three lines of defense: (1) the line of business associates who deal with the customers and transactions, (2) the associates who set policy and monitor the activity, and (3) the associates who audit whether or not the first two lines are doing their jobs and helping to keep the company in compliance with laws and regulations,” Christie said.

Most importantly, all three lines should be equally concerned about protecting the company’s vulnerability to fraud, money laundering and reputation risk, as well ensuring compliance with laws and regulations.

Companies at the Greatest Risk for Money Laundering

In general, “any company that provides a method for criminals to either exchange ill-gotten goods for legitimate assets is vulnerable to possible money laundering. And, any company that provides a way to move dirty money from one source to another, or better yet, to many other end points in an attempt to hide the money’s origin and trail and to clean the money through this route, is highly susceptible to money laundering, said Dan Soto, Senior Vice President, Anti-Money Laundering Compliance, Bank of America.

As such, almost any company, financial institution or organization can be a potential candidate for fraud. Some examples, Soto explained, include: car dealers selling cars for “dirty cash” and the car being resold to obtain “clean cash;” a retail store selling money orders or taking money wire orders with the payment proceeds being “dirty money;” casinos allowing criminals to buy many chips with “dirty money,” and then those chips are cashed in for “clean money;” financial institutions opening accounts and handling money transactions for criminals.

Another concern is doing business with companies who either operate out of countries known for their high risk of money laundering or who are from countries known as “tax haven” countries.

Yet, not all companies operating in high risk lines of business or countries are high risk, themselves. If they have the appropriate controls in place to know their customers and detect, deter and report unusual or suspicious transactions, they should be considered normal risk companies.

Legitimate companies also must know that if they become investment recipients of laundered money, knowingly or unknowingly, their assets may be confiscated by the authorities. In addition to the financial consequences of such an action, the public relations damage can be disastrous. And, since a corporation’s reputation and integrity can be its strongest assets, protecting them is imperative.

Financial Institution Responsibilities

According to The American Bankers Association, more than $2 trillion dollars flows through the U.S. banking system daily. As such, it’s no surprise that financial institutions hold a large responsibility in the fight against money laundering. Today, they must identify and investigate any potential money laundering activity. If their management falls short of these responsibilities, they can be held liable, which may mean facing stiff fines, incarceration and of course, negative publicity.

Precedents already have been established. For example, in November 2001, the managing director of a major financial institution in France was arrested based on allegations that his organization failed to investigate suspicious banking activity that resembled money laundering.

The U.S.A. Patriot Act, which was signed into law in October 2001, expanded the scope of anti-money laundering legislation to include all types of financial institutions, such as banks, broker/dealers, mutual funds, insurers and money transfer/payment agencies. And, while many financial institutions were already faithfully complying with the Bank Secrecy Act, which required many of the same elements, the U.S.A. Patriot Act brought the requirements and compliance standards to a higher level.

Previous legislation required an institution only to monitor and report certain transactions. For example, if a customer deposited or withdrew funds totaling $10,000 or more, banks were required to file a currency transaction report. More than 12 million of these reports are filed annually.

Required Reporting and Transaction Monitoring

Although there is no magic list of rules, transactions or specific actions that cause a bank to question a customer’s business activity, as required by law and in their own best interest, banks do monitor customer activity for suspicious and unusual transactions.

In a perfect world, if a bank did the appropriate due diligence on all its customers, there would be no concern about illegal activity and money laundering. Unfortunately, that’s not today’s situation, so banks must monitor all types of financial transactions. In short, any transaction that looks unusual or suspicious as compared to a customer’s normal pattern of activity is reviewed and analyzed to determine its true nature.

Banks also are required to file suspicious activity reports (SAR) when any possible violation of law is suspected. And, financial institutions must use the most powerful and effective anti-money laundering systems available. If money laundering is detected at a bank, its only true defense against criminal prosecution is to demonstrate that it did its absolute best to detect money laundering or fraudulent activity.

According to Soto, Bank of America is dedicated to performing the appropriate “Know Your Customer” due diligence on all its existing and new customers, based on an appropriate risk-based approach. “We monitor the activity and transactions moving into and through our bank. And, as required by law and regulation, should suspicious activity be detected, processes are in place to notify areas within the company that specialize in analysis and investigation, as well to report to the government when appropriate,” Soto explained.

Impact of the Internet

Over the last five to 10 years, money laundering has continued to grow. Sophisticated criminal organizations have leveraged the accessibility, speed and relative anonymity of the internet and web-based financial programs to better perform and hide their money laundering activities. In fact, instead of having to run the risk of physically transporting currency gained from illegal operations out of a country, criminals often now are concealing the currency by transforming it into a digital format. This way, dirty money is unable to be distinguished from legal currency.

However, even though the internet has provided many with the ability to establish a variety of relationships with institutions, the means for moving and settling funds transactions still resides with traditional financial institutions primarily through FedWire, Chips and SWIFT. These systems are continually checked by financial institutions for potential money laundering transactions.

On a positive note, the internet also is being used by banks, law enforcement and other interested parties as an investigative tool for research of people, companies, transactions and countries.

The Fight Against Money Laundering

The U.S. Secretary of the Treasury is at the helm of the fight against money laundering in the United States. The Secretary is responsible for anti-money laundering regulations, and within Treasury, the authority to issue and administer these regulations resides with the Director of the Financial Crimes Enforcement Network (FinCEN). FinCEN was established in 1990 to support law enforcement agencies by collecting, analyzing and coordinating financial intelligence information to combat money laundering.

The U.S. government also recently created a new national money laundering strategy that involves a government-wide effort to combat terrorist financing and emphasizes asset forfeiture as the most direct method of depriving criminals of their illegally obtained funds. This new strategy also involves the aggressive pursuit of money trails left by criminals and terrorists in order to dismantle these groups and strip them of the funds they would use to finance further acts of terror or criminal activity.

Christie said Bank of America, through various industry committees, has been “at the table” with the government to determine what steps can be taken to identify and report potential terrorists or those who support them.

“We also have implemented processes to respond to government requests for information as stipulated in the Patriot Act, and we’ve provided government agencies and members of congress with operating knowledge and experiences to help them understand the world of money transfer and correspondent banking, as well as other facets of banking susceptible to fraud and money laundering,” Christie remarked.

A Joint International Effort

Today’s global fight against money laundering includes a combined effort involving the U.S. government and several international institutions, including the multinational Financial Action Task Force, which is responsible for setting, implementing and monitoring international anti-money laundering standards, the World Bank and the IMF.

Without a doubt, money laundering is an international problem that affects virtually every country. Financial services and businesses must be especially vigilant. “Remember, a good anti-money laundering program must start with senior management commitment and follow-through,” said Christie.

This article appeared in September 2003. (BA)

John Manzella
About The Author John Manzella [Full Bio]
John Manzella, founder of the, is a world-recognized speaker, author and nationally syndicated columnist on global business, trade policy, labor, and economic trends. His latest book is Global America: Understanding Global and Economic Trends and How To Ensure Competitiveness.

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