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Money Laundering
From Gangsters to Terrorists
Before 1970 anyone could carry a large suitcase stuffed with cash into a U.S. bank and make a deposit or an overseas wire transfer, no questions asked. The banks were delighted to have the business-and were willing to turn a blind eye to suspicious behavior in the name of customer privacy.

In 1970 Congress enacted a watershed statute known as the Bank Secrecy Act, which required banks and other financial institutions to retain records and file reports concerning large cash transactions, preserving a paper trail that could lead law enforcement back to the criminal activity that generated the cash. It was not until 1986, however, that money laundering itself was made an independent crime, separate from the underlying crime. The United States was the first country in the world to establish such an offense. Today, largely as a result of U.S. influence, virtually every

The USA Patriot Act of 2001, a far-reaching antiterrorism statute enacted in the wake of the September 11 attacks, strengthened the existing laws and expanded them to encompass terrorist financing. It imposed tough new anti-money-laundering requirements, not only on banks and thrifts but also on a wide assortment of other businesses-including casinos, card clubs, money transmitters, securities broker-dealers, mutual funds, credit-card operators, insurance companies, precious-metal dealers, investment advisers, automobile and boat dealers, and real estate agents, to name just a few.

As a result, the topic of money laundering has gone from being an obscure banking issue to a legal juggernaut, and most lawyers cannot afford to be unfamiliar with the basics of it.

In the classic sense, money laundering is a series of actions designed to cover the tracks of criminal proceeds. Stated another way, it is "the process by which one conceals the existence, illegal source, or illegal application of income, and then disguises that income to make it appear legitimate." (President's Commission on Organized Crime, The Cash Connection, at 7 (Oct. 1984).)

But federal statutes prohibiting money laundering also cover a wide array of financial transactions that may have no relation to concealing criminal proceeds. For example, merely spending money derived from a crime can be a felony, even absent any effort to conceal or disguise the transaction. (18 U.S.C. § 1957.) As another example, any attempt to cause a financial institution to fail to file a Currency Transaction Report-that is, a report designed to help detect money laundering-is punishable as a felony, whether or not the proceeds involved in the transaction are criminally derived. (31 U.S.C. § 5324(a).)

No one knows precisely where the term money laundering originated. One theory is that it began with gangster Al Capone, who used coin-operated laundries in Chicago to mask his income from prostitution, gambling, and bootlegging. Another theory is that the term came from the vocabulary of drug traffickers, who speak of "washing" their "dirty money" to make it appear legitimate.

Importantly, the money- laundering statutes apply not only to the criminal organizations and individual criminals who generate illicit proceeds but also to financial institutions and other people or entities responsible for laundering the funds, even though they were not involved in the underlying criminal activity. For example, a real estate agent, who has no personal desire to conceal illicit proceeds but merely wishes to collect a sales commission, may be guilty of money laundering for ignoring such facts as the buyer's lavish lifestyle and remarks about drug money. (United States v. Campbell, 977 F. 2d 854 (4th Cir. 1992).)

The grande dame of money-laundering regulation is the statute commonly known as the Bank Secrecy Act of 1970, or BSA. (12 U.S.C. § 1829b, 12 U.S.C. §§ 1951-59, and 31 U.S.C. §§ 5311-32.) Bank secrecy is a misnomer, because the BSA is really a disclosure statute calling for banks and other institutions, both financial and nonfinancial, to keep extensive records and report customer transactions as prescribed by Treasury Department regulations. As Sen. Paul Sarbanes, chair of the Senate Banking Committee, put it: "The statute is called the Bank Secrecy Act because it bars bank secrecy in America .... Secrecy is the hiding place for crime." (Cong. Rec., Senate, S10562 (Oct. 11, 2001).)

Congress enacted the BSA based on findings that criminals were increasingly using banks and other financial institutions to promote their crimes and conceal or disguise their illicit profits. The statute supplied law enforcement agencies with four basic tools to detect, investigate, and prosecute criminal activity:
1. a paper trail of records of certain customer transactions, which must be maintained in an accessible manner by financial institutions for five years (12 U.S.C. § 1829b and 12 U.S.C. §§ 1951-59);
2. the Currency Transaction Report, which must be completed by financial institutions each time a customer engages in a cash transaction over $10,000 (31 U.S.C. § 5313(a); 31 C.F.R. § 103.22);
3. the Report of International Transportation of Currency or Monetary Instruments, which must be filed with the Bureau of Customs and Border Protection when currency or monetary instruments over $10,000 (originally $5,000) are physically transported into or out of the United States on any one occasion (31 U.S.C. § 5316(a); 31 C.F.R. § 103.23); and
4. the Report of Foreign Bank and Financial Accounts, which must be completed annually by people with a financial interest in, or signature authority over, bank or other financial accounts in a foreign country exceeding a value of $10,000 (originally $5,000) (31 U.S.C. § 5314; 31 C.F.R. § 103.24).

About three decades ago, the U.S. Supreme Court upheld the constitutionality of the BSA, over a dissenting opinion by Justice Douglas, in which he likened the statute to George Orwell's Big Brother and said he was "not yet ready to agree that America is so possessed with evil that we must level all constitutional barriers to give our civil authorities the tools to catch criminals." (California Bankers Ass'n v. Shultz, 416 U.S. 21, 85-86 (1974).)

During the 1970s and early 1980s, enforcement of the BSA was quite lax. Many financial institutions, including some of the largest banks in the country, either were unaware of their reporting and record-keeping obligations or simply chose to ignore them. The Department of the Treasury did little to educate institutions or pressure them into compliance. Moreover, it was easy for criminals to introduce large amounts of cash into the financial system without triggering a Currency Transaction Report simply by "structuring" their deposits, that is, breaking the amounts down into smaller units, each below the reporting threshold.

But the tide began to turn in the early 1980s with increasing public awareness of the growth in drug trafficking and organized criminal activity. In a highly publicized proceeding in 1985, the Bank of Boston entered a felony guilty plea for failing to file Currency Transaction Reports with respect to more than $1 billion in cash transactions.

To put more teeth into the BSA, Congress enacted the Money Laundering Control Act of 1986, or MLCA. (Pub. Law 99-570.) The MLCA prohibited people from "structuring" transactions to circumvent currency-reporting requirements. (31 U.S.C. § 5324.) More important, the statute made money laundering a criminal offense in its own right by adding sections 1956 and 1957 to Title 18 of the U.S. Code. These landmark provisions were based on evidence before Congress that no matter how many times the BSA was amended, or how rigorously it was enforced, "only a substantive prohibition of the act of laundering will deter and significantly decrease money laundering." (S. Rep. No. 99-433, at 3 (1986).)

Section 1956 makes it a serious felony for any person to conduct-or attempt to conduct-a wide array of financial transactions or cross-border transmissions of funds involving proceeds of "specified unlawful activity" with the intent to promote such specified unlawful activity, or with the knowledge that the transaction is designed to conceal or disguise the proceeds, or to avoid a transaction-reporting requirement. Section 1957 makes it a felony for any person to engage or attempt to engage in a "monetary transaction" that he or she knows involves criminally derived property.

The term specified unlawful activity is defined broadly to include a large number of state, federal, and foreign crimes. (18 U.S.C. § 1956(c)(7).) These include most of the RICO predicate offenses-such as mail fraud, wire fraud, obstruction of justice-and a long list of miscellaneous offenses ranging from murder and bank robbery to food-stamp fraud and mail theft. The list grows longer almost every time Congress enacts a new crime bill.

The MLCA also added civil and criminal asset-forfeiture statutes. The civil forfeiture statute, 18 U.S.C. § 981, authorizes forfeiture to the U.S. government of any real or personal property involved in a transaction or attempted transaction in violation of the new money-laundering offenses. The criminal forfeiture statute, 18 U.S.C. § 982, requires the court, in imposing a sentence for a money-laundering offense, to order the defendant to forfeit to the U.S. any real or personal property involved.

In 1992 Congress established a "death penalty" for financial institutions, providing that a financial institution's federal franchise or deposit insurance could be revoked upon conviction of a money-laundering offense.

In the same legislation, Congress added a provision to the BSA authorizing the Treasury to require financial institutions to report any suspicious transactions relevant to a possible violation of law or regulation. (31 U.S.C. § 5318(g).) Treasury regulations require banks, casinos, securities dealers, money transmitters, and even the U.S. Postal Service (which sells money orders) to file a suspicious activity report (SAR) whenever a clerk decides the customer is acting "suspiciously," and further require that the institution not inform the customer that a report has been filed. As one example, the recent, highly publicized Riggs Bank scandal involved the Washington bank's repeated failure to report suspicious transactions by Saudi diplomats and other valued clients, such as former Chilean dictator Gen. Augusto Pinochet.

These rules, in effect, have transformed financial institutions into a corps of secret surveillance agents for the government. The SAR form calls for extensive personal information, including the customer's full name, address, telephone number, account number, Social Security number, occupation, and date of birth, together with the amount of the transaction and a detailed narrative of the circumstances. This information does not simply sit in a dusty file but is widely disseminated to state and federal law enforcement agencies. Under regulatory guidelines, the mere purchase of a money order for cash or a moment's hesitation when asked to hand over personal information can trigger the requirement to file such a report. (See, 60 Fed. Reg. 46556, 46559-60 (Sept. 7, 1995.)

According to Sen. Sarbanes, Osama bin Laden once boasted that Al Qaeda includes "modern, educated youth who are aware of the cracks inside the western financial system as they are aware of the lines in their hands." (147 Cong. Rec. S10561 (daily ed., October 11, 2001).) Within weeks of the events of September 11, 2001, Congress enacted a far-reaching antiterrorism statute designed to help seal up those cracks.

The USA Patriot Act added a new aspect to the concept of money laundering. Traditionally, money laundering has been associated with drug traffickers, members of organized crime, and others who attempt to wash money that comes from illegal sources. Terrorist financing, on the other hand, often involves apparently clean funds from front charities, personal fortunes, overseas businesses, and other sources intended to support terrorist activity. The Patriot Act contains a number of provisions to adapt existing money-laundering laws to detect terrorist financing operations and to more deeply involve financial institutions and their regulators in that effort.

Among the significant measures of the Patriot Act relating to money laundering and terrorist financing are:
Reports of currency. Section 365 requires nonfinancial trades or businesses to file a report with the Treasury for every $10,000 in currency received in one transaction or related transactions in the course of the trade or business. (31 U.S.C. § 5331.)

Bulk cash smuggling. Section 371 created a new criminal offense of "bulk cash smuggling." (31 U.S.C. § 5332.) The offense is committed by anyone who, with the intent to evade reporting requirements, knowingly conceals more than $10,000 in currency or other monetary instruments-such as traveler's checks, money orders, personal and business checks, and promissory notes on his or her person or luggage and transports or attempts to transport it.

Anti-money-laundering compliance programs. Section 352(a) requires every financial institution to establish an anti-money-laundering program. (31 U.S.C. § 5318(h).) Previously, only banking organizations and casinos were subject to this requirement. Financial-sector industries subject to the new requirement include money transmitters and other money-services businesses; securities broker-dealers; people involved in real estate closings and settlements; futures commission merchants; mutual funds and other investment companies; operators of credit-card systems; dealers in precious metals, stones, or jewels; pawnbrokers; private bankers; travel agencies; dealers in automobiles, airplanes, and boats; loan or finance companies; insurance companies; telegraph companies; and commodity pool operators and commodity trading advisers.

Shell banks. Section 313(a) prohibits U.S. financial institutions from providing correspondent accounts in the United States to foreign banks that have no physical presence in any country, also known as shell banks. (31 U.S.C. § 5318(j)(1).) Shell banks pose an especially high money-laundering risk because there is no physical facility to which regulators or law enforcement can go to examine bank operations, review records, or freeze funds.

Customer identification. Section 326(a) calls for the Department of the Treasury to adopt regulations requiring financial institutions to verify the identities of customers who open new accounts. (31 U.S.C. § 5318(l).) The primary purpose of this requirement is to prevent financial institutions from being used as conduits for money laundering and terrorist financing. However, by requiring verification of customer identity, the statute also benefits customers by reducing the incidence of fraud and identity theft in opening new accounts.

People from all walks of life have become ensnared by the money-laundering statutes, including:
- church elders in Florida who handled the proceeds of a pyramid scheme, an attorney in Louisiana who helped clients structure transactions to evade currency-reporting requirements,

- California rabbi who structured currency transactions to evade reporting requirements in connection with soliciting used cars as a fund-raising technique,

- the mayor of a New Jersey city who divided $65,000 borrowed from an underworld figure into smaller amounts to circumvent currency-reporting requirements, and

- the commander of the U.S. Army's antidrug operations in Columbia, who agreed to plead guilty to misprision of a felony for failing to turn in his wife for money laundering.

Steven Mark Levy is an attorney in Los Angeles. He is the author of Federal Money Laundering Regulation: Banking, Corporate and Securities Compliance (Aspen Publishers, 2004).

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