Practical insights for compliance and ethics professionals and commentary on the intersection of compliance and culture.

Round-up on anti-money laundering compliance

The practice of money laundering takes on many forms, all with the objective of transferring money earned from illegal activities into the legal financial system for further use.  These various strategies for transferring profits from theft, drug sales, bribery, or other illicit activities are all targeted for the criminals to gain access to legitimate banking and from there use the money for mainstream activities such as investing, shopping, or buying property.

Some of the many ways through which proceeds from illegal activities are introduced into the financial system include:

  • Using legitimate businesses which are often cash-based (such as small restaurants or nail salons) as fronts into which the criminals merge their illicit funds with legitimate cash revenue
  • Physically removing large amounts of cash from one country with a restrictive regulatory regime on banking deposits into another country where the regulator is friendlier or less likely to take enforcement action
  • Gambling, such as buying and then cashing in chips at a casino in order to get a receipt to provide a presumptive source for the funds in the future, or playing high-stakes games
  • Using shell companies, blind trusts, and other corporate forms registered in jurisdictions which are known as tax havens or have advantageous tax rulings
  • Depositing the illicit funds in small amounts or spread between multiple accounts or financial instruments to conceal the source

Whatever its specific form, money laundering is at the intersection of ongoing criminal enterprise and the dishonest or fraudulent misconduct which plagues the financial sector.  Efforts by financial institutions or law enforcement to effectively prevent and punish these illicit financial arrangements could cut to the core of many illegal and corrupt activities all over the world.  However, supervisory authorities often seem like they do not keep pace with the innovations of criminals seeking to conceal and misrepresent the sources of their funds in order to legitimatize their money earned by illegal and corrupt conduct.  Both investigation and enforcement actions have been shown as lacking in the effort to prevent and punish money laundering as schemes become more complex and far-reaching.

  • Real estate – One traditional method of money laundering which has gained new popularity among criminals is to hide illicit funds in real estate purchases. This is done by either buying the property with money from illegal activities and then renting it out to make above-board income or flipping it to simulate legitimate revenue from the quick sale, or by manipulating the purchase price in collusion with the seller.  Shell companies often come into play here also, taking advantage of limited capacity by real estate agents to identify who is really behind purchases by shadowy corporate entities, especially those from opaque Delaware corporations or overseas transactions:  How money laundering works in real estate
  • Online casinos – As mentioned above, one typical method of money laundering involves using gambling to transfer funds or use funds in betting to co-mingle them indistinguishably with other proceeds. Internet gambling adds an extra complication to these schemes, in which the providers of these websites may not do enough to set up controls to prevent criminals from using their online casinos for money laundering.  Regulatory inquiry has shown not only insufficient controls but inadequate awareness of the risks from money laundering or the types of transactions that could constitute it, indicating that compliance or other reporting officers at these organizations are not adequately trained or competent in their oversight responsibilities:  Five UK online casinos may lose license over money-laundering fears
  • Money transfer companies – A recent settlement announcement between Western Union and the New York Department of Financial Services has brought to light regulatory scrutiny of the use of these money transfer companies by criminals, and the inadequate internal controls which may exist to identify or prevent these activities. The $60 million settlement Western Union will pay to the New York state financial regulator is largely related to the company’s failure to maintain an adequate program and conduct monitoring and reporting activities in order to deter criminals from using their services to facilitate money laundering and other fraudulent financial transactions:  Western Union settles New York money laundering probe for $60 million  
  • Regulators and “failure to fix” – Financial regulators have been criticized in the past for lax investigation efforts or punishments that do not adequately seek justice for the magnitude of the harm done by allowing these criminals to have continued access to and use of their ill-begotten gains. Reactions to this criticism have begun to show up on regulatory agendas in which supervisors agree to settlements with banks where they promise to improve their compliance efforts and toughen up their money laundering controls programs.  In 2012, Citibank was ordered by the Office of the Comptroller of the Currency (OCC) to fix its anti-money laundering program insufficiencies.  Six years later, the OCC has come back to Citibank with a $70 million fine due to its finding that the bank failed to take corrective action:  Citigroup Fined Over Failure to Fix Money-Laundering Safeguards
  • Investigation and enforcement with regards to drug cartels – Facilitation of financial transactions of Mexican drug cartels has been in the news for years. While the drug cartels present many threats to communities and are infamous for their mercenary and murderous ways, the inadequate prosecution of money laundering offenses by Mexican law enforcement allows the financial gains from the criminal activities to amass unchecked.  One issue that Mexico’s finance ministry, attorney general’s office, and other authorities struggle with in their enforcement efforts is corruption within their own ranks that impedes effective enforcement efforts:  Mexico falls short on prosecuting money laundering     

For more on money laundering, check out this post on the OCCRP and this post on the ICIJ, both of which include investigations on banking facilitation of illegal and illicit transactions, and this post on financial services industry whistleblowers, which also discusses some such banking schemes.

Check back in the future for more posts on money laundering-related topics.  In the future, this blog will also feature several further posts about depictions of money laundering in popular culture, such as television and movies, to discuss common schemes which are portrayed as well as to compare different methods or motivations.

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