FAQs

Q. What is Money Laundering?

A. Money laundering is the seamless introduction of the profits of illegal activities into the banking system. These illegal activities can be many different things; for instance, funds sourced from drug trafficking, tax evasion, insider trading, gun smuggling, illegal arms sales or even terrorism. When these funds are successfully placed in the banking system, they allow criminals or terrorists greater access, because dirty money then becomes clean.

Dirty money is money that meets the following conditions: (1) it is derived by illegal means, and (2) for an outside observer it is possible to determine that condition (1) applies.

Q. Why launder dirty money at all?

A. Successful money laundering allows criminal to access the banking system and legitimize their funds. Denied access to the banking system, criminals would be forced to utilize cash. Cash transactions are considered a warning sign, and may lead to suspicion and detection by the authorities.

Q. How is money laundering done?

A: That depends on a range of factors: the amount of money in question, how 'dirty' it is, if it is a recurring stream of dirty money that needs to be laundered or just a one-off transaction. It depends on the efforts of law-enforcement and on the laundering-infrastructure available. It also depends on what is to be done with the money afterwards. To make it short: The available methods range from very simple to very confusing, complicated and elaborate.

Fortunately, one can abstract from all these tedious complications of reality and then arrive at a fairly simple model that captures the essence of the process. Ideally, money laundering consists of three phases: placement, layering and integration.

During the placement phase, the money enters the financial system. Dirty money often begins its existence in the form of cash and big quantities of cash raise suspicions. Thus, the first task is to convert the cash into book money. Once the money has entered the financial system, the layering starts. The tracks now have to be covered - to delete the past or the illegitimate origins. To do this, they commingle the dirty money with legitimate funds and send it on a journey across the world, by way of wire transfer. After they have accomplished this task, it is time for the integration. It is good to know that one has a lot of money in a bank account in, say, Nauru, but it is even better if it can be spent. For this, a plausible explanation is needed as to why these funds are owned. Otherwise, suspicions will be raised, ruining the whole effort.

As stated earlier - this is a stylized model. In reality- maybe more often than not - examples of money laundering work quite differently. But then again, the launderer is not interested in meeting the requirements of a law-enforcement model.

Q. Why fight money laundering?

A. First of all: a world without money laundering would be a world with significantly less crime. There are mainly two reasons for this conclusion. Firstly, most crime is committed to obtain an (illegal) profit. Since it would be much more difficult to enjoy these profits without money laundering, the incentive for committing crimes of that sort should be significantly reduced. Secondly, money laundering allows for more sophisticated investment of criminally obtained money, thus boosting the financial resources of criminal groups.

A related argument states that by investigating money laundering we are able to systematically unravel the networks and/or hierarchies of organized crime groups. The "money-trail" leads us to the bosses in the background who do not get directly involved with the criminal activities that generate the profits.

If left unchecked, criminal money will slowly infiltrate the 'legal' economy and in the end will threaten the integrity of the whole society. Whereas a more narrowly economic argument warns that the enormous amounts of dirty money injected into the international financial markets may destabilize the financial system or even be employed to exert pressure on national governments by threatening to speculate against the national currency.

Q. What is the responsibility of the banking system?

A. All financial institutions are required to monitor transactions to detect money laundering activities within their institutions and for certain products such as funds transfer between other financial institutions, in the United States and overseas. Financial institutions include commercial banks, savings and loan associations, credit unions, thrift institutions, foreign banks, credit card companies, casinos, some insurance companies and brokerage houses. The list of entities regulated for money laundering continues to expand each year.

The synopsis of the main regulations and their requirement follows below. Please note this is not a complete list of requirements. Under the various laws enacted by the United States Congress, financial institutions are required to implement an Anti Money Laundering (AML) Program. The primary regulation is the Bank Secrecy Act (BSA), which was designed to help identify the source, volume, and movement of currency and other monetary instruments transported or transmitted into or out of the United States or deposited in financial institutions. The BSA stipulates that minimum components for this program are (1) a system of internal controls to ensure ongoing compliance, (2) independent testing of these internal controls, (3) designation of an individual or individuals responsible for managing BSA compliance (the BSA Compliance Officer), and (4) training for appropriate personnel. There are both criminal and civil penalties for BSA violations. Subsequent legislation has amended and strengthened the BSA.

Additionally, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act) establishes identification procedures for opening new accounts, including in certain circumstances, new accounts for existing customers as well as for new customers.

The Office of Foreign Asset Control (OFAC) publishes lists of countries and foreign nationals with whom the US and any US entity or individual is prohibited from doing business. Customers must routinely be screened against the OFAC list to make sure that we do not conduct business with these entities. Similarly, funds transfers must be screened to ensure that activity going through your bank does not include any sanctioned countries or individuals.

Q. How does a bank develop a risk assessment?

A. An AML risk assessment is a unique picture of the institution’s potential exposure for money laundering risk. A risk assessment is based on the institution’s unique set of customers, products, and geographic indicators. Your institution’s risk assessment determines what key internal controls are needed for your AML program.

With the publication of the new examination manual, this risk assessment is a requirement for all financial institutions. If the institution does not prepare one, the examination team is required prepare one for the AML exam

Q. What are the penalties for noncompliance?

A. The penalties for noncompliance are substantial. They are both civil and criminal. Recent penalty actions have included those against small banks, thrifts and credit unions, as well as some of America’s largest banks. The penalties range from a few thousand dollars to fifty million. Additionally, the reputation risk exposure for any individual institution simply cannot be calculated. The impact of negative publicity to the customer and potential customers for lack of compliance is substantial. In some cases, this lack of compliance can result in imprisonment of bank officers and board members and revocation of the bank’s charter.

 

 

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