You’ve probably heard quite a bit in recent years about money laundering and the need for banks and financial institutions to keep abreast of the issue, including developing and implementing strict and verifiable measures to detect and prevent it. The latter is known as anti money laundering (AML) compliance. Detect just what, you may ask? And what exactly is money laundering?
In essence, money laundering is generally defined as measures taken by persons involved in illegal activity to hide or to disguise the unlawfully derived funds, making them look “clean”, thus the term, “laundering”. The laundering process need not be successful, as attempts at money laundering qualify as a violation of the statute, both under US and EU law as well as under the laws of individual EU member states, and those of other countries as well.
Money laundering is accomplished in three stages: placement, layering and integration.
Placement involves the introduction of criminal proceeds into the financial system. A clear example could be a drug trafficker depositing large sums of cash into a bank account-say $50,000 or more. Another example is the opening of an investment or brokerage account in which the money will be deposited. Yet another example is through the use of currency exchange houses or money transfer facilities, such as Western Union. The objective in the placement stage is to park the cash in a financial institution for subsequent use or disbursement. And of course, a key element is that the proceeds must derive from a “predicate offense”, meaning specifically defined criminal activity.
Layering is the second stage of the money laundering process. It is designed to conceal the criminal proceeds through their distribution among various accounts. For example, if I have one million dollars to launder, I can place half of it in a bank and then half of it with an independent stockbroker. I then further divide the proceeds, buying a few CDs at the bank and maybe having the same bank transfer $100,000 of my deposit to a bank account overseas. The objective here is to make the investigative trail go “cold” by splitting up the proceeds and often commingling them so as to make it difficult to determine which proceeds are legitimate or which are derived from criminal activity.
Finally, integration is the last phase of the process and it involves introducing the new asset into the legitimate economy. A easily understood example is when some of the above hypothetical drug proceeds are used to open a retail store, such as an independently owned franchise burger or pizza place. I’m now creating work and wealth-paying my employees and possibly reinvesting the profits-using this legitimate business. The money laundering process is now complete. Note that although I use the term “legitimate economy”, but even if the establishment is operating lawfully, it was opened with the use of criminal proceeds, making it subject to seizure and forfeiture to the government in most jurisdictions.
For however many times a person “washes” criminal proceeds or “dirty” money, under US law at least, the “taint” can never be removed. This means that any and all assets-whether real estate or bank or brokerage accounts or other assets-are subject to liquidation and conversion to government property should a court determine that in fact the government has met its burden of proof.
How can you prevent your institution from being used as a vehicle with which to launder money? What measures can you take? Do you have a compliance officer and are you routinely vetting your AML procedures for effectiveness? We’ll address these compliance aspects in our next installment.
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