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Anti-Money Laundering Laws and Practices for Banks, Individuals, and Corporations Involved in AML Litigation

Expert Witness: Don Coker
The author discusses the requirements of the United States’ anti-money laundering laws and the banking industry’s standard practices and procedures for implementing these legal requirements. He also explains some related principles of offshore banking, wire transfers, Know Your Customer, Economic Substance, and other pertinent practices related to anti-money laundering issues and litigation.

The United States has passed eight major laws that define how banks and the country as a whole deal with money laundering:

1. Bank Secrecy Act of 1970

Key Points:

● The Grand Daddy of anti-money laundering laws. It established the original requirements for recordkeeping and reporting by banks, individuals, and some other financial institutions.

● Required banks to file Currency Transaction Reports (“CTRs”) with the Financial Crimes Enforcement Network (“FinCEN”) at the IRS’s Detroit Computing Center for any cash – read “currency” – transactions over $10,000.

● Established basic Know Your Customer requirements for banks.

2. Money Laundering Control Act of 1986

Key Points:

● Addressed the prohibition of deposit structuring intended to avoid the $10,000 reporting ceiling.

3. Anti-Drug Abuse Act of 1988

Key Points:

● Began requiring car dealers and real estate closing personnel to file CTRs for transactions involving more than $10,000.

● Required sellers of financial instruments of $3,000 or more to verify the identity of the purchaser.

4. Annunzio-Wylie Anti-Money Laundering Act of 1992

Key Points:

● Instituted the Suspicious Activity Report (“SAR”) form as a replacement for the previously used Form 366 Criminal Referral. SARs are filed with FinCen at the IRS’s Detroit Computing Center.

● Began requiring banks to verify and maintain records regarding wire transfers.

5. Money Laundering Suppression Act of 1994

Key Points:

● Required every Money Services Business to register with FinCEN.

● Facilitated the CTR exemption process for legitimate businesses that handle large amounts of cash.

● Required banking agencies to review and enhance their anti-money laundering training, and develop anti-money laundering examination procedures.

● Required banks to establish improved procedures for referring suspected cases of anti-money laundering to the appropriate law enforcement officials.

6. Money Laundering and Financial Crimes Strategy Act of 1998

Key Points:

● Required banking agencies to include anti-money laundering training in their bank examiner training programs.

● Required the formulation of an overall national strategy to deal with money laundering.

● Established the ability to target anti-money laundering enforcement activities against specific
geographical areas, industry sectors, or financial institutions where warranted.

7. USA PATRIOT Act a/k/a/ Uniting and Strengthening America by Providing Appropriate Tools to Restrict, Intercept and Obstruct Terrorism Act of 2001. Title III of the USA PATRIOT Act is known as the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001.

Key Points:

● Strengthened customer identification procedures required of financial institutions.

● Required financial institutions to establish adequate due diligence procedures for offshore and foreign bank accounts.

● Prohibited United States financial institutions from doing business with foreign shell banks.

● Permitted the federal government to seize the assets of a bank that is holding assets of a person or entity that is laundering money.

● Improved information sharing between financial institutions and the U.S. government.

● Expanded the anti-money laundering program requirements to all financial institutions.

● Permitted imposing more strict anti-money laundering measures on jurisdictions, institutions, or transactions that are deemed to be more likely to be engaged in money laundering activities.

● Required federal banking agencies to consider a bank’s anti-money laundering practices while considering approval of proposed bank mergers and bank or branch acquisitions.

8. Intelligence Reform & Terrorism Prevention Act of 2004

Key Points:

● Permitted requiring specific financial institutions to report cross-border electronic transmittals of funds.

As you can tell from the development of American anti-money laundering laws over the last forty years, the government has gradually increased the intensity of the preventive and detection measures in response to the failure or inadequacy of the previously enacted measures. For example, the introduction of the CTR in 1970 did not foresee the obvious inevitability of structuring transactions; yet structuring was not addressed until sixteen years later in 1986.

For another example, focusing law enforcement attention on a specific area, such as Columbia, was not addressed until 1998, some 28 years after the Bank Secrecy Act, even though it was known in 2006 that 70% of the world’s cocaine originated in Columbia. (Source: United States National Drug Intelligence Center.)

Clearly, anti-money laundering laws are generally one step behind what needs to be in place in order to be effective.

Cash versus Wire Transfers

Initial anti-money laundering efforts were primarily aimed at detecting cash deposits by criminals into financial institutions so that they could then move around their funds. As time passed, it became obvious that a great deal of criminally-sourced funds were making their way into the financial system; and money laundering detection efforts expanded their initial concentration on funds entering the system and began to look at funds already in the system and moving around by wire transfer, check and other means.

These detection efforts involve enhanced due diligence on the part of financial institutions and their knowledge of their customers’ businesses and at least basically how they operate. This is sometimes referred to as the “Know Your Customer” policy. The goal is for the bank to understand the Economic Substance of their customers’ businesses so that the bank can understand how the funds transfers under consideration fit into their customers’ normal business patterns.

Verification of identification for individuals and companies opening new accounts has been a part of effective anti-money laundering procedures for a long time; and this is easier to accomplish than the Know Your Customer aspect. Nevertheless, it is not unreasonable that banks should be required to have a face-to-face meeting with their customers and understand their business model and their standard operating system.

Once a bank has this understanding of who their customer is and how they operate, the bank can be alert as to any out-of-pattern account activity that could indicate money laundering going on in the account.

If a bank does detect out-of-pattern activity, the bank should immediately file a Suspicious Activity Report with FinCEN through the IRS’s Detroit Computing Center, as directed on the SAR form.

One often overlooked area that may give rise to money laundering is when one company acquires another. The problem that can occur is that a criminal-controlled company can acquire a legitimate company that already is a bank customer. This makes it important that the bank re-investigate its customer anytime that the customer is acquired by another entity.

Particular attention should be paid to wire transfers and other transactions to or from so-called offshore banks, offshore bank accounts, or offshore entities that are located in areas known for their lax banking and financial policies.

Without blindly accusing any particular jurisdiction, here is a list of countries that are generally considered by the financial community to be suspicious locations for inbound or outbound financial funds transfers, and that warrant close scrutiny:

Andorra, Anguilla, Antigua and Barbuda, Bahamas, Bahrain, Barbados, Belize, Bermuda, British Virgin Islands, Cayman Islands, Cook Islands, Cyprus, Dominica, English Channel Islands of Jersey and Guernsey, Ghana, Gibraltar, Hong Kong, Ireland, Isle of Man, Labuan (in Malaysia), Liechtenstein, Luxembourg, Madeira, Malta, Macau, Mauritius, Monaco, Montserrat, Nauru, Panama, Saint Kitts and Nevis, Seychelles, Singapore, Switzerland, and the Turks and Caicos Islands.

This is what banks need to know and do in order to effectively deal with the prevention of money laundering:

1. Establish and have in place complete anti-money laundering policies and procedures.

2. Document these policies and procedures in either your existing policy and procedure manual(s) or in a separate manual.

3. Make sure that all existing and new employees that are in a position to observe money laundering activities are informed regarding money laundering and the bank’s means for preventing it.

4. Make sure that the established policies and procedure manuals are available for reference by the staff when operational questions arise.

5. Make sure that all employees know to whom they should refer any questions on this subject when they arise.

6. Be aware of any unusual or out-of-pattern funds transfer activities, and report them on a Suspicious Activity Report.

7. Don’t be afraid to turn down an account that you suspect might be involved in money laundering or any other illegal activity. You will be better off without it, and you may save your bank the kind of front page notoriety that it doesn’t want.

Expert witness and consulting services. Over 430 cases for plaintiffs & defendants nationwide, 107 testimonies, 12 courthouse settlements, all areas of banking and finance. Listed in the databases of recommended expert witnesses of both DRI and AAJ. Clients have included numerous individuals, 60 banks, and governmental clients such as the IRS, FDIC.

Employment experience includes Citicorp, Ford Credit, and entities that are now JPMorgan Chase Bank, BofA, Regions Financial, and a two-year term as a high-level governmental banking regulator. B.A. degree from the University of Alabama. Completed postgraduate and executive education work at Alabama, the University of Houston, SMU, Spring Hill College, and the Harvard Business School.

Called on by clients in 27 countries for work involving 57 countries. Widely published, often called on by the media.

Copyright Don Coker

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.

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