August 25, 2003

The New Face of Money Laundering

Gregory A. Baldwin

According to legend, the fall of Troy was accomplished by a clever ruse.  After ten years of unsuccessfully dashing themselves against the impregnable walls of Troy, the Greeks pretended to give up and sail away from the besieged City, leaving behind a giant, hollow wooden horse.  The Trojans, considering the wooden horse to be symbolic of their hard-earned victory, demolished the walls that had protected them for so long and triumphantly wheeled the horse inside their City.  Only a handful of the jubilant Trojans suspected that there might be something wrong.  One of them, supposedly the high priest, is said to have muttered the memorable phrase as the horse was pushed and dragged into Troy, “Whatever that thing is, I fear the Greeks bearing gifts.”  Fateful and prescient words.  That night, as the reveling Trojans slept, Greek soldiers poured our of the hollow wooden horse, and the fall of Troy was at long last accomplished.

The modern world has its counterpart to the lesson of Troy: money laundering.  And the results can be equally as devastating to the modern business person: loss of reputation, draconian fines, bankruptcy, imprisonment.  Once let a money launderer, the modern equivalent of the Trojan Horse, into a business without heeding the warning to “fear the Greeks bearing gifts,” and this can be the result.

It is not so long ago that money laundering was relatively easy to recognize.  It involved scruffy looking characters delivering hordes of cash in cardboard boxes, paper shopping bags, duffel bags, suitcases and the like.  More often than not, the delivery persons had not even counted the hundreds of thousands of dollars in cash   delivered by them.  Receipts were never expected.  A classic example is the Miami bank in which over $242 million in cash was deposited into one checking account in one branch in the space of eight months, all in cash and all delivered to the bank in precisely the manner just described.  In that case, the cash poured in so quickly that the bank itself limited the amount of cash it would accept – to no more than $2 million per day.[1]            

Many still believe that these remain the hallmarks of money laundering today.  Unfortunately, today, money launderers no longer fall into these easily recognizable roles.  Increasingly, they take the form of well dressed, well spoken individuals employing the most complex and sophisticated international investment techniques, never moving cash but instead operating in the far more effective and efficient world of electronic and wire transfers of funds.  Representing vast amounts of money collected from scores of persons throughout the world, modern money launderers’ operate what appear to be perfectly legitimate trust or investment businesses, often duly licensed and purportedly regulated in foreign jurisdictions.  Aiming to safely and anonymously invest the funds collected from their “clients,” they separate their “clients” from the actual investments through a Byzantine labyrinth of legal entities, including foreign trusts and corporations designed expressly to cloak the true ownership and source of the funds they are investing.

 Anonymity of the ultimate owner of the funds and of the funds’ true source is, after all, the ultimate goal of the money laundering process.  Whether the purpose of money laundering is tax avoidance, tax evasion, terrorist financing or the transformation of criminally derived funds into funds that appear to have been legitimately earned, anonymity is absolutely essential.  Thus, regardless of the degree of sophistication employed in the process, three characteristics of money laundering still remain: the vast amount of money to be moved or invested; the absolute need to prevent disclosure or discovery of the true ownership of that money; and the  absolute need to completely cloak the actual criminal source of it.

For the most part, while the methods of money laundering have grown increasingly elaborate over the past several decades, the anti-money laundering statutory and regulatory framework in the United States had not kept pace.  Prior to 9-11, anti-money laundering efforts in the United States were largely confined to a system of reporting large cash transactions over $10,000, and regulations requiring the implementation of formal Anti-Money Laundering Programs.  Large cash transactions over $10,000 were (and still are) required to be reported to the Treasury Department by banks on Currency Transaction Reports, or CTRs.  Other cash transactions for most other businesses were (and still are) reported to the Treasury on an IRS Form 8300.[2] 

Regulations requiring formal Anti-Money Laundering Programs were restricted to “financial institutions” as defined by the federal Bank Secrecy Act.[3]  The term “financial institution” was very broadly defined to include banks, securities and commodities brokers; investment companies; issuers or redeemers of travelers' checks or similar instruments; currency exchanges; operators of a credit card system; money transmitters; telegraph companies; pawnbrokers; insurance companies; travel agencies; loan or finance companies; dealers in precious metals, stones or jewels; automobile, boat and airplane dealers, casinos and “persons involved in real estate closings and settlements.”[4]  Regardless of the breadth of this definition, though, the requirement to implement formal Anti-Money Laundering Programs had been restricted largely, but not exclusively, to banks and their affiliates.  Other “financial institutions” remained, for the most part, untouched by regulations aimed at deterring and detecting money laundering.              

Consequently, it was not terribly difficult to find businesses in the United States that were more than willing to accept large amounts of funds without asking too many questions.  Even those that may have asked questions were frequently confronted by an impenetrable wall of foreign entities in the form of trusts and corporations that effectively prevented them from learning exactly who owned the funds, or how the funds had been earned.  Now, however, in our post 9-11 world, this has completely changed.  Amendments to the Bank Secrecy Act created by the U.S.A. Patriot Act require that Anti-Money Laundering Programs be adopted by all “financial institutions” unless they are affirmatively exempted from the requirement by the Treasury Department, and securities brokers and dealers must report “suspicious activity.”[5]  As a result, Treasury has issued a series of new regulations imposing the Anti-Money Laundering Program requirement on entire industries that previously had remained largely untouched by ant-money laundering regulations.  This includes mutual funds and even a new category of “Unregistered Investment Companies.”[6] 

An Anti-Money Laundering Program requires at least four things: (1) the development of internal policies, procedures and controls designed to prevent money laundering; (2) the formal designation of a compliance officer to oversee and run the program; (3) ongoing employee training about the program; and (4) an independent audit function to test program to make sure it is being followed.  And, as a practical matter, it needs to be in writing.[7]  In effect, the requirement means that many investment companies and other businesses have now begun to engage in “due diligence” concerning their customers, the actual ownership of the funds invested, and the legitimacy of the source of those funds.  More businesses than ever before are now  asking hard questions to their customers, questions designed to firmly establish not only the identity of the person they are dealing with, but also to firmly establish the legitimacy of the funds they are handling – exactly the type of examination most detested by money launderers.

In effect, in the space of a little under two years, a substantial part of the business and investment community has moved from a relatively laissez faire attitude towards knowing who it was dealing with, and where their money came from, to a virtually “question everything” attitude.  This is not, of course, to say that no businesses except banks had been actively engaged in the detection and prevention of money laundering before the advent of the U.S.A. Patriot Act.  To the contrary, many of the largest and most reputable investment firms had already adopted Anti-Money Laundering Programs long before.  But nevertheless, formal Anti-Money Laundering Programs remained the exception rather than the rule, and a large number of investment firms performed only rudimentary, or in some cases even no “due diligence” to establish customer identity and to verify the legitimacy of the source of their customers’ funds.  Indeed, even now, after the passage of the U.S.A. Patriot Act and the dramatic expansion of “due diligence” required by statute or regulation, there remain sectors of the investment community that still are not required by law to implement Anti-Money Laundering Programs.  The viatical settlement industry is a prime example.[8]  And there are still those that, having remained untouched by the legal requirements, have not voluntarily implemented any due diligence at all.     

The response of money launderers has, therefore, been predictable.  Rather than face determined due diligence by the very businesses through which they have normally invested their clients’ funds, money launderers are now moving on to those investment vehicles that are not yet subject to anti-money laundering regulations and due diligence requirements.  In those areas where strict “due diligence” requirements to not apply, the money launderers hope to meet with less resistance and fewer questions.  It is in these as yet unregulated areas that the assault is now beginning to be seen. 

Investment businesses in the United States that had never before been approached by foreign companies seeking to place or invest millions of dollars are now being contacted for the first time.  Dazzled by the prospect of enormous business and large commissions, unhampered by formal anti-money laundering due diligence rules and regulations, flattered by the attention of foreign trust companies with seemingly endless financial resources, the temptation to not ask questions is almost irresistible.  The reality, of course, is that these placers of enormous amounts of funds have not just now discovered these “new” investment vehicles.  After all, most investment vehicles have been in existence for decades, and have been readily available.  Instead, it is that other investment methods have now become subject to anti-money laundering regulations, and are now required to ask the hard questions. 

Even for those non-regulated businesses that may attempt to conduct due diligence questioning about their clients, the responses of money launderers may take several forms.  Often, money launderers try to overcome due diligence simply with evasive answers.  In the face of persistent due diligence, they may respond that the information requested is “highly confidential” and simply cannot be disclosed, or that they are prohibited by the law of their home jurisdiction from disclosing client information.  When faced with determined questioning, they may reluctantly disclose that the funds are owned not by an individual, but by a trust or corporation.  But when further pressed for the disclosure of the actual persons contributing money to the trust or investing in the corporation, they may resort to browbeating accusations: the questioner does not understand foreign law; the questioner should rely exclusively on the fact that the investing company is “heavily regulated” in its home jurisdiction or that it is subject to a “superior anti-money laundering regime” there; or, in the last resort, that the questioner is either too inexperienced or too unsophisticated to really understand either anti-money laundering compliance or the nature of international finance.  These evasive, blustering responses to legitimate questions may even be accompanied by suggestions of the vast amount of business awaiting the questioner, sometimes up to hundreds of millions of dollars, if only a way can be found for the questioner to be “reasonable.”  All of this, of course, is designed for one purpose, and one purpose only – to maintain the anonymity of the actual owner of the money, as well as its true source.

If all this fails, and the questioner persists, the names of the actual owners of the funds, or the actual source of the money, will still not be disclosed.  Instead, the money launderer will move on to another investment businesses, hopefully one less diligent or persistent.  The money launderer is searching for the path of least resistance because, like water, money launderers follow the path of least resistance.  Block any flow of water, no matter how effectively, and the result will eventually be the same: the water will sooner or later find a way over, under, around or through the obstacle in its path.  Money laundering is no different.  When one part of the investment community begins to perform strict due diligence in the form of asking the hard questions to their customers about exactly who owns the money being invested, and exactly what the source of that money is, and requiring absolute identification of the customers who own the funds, money launderers will move on to another sector of the industry that does not ask the hard questions.

Whether formally required by regulation or not, the price for failing to conduct due diligence is extreme.  Regardless of whether a business is a “financial institution,” it is still prohibited from engaging in money laundering by the federal Money Laundering Control Act.[9]  Basically, this law makes it a crime to engage in a financial transaction “knowing” that the funds come from some unlawful activity, or that the transaction is designed to evade taxes or avoid a federal reporting requirement.  The courts have interpreted “knowledge” as including “willful blindness.”  This means that a business or person intentionally ignored those warning signs or “red flags” that would have caused a reasonable person to suspect that the funds were derived from criminal activity, or that the purpose of the transaction was prohibited.[10]  The penalties for conviction for money laundering are severe: a fine of $500,000 or twice the value of the amount laundered, whichever is greater; and imprisonment for up to twenty years.

In sum, investment companies that are not required by the Bank Secrecy Act to implement and maintain formal Anti-Money Laundering Programs or to conduct due diligence should not feel relieved.  That very fact is making them more attractive than ever before to money launderers.  And no business should expect that, simply because a client is well dressed and well-spoken and represents an apparently legitimate company with millions of dollars to invest, he or she or the company they represent it is not involved in money laundering.  It is imperative to ask questions, whether formally required by law or not.  And it is imperative to get clear, unhesitating responses.  Anything less exposes any person or business in the United States to a charge of “willful blindness” in money laundering. 

Ask questions.  Get answers.  Fear the Greeks bearing gifts.  After all, if someone in Troy had insisted on some answers before letting the wooden horse in, Troy might still exist. 


[1] United States v. $4,255,625.39, 551 F.Supp. 314 (S.D. Fla. 1982), affirmed 762 F.2d 895, cert en. 474 U.S. 1056 (1983).

[2] For CTRs, see 31 U.S.C. § 5316, and 31 C.F.R. § 103.22.  For IRS Form 8300, see 26 U.S.C. § 6050I, and 31 C.F.R. § 1.6050-1.

[3] 31 U.S.C. § 5311, et seq.

[4] 31 U.S.C. § 5312(a)(2).

[5] USA Patriot Act of 2001, Public Law No. 107-56 (October 26, 2001); see §§ 352, 356.

[6] 67 Federal Register, No. 187, p. 60617, Sept. 26, 2002; Proposed Rule 31 C.F.R. § 103.132.  This proposed regulation, if made final, will require that hedge funds, private equity funds, venture capital funds, commodity pools and real estate investment trusts, among others, to implement and maintain Anti-Money Laundering Programs.  In some cases, it will apply  to “offshore” funds as well.

[7] 31 U.S.C. § 5318(h).

[8] Generally, the viatical settlement industry acts as a broker between terminally ill persons who desire to sell the benefits of their life insurance policies while they are still alive, and purchasers who want to purchase those benefits. Viatical companies are not presently considered to be “financial institutions” within the meaning of the Bank Secrecy Act.  Consequently, they are not yet required to implement or maintain formal Anti-Money Laundering Programs, although several of the major viatical companies in the United States have already voluntarily implemented such Programs.  

[9] 18 U.S.C. §§ 1956, 1957.

[10] The following cases are illustrations of willful blindness: US v. Kaufman, 985 F.2d 884 (7th Cir. 1993)(car dealer was convicted of money laundering after sting operation in which undercover  agents asked to purchase a Porsche in cash by a person defendant was told was a marijuana dealer);   US v. Campbell, 977 F.2d 854 (4th Cir. 1992)(real estate agent’s conviction for money laundering conviction reinstated based upon the agent's willful blindness that her client was a drug dealer; evidence indicated buyer drove numerous expensive cars, talked on cell phone, was absent from the office for long stretches of the day, paid with cash under the table, and that the defendant even stated to another agent that the money "might have been drug money;"); US v. Smith, 46 F.3d 1223, 1238 (1st Cir. 1999)(willful blindness supported by evidence that defendant said "I don't want to know about this" and left room in which coconspirators were discussing money laundering scheme); US v. Monaco,  1999 WL 980946 at 5 (2d Cir. 1999)(willful blindness found because defendant never inquired whether proceeds given to him by known felon had illegal source; evidence showed that the defendants knew that of the key player's multiple arrests and prison terms); US v. Lynn, 1999 WL 97244 (6th Cir. 1999)(willful blindness found where defendant never tried to find out whether the use of gaming machines was a felony, despite the fact that his machines had twice been raided by the government); US v. Cunan, 152 F.3d 29 (1st Cir. 1998)( evidence that the defendants were closely involved with the money launderer's extensive purchases, were aware that he was purchasing goods and property under false names, and knew that he was a fugitive from a drug trafficking charge, yet accepted large amounts of cash from him, turning that cash into checks for his purchases).

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