Why ARE There BSA/AML Regulations?
As anyone in compliance can attest, there are myriad
consumer compliance regulations. For financial institutions, these
regulations are regarded as anything from a nuisance, to the very bane of the
existence of banks. However, in point of fact, there are no bank consumer
regulations that were not earned by misbehavior in the past. Like it or
not these regulations exist to prevent bad behavior and/or to encourage certain
practices. We believe that one of the keys to strengthening a
compliance program is to encourage your staff to understand why
these regulations exist and what it is the regulations are
designed to accomplish. To further this cause, we have designed a series
of blogs that from time to time throughout the year, will address these
questions about various banking regulations. We call this series “Why is
there….”
BSA- the Early Years
Since the beginning of crime, there has been a need to hide the
ill-gotten gains of criminal activity.
Early bad guys held their loot in caves.
Later, treasure chests provided a means of hiding criminal wealth. However, despite the form that ancient loot
took, the goal was and has always been to reduce assets to currency so that it
can be used in exchange for other goods and services. The need to take illicit assets or money and
hide its source is known commonly as “money laundering”. Criminals of all sorts engage in money
laundering and have become exceedingly sophisticated in their pursuit of hiding
the sources and uses of their money.
Because
the “bad guys’ continue to evolve, the history of the Bank Secrecy Act (“BSA”)
and Anti-Money Laundering laws (“AML”)
is one of ongoing change. The
laws that make money laundering illegal can be traced back to the Bank Secrecy
Act of 1970. Since the time the BSA was
passed, there have been seven major legislative changes to the overall
legislative scheme that covers this area.
These changes are;
· Money
Laundering Control Act (1986)
· Anti-Drug
Abuse Act of 1988
· Annunzio-Wylie
Anti-Money Laundering Act (1992)
· Money
Laundering Suppression Act (1994)
· Money
Laundering and Financial Crimes Strategy Act (1998)
· Uniting
and Strengthening America by Providing Appropriate Tools to Restrict, Intercept and Obstruct
Terrorism Act of 2001 (USA PATRIOT Act)
· Intelligence
Reform & Terrorism Prevention Act of 2004
As
technology has changed, so have the goals of many of the criminals that want to
launder money. In addition to drug
dealers, there are terrorists, human traffickers, politicians and embezzlers, all
of whom are developing ways to hide their cash.
Money Laundering
What
exactly is money laundering? Well FinCen,
which is the federal agency that is specifically charged with monitoring and
preventing money laundering defines it this way;
Money laundering is the process of
making illegally-gained proceeds (i.e. "dirty money") appear legal
(i.e. "clean"). Typically, it involves three steps: placement,
layering and integration. First, the illegitimate funds are furtively
introduced into the legitimate financial system. Then, the money is moved
around to create confusion, sometimes by wiring or transferring through
numerous accounts. Finally, it is integrated into the financial system through
additional transactions until the "dirty money" appears
"clean." Money laundering can facilitate crimes such as drug
trafficking and terrorism, and can adversely impact the global economy.[1]
Put
another way, when criminals conduct their business, they almost always do so in
cash, for what should be obvious reasons.
As early as the 1970’s federal regulators realized that without some
regulatory help, financial institutions would be used as tools for disposing of
the cash received from crimes. Criminals
would simply deposit their money in the bank, wait a few days and then make
legitimate withdrawals. Once the cash
was co-mingled with other deposits, there would be no way to tell which money
came from real legitimate effort and which was the result of crime.
Popular Schemes
Some of
the more popular schemes for changing criminal cash into legitimate money include;
·
Black Market
Foreign Exchange:
In this enterprise, all of the participants are breaking one law or
another. On one end are importers of
goods who do not want to pay the government rate for exchanging currency from
US Dollars to the home currency (e.g. Peso’s).
These importers make a deal with a broker who is willing to import goods
illegally. The importer makes a deal
with a criminal who has “dirty” US dollars.
The importer uses the “dirty” money to buy US goods and ships them to
his own country. The goods are then
sold to the importers who pay the broker in local currency. The criminal gets his money back in Pesos
that are now “clean”
·
Investing
in Legitimate Businesses: Here a criminal buys all or part of
a legitimate business and simply mixes his cash in with the earnings of that
business. This only works for business
that already deal extensively in cash.
This is why gas stations, casinos, bars and check cashing stores are
considered “high risk” for money laundering.
Because many professional service providers such as doctors and lawyers
often take cash for payments, they are also considered “high risk”.
·
Smurfing: Sometimes a criminal will get a number of
people working together to break up his cash deposits into small amounts. This is called smurfing
·
Structuring: This is by far and away the most frequent
form of attempted laundering. Most
people realize these days that a cash deposit above $10,000 has to be reported
to the IRS. Criminals have for years,
tried to get around this limit by making deposits of smaller amounts on
subsequent days. This is called structuring
Over
the years there have been many different schemes for trying to avoid detecting
of money laundering. In fact there are
simply too many to list here. Suffice to
say that there are criminal groups with nothing but money and time to try to
figure out new and different ways to make “dirty” money clean.
What is
the Money Used For?
There are many different uses for money once it has been
laundered. Some of the more onerous uses
include:
·
Drug Dealing Activity
·
Human Trafficking
·
Terrorist financing
·
Tax evasion
·
Embezzlement
As you can see, money that is laundered is used to fund extreme
criminal enterprises. This is why it
critically important is that financial institutions do all that they can to
lend a hand to legal authorities to stop money laundering.
Each of the changes in BSA/AML laws were designed to improve the
overall monitoring of cash and cash equivalent transactions. For small financial institutions, the changes
have been ongoing and significant. As
the regulations changed, the expectations of the regulatory bodies
evolved. Today, no self-respecting
banker would consider operating without a full BSA/AML compliance program. Moreover, very few banks can get away with a
manual system for tracking and aggregating the transactions of their
customers. Today, a sound BSA/AML
program includes software that helps bank staff aggregate and monitor
transactions of its customers.
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