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)

 

·    Intelligence Reform & Terrorism Prevention Act of 2004

 

·    Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and  Obstruct terrorism

 

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.  

 

 BSA/AML laws are really financial institution’s way of helping to keep the world a better, safer place.

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[1] https://www.fincen.gov/news_room/aml_history.html  “History of Money Laundering Laws”