Money laundering constitutes the process of making illegally-gained proceeds appear legal, which involves three steps - placement, layering and integration. First, the illicit funds are secretly introduced into the legitimate financial system. Then, the money is moved around to create confusion, like by transferring through numerous accounts (referred to as layering in money laundering). Finally, it is integrated through additional transactions until the money appears "clean." Anti-Money Laundering Regulations in the United States originated in 1970 with the Bank Secrecy Act (BSA). It was understood that financial transaction records have a “high degree of usefulness in criminal, tax, or regulatory investigations or proceedings.” Therefore, the legislation authorized financial institutions to establish and adhere to certain AML practices.
The Financial Crimes Enforcement Network (FinCEN) exercises regulatory functions for the US anti-money laundering laws primarily which come under the Currency and Financial Transactions Reporting Act of 1970, as amended by USA PATRIOT Act of 2001 and other legislation, which is commonly referred to as the "Bank Secrecy Act" (BSA).
The Bank Secrecy Act (BSA) is the first and most comprehensive US anti-money laundering and counter-terrorism financing (AML/CFT) law. It issues regulations requiring the banks and other financial institutions to take precautions against financial crime, including the establishment of AML programs and the filing of reports.
The Financial Action Task Force (FATF) is an inter‐governmental policy-making body, composed of over 39 member nations, that has a ministerial mandate to establish international standards for combating money laundering and terrorist financing.
AML Regulations in the United States
The AML US framework includes key elements such as requirements for reporting, customer identification and due diligence, recordkeeping, and the establishment and maintenance of AML compliance programs. Examiners of the bank are required to take charge and probe banking officials on the effectiveness of AML policies and procedures. The approach to “follow the money” among federal law enforcement agencies has contributed to, on average, 1,200 money laundering-related convictions annually. Post September 11, 2001, terror attack, the United States passed the USA Patriot Act. This Act targets financial crimes associated with terrorism and expands the scope of the BSA by giving law enforcement agencies additional surveillance and investigatory powers. Under US AML regulations and laws, the USA Patriot Act includes specific provisions and controls for cross-border transactions in order to combat international terrorism and financial crime.
The primary US AML laws prior to the Patriot Act and BSA are:
- Bank Secrecy Act (1970)
- Money Laundering Control Act (1986)
- Anti-Drug Abuse Act (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 Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act)
- Intelligence Reform & Terrorism Prevention Act of 2004
1. Reporting & Record-keeping Requirements
The US AML policy is based on accurate, timely, and complete reporting of suspicious activity to the Treasury Department. They ensure that situations that may warrant further investigation are flagged for law enforcement authorities. Other reports may include individuals transporting large amounts of cash internationally, people with large foreign financial interests, and non-financial entities conducting large cash transactions. These are unique to specific jurisdictions, countries or situations. These include:
Suspicious activity reports (SARs)
FinCEN has issued implementing regulations in financial institutions to file SARs on “any suspicious transaction relevant to a possible violation of law or regulation.” Separate regulations specify SAR reporting requirements for banks; money services businesses; operators of credit card systems; loan or financing companies.
Currency transaction reports (CTRs)
All financial institutions including money service businesses should file CTRs for one or a group of cash transactions in a day that aggregate to more than $10,000.
Currency or monetary instruments reports (CMIRs)
Individuals should report import/export of more than $10,000 in monetary instruments (e.g., currency, traveler’s checks, and all bearer negotiable financial instruments).
Foreign bank and financial accounts reporting (FBAR)
FinCEN regulations require people to file an FBAR “if a person had a financial interest located outside of the United States; and the aggregate value exceeded $10,000 at any time during the calendar year reported.”
Geographic targeting orders (GTOs)
Under FinCEN regulations, US financial or nonfinancial businesses in a particular geographic area are to assist regulators and law enforcement agencies in identifying criminal activity, these GTOs may only remain effective for a maximum of 180 days.
Comprehensive Iran Sanctions, Accountability and Divestment Act (CISADA) reporting.
All U.S. banks, upon request from FinCEN, are to investigate specified foreign banks for which the U.S. bank maintains a parallel account, and report it to the Treasury Department, with respect to each foreign bank.
2. Customer Identification and Due Diligence:
- Financial institutions are required to report large payments of cash made by clients, including those totalling US$10,000 or more, or where they receive cash payments totalling US$5,000. Their transaction records must be kept for up to 5 years.
- All financial institutions that establish, maintain, administer, or manage private banking accounts or correspondent accounts in the United States for people from outside the States have appropriate, specific and enhanced due diligence policies, procedures and controls. These are designed to detect and report instances of money laundering through the same accounts.
- Following the Model Rules, lawyers can withdraw from representation and/or disclose confidential information when a client uses the lawyer’s advice in furtherance of a financial crime.
- Good Practices Guidance indicates that lawyers should first perform a standard level of client due diligence including an identity check and verification. This verification includes a scan of the ‘Office of Foreign Assets Control’s Specially Designated Nationals’ and ‘Blocked Persons’ list.
- The lawyer should then identify the beneficial owner, taking any reasonable measures to do so, such that the lawyer is satisfied that he or she knows who the beneficial owner is. Secondly, the lawyer should obtain information on the purpose and nature of the business relationship. And finally, the lawyer should conduct on-going due diligence on the professional, business-related relationship and scrutinize the transactions undertaken periodically throughout the course of that relationship to ensure that the transaction is consistent with the lawyer’s knowledge of the client.
3. The establishment and maintenance of AML compliance programs.
All businesses and financial institutions must develop and implement an internal AML/CFT program. This program, which comes under US AML law should take notice of all profiles with potential risk to their customers and financial business sectors. The four pillars to an effective US AML program are:
- Development of internal policies, procedures, and controls
- Designation of a money laundering reporting officer
- An ongoing training program
- Independent review for compliance
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