Recognizing illegal activities

Financial professionals must act in the best interest of their customers. However, what if a representative believes their customer is engaging in illegal activities? It’s their responsibility to identify suspicious activities and report them accordingly.

The term ‘money laundering’ comes from the Al Capone era. In the days of prohibition, Capone made significant amounts of money selling alcohol on the black market. The mob used laundromats to legitimize the “dirty” cash received from these operations. As laundromats are a cash-intensive business, Capone and his crew funneled their illegal funds through the laundromat to “cleanse” their money. By doing so, they could hide the source of the illegal funds and cover their tracks.

Money laundering still happens today, but in more sophisticated and intricate ways. Criminals can use investment accounts if they want to hide the source of their illegally obtained funds. After terrorists in the 9/11 attacks used financial accounts to fund their operations, the Patriot Act was signed into law and the Bank Secrecy Act was amended. Both laws require financial firms to identify and report money laundering diligently. Firms are required by the Bank Secrecy Act to create and maintain anti-money laundering (AML) programs, which are designed to help their representatives recognize and report money laundering.

Money laundering involves three stages:

• Placement
• Layering
• Integration

Placement

Placement is the funneling of “illegal” money into the financial system. For example, assume Bob sells illegal drugs for which he receives $100,000 cash. He needs to get the money into the financial system, so he starts funneling these funds into his bank account (this is placement). Bob obviously doesn’t want to set off any alarms.

Currency transaction reports (CTRs) help the government track the movement of larger sums of cash. Whenever a customer deposits or receives more than $10,000 of currency, their financial firm must report it to the federal government (specifically with FinCEN, which is discussed below) within 15 days. If Bob wants to avoid being reported, he could arrange several small deposits of just under $10,000. For example, he periodically deposits $9,900 weekly. Reducing a transaction to avoid a CTR report is an illegal activity known as structuring.

Sometimes, a customer may not be doing anything illegal, but their actions seem suspicious. For example, it’s within a customer’s right to ask about CTR reports, but it may seem odd if they’re asking very detailed questions about the firm’s protocols and rules for government reporting. When suspicious activity is identified, financial professionals must report the issue to their superiors. If warranted, the firm must file a suspicious activity report (SAR) with the Financial Crimes Enforcement Network (FinCEN), which is a division of the U.S. Treasury Department. SARs must be filed within 30 days of the suspicious activity.

Layering

The next step in Bob’s money laundering scheme is known as layering. Bob performs dozens of transactions in his account after his “dirty” funds are placed in the system. This includes transferring the money to and from seemingly unconnected accounts, some in the U.S. and some in foreign countries. Although the accounts seem unconnected, Bob owns all of them. The more transactions involved, the more difficult it is for the authorities to follow the paper trail.

Integration

The last step for Bob in his quest to launder his money is integration, which transfers the “layered” funds into legitimate sources. For example, Bob could fund a new real estate business and purchase properties with the layered funds. Once the funds are invested in the properties, his money is “clean.”

Anti-money laundering protocols

Member firms must train representatives to detect and report potential money laundering. In addition, firms must designate an employee as their AML (anti-money laundering) compliance officer. This role is responsible for creating and implementing a system to detect red flags, such as:

• Customers overly concerned with CTR reporting
• Transactions between unrelated accounts that don’t make sense
• Consistent cash and/or cashier’s checks deposits
• Customers with a lack of concern over the status of their account, risk, or fees

A representative who identifies any of the above actions must escalate the issue to a supervisor. From there, the appropriate parties at the firm will investigate and report to the relevant authorities if necessary.

When a customer opens an account, the firm must check a document called the Specifically Designated Nationals (SDN) list. This list includes the names of individuals controlled by or acting on behalf of hostile nations, as well as known terrorists and drug traffickers. If a customer’s name appears on the SDN list, it’s the firm’s responsibility to freeze the account and cease doing business with the customer. Any account assets are reported and may be seized by the U.S. Government.

The Office of Foreign Assets Control (OFAC), which is also part of the U.S. Treasury Department, maintains and oversees the SDN list. Additionally, OFAC controls which countries financial firms are allowed to do business with.