Chapter 18 Money Laundering: Legal Issues
- Robert Effros
- Published Date:
- June 1994
Just as money is the lifeblood of legitimate business and industry, so too, is it the lifeblood of all domestic and international organized crime groups. Its flow through the international banking system sustains illicit operations by providing criminals with the new capital needed to pay operating expenses and to buy more goods and services. If the flow of money back to the criminal can be cut off, the criminal organization will wither and die no matter how great the demand for its products or services. This is especially true for drug trafficking groups, which generally deliver on consignment. Suppliers are often not paid until after the drugs are sold in individual-use quantities on the street. For this reason, law enforcement worldwide attaches great significance to money laundering.
The United States is one of several countries with recently enacted money laundering legislation. The statutes enacted in the United Kingdom, Canada, Australia, and Switzerland also merit close study. Everyone stands to benefit from information sharing—to avoid making the same mistakes at different times. Delay and error benefit only organized criminal groups. The focus of this paper is the approach taken by the United States to combat international money laundering. Two money laundering statutes (18 U.S.C. §1956 (amended 1970) and 1957) and asset forfeiture provisions (18 U.S.C. §981 and 982) are highly relevant to this review.1
The U.S. Congress passed the two money laundering statutes in 1986. Section 1956 criminalizes virtually any dealings with the proceeds of a wide range of specified unlawful activities when those dealings are aimed at furthering the same specified unlawful activities or at concealing or disguising the source, ownership, location, or nature of the proceeds. Subsections 1956(a)(1) and 1956(a)(2) lay out the core of this provision. Subsection (a)(1) deals with violations in a domestic context. Subsection (a)(2) involves violations that occur when monetary instruments or funds are transported between the United States and a foreign country.
Section 1957 effectively criminalizes any knowing “monetary transaction” or attempted monetary transaction in criminally derived property when three factors exist: (1) more than $10,000 is involved, (2) a financial institution is used, and (3) the property is derived from specified unlawful activity. The statute does not require that the transaction be conducted for any additional criminal purpose. The detailed elements and substance of these offenses are discussed below in further detail.
U.S. Money Laundering Statutes
Subsection 1956(a)(1) Domestic Transactions
“Whoever, knowing that the property … represents … some form of unlawful activity”
As defined in §1956(c)(1), this means that the person conducting the financial transaction knew the property involved in the transaction represented the proceeds of some form, though not necessarily which form, of activity that constitutes a felony under state or federal law—regardless of whether that unlawful activity is a listed specified unlawful activity (see §1956(c)(7)). Knowledge can be proven actually, or circumstantially, or by concepts known as either willful blindness or purposeful ignorance.
“[C]onducts or attempts to conduct”
As defined in §1956(c)(2), this includes initiating or concluding a transaction (or attempting to) and participating in initiating or participating in concluding (or attempting to) a transaction. It is noteworthy that because the term “participating” is undefined, it must be given its normal dictionary definition meaning. This generally includes concepts of facilitating and aiding and abetting.
A “financial transaction”
“Financial transaction,” as defined in §1956(c)(4), has three subdefinitions, and also references the term “transaction,” which is itself defined in §1956(c)(3). First, according to the three subdefinitions, a financial transaction means a transaction involving: (a) “the movement of funds by wire or other means”; or (b) “one or more monetary instruments”; or (c) “the use of a financial institution.” All three must affect interstate or foreign commerce. This requirement comes from the Hobbs Anti-Racketeering Act, 18 U.S.C. §1951 (1934). It is intended to reflect the full exercise of congressional powers under the Commerce Clause of the U.S. Constitution (Art. I, sec. 7, cl. 3).
Thus, in order to conduct a financial transaction, a person must engage in a transaction. The term “transaction” is defined in the statute in two separate categories. As to nonfinancial institutions, “transaction” includes purchase, sale, loan, pledge, gift, transfer, delivery, or other disposition.2 As to financial institutions, “transaction” includes the deposit, withdrawal, transfer between accounts, exchange of currency, loan, extension of credit, purchase or sale of any stock, bond, certificate of deposit, or other monetary instrument, or any other payment, transfer, or delivery by, through, or to a financial institution, by whatever means effected.3
The word “funds,” which is found in the financial transaction subdefinition (a) above, is undefined. In the context of the statute, it is logical to presume it to include any form of electronic funds transfer; however, it could also encompass anything representing value that is not a monetary instrument. If the latter is true, one could “launder” personal property, such as stolen goods, under this statute. This matter will ultimately be resolved by the courts.
The term “monetary instrument,” found in subdefinition (b) above, is defined in §1956(c)(5). It includes:
“coin or currency of the United States or any other country,” which includes gold and other precious metal coins that are legal tender of a country but do not circulate as such or whose value is determined by the worth of their metallic content rather than by operation of normal currency exchange markets;
“travelers’ checks, personal checks, bank checks, and money orders” in any form; and
“investment securities or negotiable instruments, in bearer form or otherwise in such form that title” passes upon delivery.
Thus, in its broadest configuration, a financial transaction includes any “transfer” of “cash” (that is, a monetary instrument) that affects interstate commerce even though this cash never entered a bank. Similarly, a transfer between accounts within one bank (for example, checking account to savings account) would be a financial transaction. Likewise, a single wire transfer out of the United States would be a financial transaction. So, for example, a simple transfer of cash among members of a drug conspiracy, even though it never enters a bank, constitutes a financial transaction, if it affects interstate commerce. Also, each transaction is a separate felony that carries a 20-year term of imprisonment.
“[W]hich in fact involves the proceeds of specified unlawful activity”
The property involved in the financial transaction must have in fact been derived from a specified unlawful activity. The government must prove that the underlying criminal activity that gave rise to the money being laundered is contained in the list of predicate crimes.
The list of specified unlawful activities is found in §1956(c)(7), and includes: (a) all RICO predicates;4 (b) any foreign drug offenses involving the manufacture, distribution, importation, or sale where the financial transaction occurs in whole or in part within the United States; (c) continuing criminal enterprise violations;5 and, (d) numerous miscellaneous crimes found in the United States Code.6
When one engages in a financial transaction, one must do so with the intent to accomplish one of four purposes:
(1) Intent “to promote carrying on of specified unlawful activity.” This is derived from 18 U.S.C. §1951. It requires proof that the accused intended to promote or facilitate activity that he or she generally knows to be illegal. It does not require proof that the accused intended to promote a specific statutory offense. Further, the underlying criminal offense intended to be promoted need not have been actually or fully completed.
(2) Intent to engage in activity violating certain portions of the Internal Revenue Code, that is, tax evasion and tax fraud.7
(3) Conducted the transaction knowing (intending) that it was designed in whole or part “to conceal or disguise the nature, location, source, ownership, or control of … the proceeds … “8
(4) Intent to avoid (evade) “a transaction reporting requirement under State or Federal law.”9
Subsection 1956(a)(2)—International Transportation
“Whoever transports … or attempts to transport”
“Transportation” is an undefined term. It is interpreted to include all transfers and transmissions, not simply the physical import or export of monetary instruments.10
A “monetary instrument or funds”
The definition of “monetary instrument” in §1956(a)(2) is identical to that in §1956(a)(l). “Funds” is an undefined term in this section of the statute also. The analysis provided earlier for §1956(a)(l) would also apply here.
“[F]rom a place in the United States to … a place outside the United States or to a place in the United States from … a place outside the United States”
This subsection requires the international transportation of funds or a monetary instrument by any means.
“[W]ith the intent”
Three of the intents are identical to §1956(a)(l). Tax evasion and tax fraud are not included. Interestingly, however, the statute is written differently from §1956(a)(l): in §1956(a)(l), the phrase “in fact derived from a specified unlawful entity” modified all the intents. Here, it modifies only the intent to conceal or disguise (§1956(a)(2)(B)(i)). Thus, under §1956(a)(2)(A), one can be guilty of laundering or assisting in laundering money not derived from crime.
The maximum penalties under §1956(a)(l), (a)(2), and (a)(3) are: a 20-year term of imprisonment; a fine of $500,000 or twice the value of the property involved in the transaction, whichever is greater; and a civil penalty of $10,000 or the value of the property, funds, or monetary instruments involved in the transaction, whichever is greater.
Subsection 1956(a)(3)—Sting Exception
“Whoever … conducts or attempts to conduct”
Subsection §1956(a)(l) definitions apply to overlapping terms, such as “conducts.”
A “financial transaction”
As with §1956(a)(l), the definition taken from §1956(c)(4) applies here.
“[I]nvolving property represented by a law enforcement officer”
For purposes of this section, “represented” is defined to mean a representation made by: (a) a law enforcement officer (presumably state, local, or federal), or (b) by another person at the direction of, or with the approval of, a federal official authorized to investigate or prosecute violations under §1956 (essentially all Justice and Treasury agencies). Thus, under §1956(a)(3), the Justice Department can use undercover money and can make representations through an undercover agent or a confidential informant.
“[T]o be the proceeds of specified unlawful activity, or property used to conduct or facilitate specified unlawful activity”
While there are no definitions of “proceeds” or “facilitate,” the forfeiture law, under 21 U.S.C. §881, might be looked to for guidance. The definition of “specified unlawful activity” would mirror that in §1956(c)(7).
“[W]ith the intent”
This provision uses three of the four intent provisions of §1956(a)(l). It does not include the tax fraud/tax evasion intent.
The maximum penalties under §1956(a)(3) are: a 20-year term of imprisonment; and a fine ($250,000) as prescribed in 18 U.S.C. §3571. There are no civil penalties under §1956(a)(3).
Finally, §1956(f) provides for extraterritorial jurisdiction under two circumstances: (1) “the conduct is by a United States citizen or, in the case of a non-United States citizen, the conduct occurs in part in the United States”; and (2) “the transaction or series of related transactions” exceeds $10,000. Thus, a foreign national who wire-transfers money into the United States to disguise it or with the intent to promote a specified unlawful activity can be indicted under this section, even if he or she never sets foot in the United States.
Section 1957—Monetary Transactions in Criminally Derived Property
Section 1957, in effect, proscribes any knowing receipt of criminally derived funds in excess of $10,000, where those funds are, at some point, processed through a financial institution.
“Whoever … knowingly11 engages or attempts to engage in a monetary transaction” involving “criminally derived property”
“Monetary transaction” encompasses: (a) any “deposit, withdrawal, transfer, or exchange” of funds or monetary instrument(s);12 (b) “by, through, or to a financial institution”; (c) that affects “interstate or foreign commerce.”
“Criminally derived property” requires proof that the defendant know that the property involved in the transaction derived from some criminal offense (18 U.S.C. § 1957(f)(2)). He need not know that it derived from a particular criminal offense or even any “specified unlawful activity.”
The value of which exceeds $10,000 …
Which criminally derived property is in fact derived from a “specified unlawful activity.”
The government must establish, in proving its case, that the property did in fact emanate from a “specified unlawful activity,” as defined in §1956(c)(7).
Thus, §1957, in effect, proscribes any knowing receipt of criminally derived funds in excess of $10,000 where those funds are, at some point, processed through a financial institution.
The maximum penalties under §1957 are: a 10-year term of imprisonment; and a fine as in Title 18 (generally $250,000) under 18 U.S.C. §3571 or not more than twice the value of the “criminally derived property” involved in the transaction. There are no civil penalties under §1957.
That is an overview of the substantive money laundering statutory system in the United States. However, no system of law in this area is complete without a complementary forfeiture component.
U.S. Money Laundering Forfeiture Laws
U.S. money laundering forfeiture laws are found at 18 U.S.C. §981 and 18 U.S.C. §982.
This section provides for the civil in rent forfeiture of “[a]ny property, real or personal, involved in a transaction or attempted transaction in violation of section 5313(a) or 5324 of title 31, or of section 1956 or 1957 of this title, or any property traceable to such property.”
Under this provision the government can forfeit the corpus of the money laundered or other property involved in the transaction, any property traceable to such property, and apparently any other real or personal property involved in (that is, which facilitated) the commission of the money laundering offense. Courts may attempt to impose a “substantial connection” requirement with respect to the forfeiture of other “facilitating” properties forfeited such as required under 21 U.S.C. §881(a)(4) and (a)(7).
This section provides for the criminal forfeiture of money laundering property as follows: “[t]he court, in imposing sentence on a person convicted of an offense in violation of… section 1956 or 1957 … shall order that the person forfeit to the United States any property, real or personal, involved in such offense, or any property traceable to such property.” It should be noted that forfeiture under this provision is mandatory.
Section 6464 of the Anti-Drug Abuse Act of 1988 (18 U.S.C. §982(b)) authorizes the criminal forfeiture of “substitute assets” by incorporating by reference the provisions of 21 U.S.C. §853(p). That subsection provides that if any forfeitable property because of “any act or omission of the defendant, (1) cannot be located upon the exercise of due diligence; (2) has been transferred or sold to, or deposited with, a third party; (3) has been placed beyond the jurisdiction of the court; (4) has been substantially diminished in value; or (5) has been commingled with other property which cannot be divided without difficulty; the court shall order the forfeiture of any other property [not otherwise forfeitable in lieu of the forfeitable property] of the defendant up to the value of” the otherwise forfeitable property.
However, section 6464 limits the scope of this provision by adding the following sentence to 18 U.S.C. §982(b)(2): “The substitution of assets provisions … shall not be used to order a defendant to forfeit assets in place of the actual property laundered where such defendant acted merely as an intermediary who handled but did not retain the property in the course of the money laundering offense …”
This additional language is extremely problematic as applied to professional money launderers, because they never finally retain the money laundered, but almost immediately pass it on to their “clients.” It strains credulity, however, to suggest that Congress intended to exempt such professional money launderers from the “substitute assets” provision. Indeed, when Congress drafted this exemption, it probably had in mind the “employees” used by these professionals—for example, “smurfs,” a colloquial expression used to denote the persons who make cash deposits in different banks for the money launderers in order to circumvent the reporting requirements of the law. The courts will ultimately have to decide the proper scope of this provision, if a legislative correction is not made.
One of the most critical aspects of U.S. forfeiture laws was the establishment of the Assets Forfeiture Fund and the provisions that allow for domestic and international equitable sharing of confiscated assets. Under the terms of 28 U.S.C. §524(c), a special fund was established for the receipt of property representing the net result of final confiscation proceedings. This fund may be used by the Attorney General for specific purposes set forth in the statute. Significant among the various uses to which this money may be put include: (a) “payment of awards for information … relating to violations of the criminal drug laws of the United States”; (b) “equipping … government-owned or -leased vehicles and” vessels, and aircraft for drug law enforcement; and (c) “purchase of evidence,” that is, money to be used by undercover agents in “buy-bust” operations.
Further, under 18 U.S.C. §981(e), any property forfeited to the government may be equitably transferred to any state or local law enforcement agency as generally to reflect the agency’s direct participation in any of the acts that led to the seizure or forfeiture of the property. Also, under 18 U.S.C. §981(i), any property forfeited may be equitably transferred to foreign countries in an amount that generally reflects their direct or indirect participation in any acts that led to the seizure or forfeiture of such property.
That is the broad outline of U.S. money laundering forfeiture law. Next, this paper will treat the work of the United Nations, a project in the Council of Europe, and finally, the report of the Financial Action Task Force.
UN Illicit Traffic Convention
The United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (the “Vienna Convention”) was adopted on December 19, 1988.13 Article 3, paragraphs l(b)(i), l(b)(ii), and (c)(1) outline offenses under the convention.
Paragraph 1(b)(i) requires criminalization of “[t]he conversion or transfer of property, knowing that such property is derived from any [narcotics or narcotics-related] offence or offences … or from an act of participation in such offence or offences, for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in the commission of such an offence or offences to evade the legal consequences of his actions.”
Paragraph 1(b)(ii) requires criminalization of “[t]he concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property, knowing that such property is derived from an [narcotic or narcotics-related] offence or offences … or from an act of participation in such an offence or offences …”
Paragraph (c)(i) requires criminalization of “[t]he acquisition, possession or use of property, knowing, at the time of receipt, that such property was derived from an [narcotics or narcotics-related] offence or offences … or from an act of participation in such offence or offences …” This aspect of the convention is limited by an allowance that a country need only enact legislation criminalizing the conduct described therein if to do so would not violate its constitutional principles or the basic concepts of its legal system.
Article 5 provides for forfeiture, seizure, tracing, and freezing of property involved in Article 3 offenses listed above. It further provides that bank secrecy laws shall not be a bar to cooperation under the Convention.
Council of Europe Convention
The Council of Europe Select Committee of Experts on International Cooperation regarding Search, Seizure, and Confiscation of Crime Proceeds has worked since 1987 to establish a multilateral cooperation agreement on the laundering of crime proceeds and the confiscation of such proceeds. The committee presented its draft Convention on Laundering, Search, Seizure, and Confiscation of the Proceeds from Crime to the Committee on Crime Problems in June 1990.14 It was adopted on September 8, 1990.
Article 6 of the Convention provides that:
Each Party shall adopt such legislative and other measures as may be necessary to establish as offences under its domestic law, when committed intentionally:
a. the conversion or transfer of property, knowing that such property is proceeds, for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in the commission of the predicate offence to evade the legal consequences of his actions;
b. the concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of, property, knowing that such property is proceeds; and, subject to its constitutional principles and the basic concepts of its legal system;
c. the acquisition, possession or use of property, knowing, at the time of receipt, that such property was proceeds;
d. participation in, association or conspiracy to commit, attempts to commit and aiding, abetting, facilitating, and counselling the commission of any of the offences established in accordance with this article.
For the purposes of implementing or applying paragraph 1 of this article:
a. it shall not matter whether the predicate offence was subject to the criminal jurisdiction of the Party;
b. it may be provided that the offences set forth in that paragraph do not apply to the persons who committed the predicate offence;
c. knowledge, intent or purpose required as an element of an offense set forth in that paragraph may be inferred from objective, factual circumstances.
Each Party may adopt such measures as it considers necessary to establish also as offences under its domestic law all or some of the acts referred to in paragraph 1 of this article, in any or all of the following cases where the offender:
a. ought to have assumed that the property was proceeds;
b. acted for the purpose of making profit;
c. acted for the purpose of promoting the carrying on of further criminal activity.
Each Party may, at the time of signature or when depositing its instrument of ratification, acceptance, approval or accession, by declaration addressed to the Secretary General of the Council of Europe declare that paragraph 1 of this article applies only to predicate offences or categories of such offences specified in such declaration.
Financial Action Task Force
The Financial Action Task Force was convened at the behest of the G-7 nations and the Commission of the European Communities to accomplish two purposes. First, the Task Force was to assess the results of previous and existing international cooperation in combating money laundering practices—particularly practices that exploit international and domestic financial and banking systems in laundering the proceeds of crime. Second, the Task Force was to consider and make recommendations to the G-7 summit regarding additional preventive measures that may be undertaken both to strengthen national laws against money laundering practices and to enhance multilateral legal assistance in the prevention of money laundering.
Several nations outside the G-7 expressed interest in the work of the Task Force. Thus, the Task Force ultimately consisted of the G-7 nations (Canada, France, Germany, Italy, Japan, United Kingdom, United States),15 the Commission of the European Communities, plus Australia, Austria, Belgium, Luxembourg, the Netherlands, Spain, Sweden, and Switzerland. France chaired the Task Force.
The Task Force met five times between October 1989 and February 1990—four times in Paris and once in Washington. In the end, the Task Force participants agreed on 40 “action recommendations” for implementation. The recommendations were embodied in the Final Report, which was publicly released on April 23, 1990.16
Part I of the Final Report discusses the extent and methods of international money laundering. It outlines the conditions and techniques that make money laundering possible, including:
the relative “cash intensiveness” of various national economies (that is, reliance on currency as the primary form of exchange);
the use of financial institutions (including such nonbank financial institutions as currency exchanges and dealers in precious metals);
the existence of “bank secrecy haven” countries;
the use of corporate techniques to disguise personal ownership of funds.
Part II of the Final Report describes the international agreements that already exist to combat money laundering (the Vienna Convention and the Basle Statement of Principles)17 and the existing domestic statutory and regulatory measures against money laundering adopted by the Task Force countries.
Part III, the heart of the Final Report, contains the 40 action recommendations agreed to by the Task Force participants. The more salient features of these recommendations include:
full and expeditious ratification and implementation of the Vienna Convention to serve as a baseline measure against money laundering;
criminalization of money laundering to include, at a minimum, the laundering of drug moneys (but recommending, as an alternative, criminalizing the laundering of proceeds of other serious crimes); and
adoption, where possible, of theories of corporate criminal liability and measures for the seizure and forfeiture of proceeds and property involved in money laundering offenses.
With respect to the role of both bank and nonbank financial institutions in preventing money laundering, the recommendations include:
prohibition of anonymous accounts and implementation of measures for identifying and recording the identification of customers (and any person on behalf of whom an account is opened or transaction conducted);
recording and, at a minimum, voluntary reporting of suspicious transactions to law enforcement authorities;
implementation of internal measures against money laundering with provisions for compliance, training, and auditing;
adoption of measures to monitor movements of cash at national borders;
consideration of the feasibility and utility of systems for the reporting of currency transactions above a certain amount through financial institutions;
enlistment and enhancement of the role of regulatory and supervisory authorities in the implementation and enforcement of measures against money laundering; and
adoption of measures to enhance both formal and informal cooperation among national authorities in the detection of money laundering offenses and the enforcement of money laundering laws.
The 40 action recommendations of the Task Force were presented to the heads of state of the G-7 nations when they met in Houston in July 1990. Most of the nations that participated in the Task Force, however, are not members of the G-7 summit. Thus, discussions were conducted on adopting a mechanism by which the work of the Task Force can be continued, as a means of determining what progress is being made among member nations in implementing the recommendations and of adopting new recommendations.
The problem of international money laundering threatens the vitality of the international financial system. To the extent that illicit money is allowed to flow unimpeded through this system, we are all threatened. The experience in Panama proves this point. The existence of strict bank secrecy laws served as a magnet for organized crime groups seeking safe haven for illicit funds. As these groups infiltrate a society, they endeavor to corrupt law-abiding institutions and individuals. Unfortunately, because of their enormous wealth and willingness to use violence to convince the unwilling, they all too often succeed. Once they become established, removing their stranglehold is very difficult. So, today and in the days ahead, we face the difficult task of establishing legal mechanisms to ensure that the worldwide monetary system cannot be used by international criminals. Achieving this goal will take our best collective efforts.
Overview of the Financial Action Task Force Report and the U.S. System
From the U.S. Treasury’s point of view, one of the most important international initiatives to combat money laundering in 1990 was the publication of the Final Report of the G-7 Financial Action Task Force on Money Laundering (“Task Force”) in April 1990.1 The Task Force was convened by the 1989 Economic Summit in Paris, and, at the time the report was issued, consisted of 15 countries (the seven summit participants plus Australia, Austria, Belgium, Luxembourg, the Netherlands, Spain, Sweden, and Switzerland) and the European Community. The purpose of the Task Force was to study the measures that have been taken by its participants to prevent the use of the banking system and financial institutions by money launderers and to make recommendations on how to improve international cooperation. The Task Force was unique in that it brought together law enforcement agents, finance ministers, financial institution regulators, and foreign ministry officials, who recognized that, to deal effectively with the money laundering problem, they must work together and with banks and other financial institutions. Financial institutions must be the first line of defense.
The report, which contains 40 substantive recommendations, surpassed the expectations of the United States. Many of the recommendations go beyond the UN Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (the Vienna Convention),2 and impose positive obligations on banks, other financial institutions, bank regulators, and governments. For instance, the report recommends that governments permit banks to report suspicious transactions to law enforcement authorities without notifying their customers and free from liability under secrecy laws. For many countries, this is a significant change in their legal systems, because many countries prohibit disclosure of bank records to government authorities.
The report establishes a comprehensive scheme for dealing with money laundering issues domestically and for sharing information and records internationally in connection with ongoing investigations, prosecutions, and property seizures. The report recommends that banks and other financial institutions record information about financial transactions, including large currency transactions, and maintain that information for five years, so that it is available to law enforcement officials. The Financial Action Task Force found that currently retention requirements vary from country to country. In many countries, records are maintained for only as long as they are needed for business purposes. The report also recommends that regulators work with financial institutions to help them to put programs in place to prevent and identify possible money laundering.
Several recommendations would facilitate implementation of the Vienna Convention. Under the Vienna Convention, signatory countries must enact laws to provide for the identification, tracing, seizure, and confiscation of the proceeds of narcotic trafficking and money laundering crimes.3 The Financial Action Task Force Report recommends that these measures include providing the authority to identify, trace, and evaluate the proceeds and the instrumentalities of drug trafficking and other crimes. The report also recommends that provisional measures, such as the freezing and seizure of bank accounts and other assets, be explored; that appropriate investigatory measures be permitted; and that confiscation of property be allowed.
The report recognizes that money laundering is not confined to drug trafficking. Money is laundered with respect to many crimes, especially crimes that generate large amounts of cash. The report, therefore, recommends that countries expand the provisions of the Vienna Convention to prevent not only drug money laundering but also the laundering of the proceeds of other serious crimes.
As mentioned, the report recommends that records of financial transactions (including large currency transactions and identification of customers) be maintained for five years and be made available to competent authorities in criminal prosecutions and investigations. The United States has in place a system for identifying, seizing, tracing, and forfeiting assets, which includes the making of reports and keeping of records useful to law enforcement and regulatory authorities. Since 1972, as part of the Currency and Foreign Transactions Reporting Act, the United States has required financial institutions to report large currency transactions and transportations and maintain a variety of records for five years.4 This system has been refined over the last 20 years.
The purpose of the Currency and Foreign Transactions Reporting Act is to create a paper trail to trace drug and other proceeds to their illegal sources and to identify the volumes, sources, and movements of money domestically and internationally. By following the money (as opposed to the drugs), the higher echelons of criminal organizations can be identified (the people who generally distance themselves from the drugs, but not the money); their property can be seized and forfeited; and their criminal organizations can be disrupted.
Criminals use their ill-gotten gains to purchase houses, cars, and airplanes, often in the names of nominees or foreign companies. The U.S. Government believes that if it can identify these assets, they can be seized and forfeited. This is important because it provides the government with an additional way of punishing the criminal. In many cases, going to jail is considered just a cost of doing business. When released five or ten years later, the criminal can use money that he or she has tucked away. But if the government can take away the criminal’s profit, the incentive for engaging in the illegal activity should be eliminated.
The following is an overview of the Currency and Foreign Transactions Reporting Act and the Treasury Financial Data Base, proposed regulations on wire transfers, and Section 4702 of the Anti-Drug Abuse Act of 1988, (the Kerry Amendment).5
Currency and Foreign Transactions Reporting Act
The Currency and Foreign Transactions Reporting Act requires the filing of three types of reports and the retention of a variety of different records.6 The most common report is the Currency Transaction Report (CTR).7 Banks and other financial institutions must file this report with the government whenever there is a deposit, withdrawal, exchange of currency, or other transfer or payment by, through, or to a financial institution that involves a transaction in currency of more than $10,000 or its foreign currency equivalent. Under the regulations, financial institutions include banks, savings and loans, currency exchangers, security broker-dealers, check cashers, wire transmitters, and casinos.8
The CTR reporting requirement covers only the physical transfer of currency; it does not apply to transactions that do not involve currency. For instance, if you were to go into a U.S. bank and deposit a $12,000 check into your account, no report would be required because the transaction does not involve currency. However, if you were to deposit $12,000 in U.S. currency or its foreign currency equivalent into your U.S. account, then a CTR must be filed. The purpose is to create a paper trail to link the cash with the individual conducting the transaction (as well as the person on whose behalf the transaction is conducted).
The second report required by the Currency and Foreign Transactions Reporting Act is the Report of International Transportation of Currency or Monetary Instruments (CMIR), Customs Form 4790.9 A CMIR must be filed by any person who physically transports more than $10,000 or its foreign currency equivalent in currency or certain negotiable instruments into or out of the United States. You may remember completing a Customs Declaration form when you entered the United States. That form asks whether you are carrying in excess of $10,000 in currency or monetary instruments. If the answer is “yes,” then you must file a Customs Form 4790. The report must be filed not only for cash, but also for traveler’s checks in any form, negotiable instruments in bearer form, negotiable instruments made out to a fictitious payee, and similar cash-equivalent negotiable instruments. In addition to physical transportations, a CMIR must be filed by any person who ships or mails currency or other negotiable instruments that aggregate to over $10,000 into or out of the United States, or who receives them in the United States from outside the United States. Anyone who receives currency or other instruments from abroad is required to file a CMIR within 15 days of receipt.
The third report required to be filed by the Act is a Report of Foreign Bank and Financial Accounts (FBAR).10 An FBAR must be filed annually by any person subject to the jurisdiction of the United States who has a financial interest in, or signature authority over, a foreign bank, securities, or other type of financial account that in the aggregate, at any time during the calendar year, exceeds $10,000 or its foreign currency equivalent.
In addition to the reporting requirements under the Currency and Foreign Transactions Reporting Act, banks and other financial institutions are required to maintain a variety of records that are useful for law enforcement. For instance, banks are required to keep for five years records of their customers’ taxpayer identification numbers, signature cards, account statements, records of checks over $100 deposited into accounts, deposit slips, and each advice, request, or instruction regarding any transaction of more than $10,000 into or out of the United States.11
U.S. Treasury Financial Data Base
All three reports required by the Currency and Foreign Transactions Reporting Act are filed with the government and put into the same computer data base to form the Treasury Financial Data Base. This data base can then be queried by law enforcement agents and financial institution regulators who are charged with examining banks and other institutions to ensure compliance with the Currency and Foreign Transactions Reporting Act. Information obtained from the data base can be used as probative evidence at trial and can support criminal investigations, prosecutions, and tax collections. In 1989 alone, there were almost two million queries made of the data base by law enforcement investigators, and over a two-year period, analysis of the data produced almost 400 investigative reports identifying 2,000 persons and companies as targets.
One example was Operation Polar Cap. In that case, two banks in California, Bank of America and Wells Fargo Bank, called the Internal Revenue Service (IRS) to alert it to suspicious activity involving gold brokers and jewelry stores in Los Angeles. Wells Fargo Bank reported that one wholesale jewelry store had deposited more than $25 million in cash in a three-month period. That is a lot of cash, especially for a wholesaler, who generally is not thought of as dealing in cash. In querying the data base, the IRS identified other reports required by the Internal Revenue Code (Form 8300), which were filed by the wholesale jewelry stores reporting purported purchases of jewelry. Form 8300 is required to be filed by trades and businesses other than financial institutions when they receive cash in excess of $10,000.12
Using the Treasury Financial Data Base and electronic surveillance, the IRS and other government agencies were able to trace the money to a number of banks and identify a billion-dollar money laundering ring (“La Mina”) with direct links to the Medellin cartel. At the time, it was believed that 80 percent of the cocaine in the United States came from the Medellin cartel. The government identified approximately $1.2 billion laundered through wholesale jewelry stores and gold brokers that were used as front companies to launder narcotics proceeds. These proceeds came from street sales of cocaine, heroin, and hashish in New York, Houston, Detroit, and Los Angeles. Once the stores and brokers received the proceeds from these drug sales, they were made to appear as legitimate purchases of jewelry or gold. In some instances, cash was put into hollow gold bars to make it look like gold in order to facilitate its transportation. Much of the money was deposited into U.S. banks and wire-transferred to bank accounts in Panama, Uruguay, Canada, Switzerland, England, and Germany.
As a result of this operation, more than one hundred people were arrested and approximately 2,000 pounds of cocaine, 20,000 pounds of marijuana, $13 million in cash, $14 million in real estate, $19 million in bank accounts, $15 million in jewelry, 43 vehicles, and $200,000 in computer equipment were seized. In addition, $45 million was provisionally frozen in bank accounts in the United States and abroad, and 173 U.S. banks were ordered to produce records of more than 750 bank accounts into which nearly $400 million in illegal drug profits had been deposited.
Once Operation Polar Cap was concluded and additional bank records were provided, investigators were able to follow the money further. More than three-quarters of the accounts, 684 of them, were ordered frozen pending forfeiture procedures by the government. Many of these accounts were identified as the result of an examination of Panamanian and other foreign bank account records. These records, in turn, showed that between 1987 and 1989 almost $350 million that was wire-transferred out of the United States later returned to the United States in different forms. Another $15 million is believed never to have left the United States. It is not yet known exactly how much money remains in these accounts. Operation Polar Cap demonstrates the importance of using reports to identify additional bank accounts and related individuals and the importance of having the ability to freeze accounts.
Particularly significant in Operation Polar Cap was the level of international cooperation. In the first days of Operation Polar Cap, eight foreign governments assisted in law enforcement operations. As a result of asset sharing,13 a million dollars was shared with Canada and another million with Switzerland.
In addition to analyzing data in the Treasury Financial Data Base, the Treasury Department has a rule-based artificial intelligence system that combines the data from the data base with other information, including data from Federal Reserve banks. This information can be compared with copies of criminal referral forms, which banks are required to file pursuant to regulations issued by the bank regulatory agencies. The artificial intelligence system targets suspicious currency transactions and movements. The rule-based artificial intelligence uses indicators that identify persons using different social security numbers, occupations, driver’s licenses, or multiple accounts. Also, there is a box on each CTR that financial institutions staff check if they believe a transaction that they are reporting is suspicious.
At the same time that reports were being received from the California banks in the Polar Cap case, this artificial intelligence system had identified as suspicious some of the transactions of the same jewelry stores. Through additional querying of the data base in Operation Polar Cap, the Treasury was able to identify other connected persons, companies, bank accounts, and assets. From 1988 through mid-1990, more than 787 targets, connected to criminal activity exceeding over $789 million, were identified through artificial intelligence.
The Treasury Financial Data Base will be the core of one recent Treasury initiative, the creation of a new Treasury agency known as the Financial Crimes Enforcement Network (FinCEN). FinCEN will coordinate federal, state, local, and international law enforcement efforts and draw upon data from law enforcement, bank regulators, foreign governments, and the private sector. FinCEN will build upon the existing artificial intelligence system to identify new targets, money laundering methods, patterns, and trends.
An area of increasing concern to the U.S. Congress, banking industry, and banking regulators is the use of the international payment system—especially the wire transfer system—in the laundering of illegal monies. Currently, detailed records of international wire transfers are not required. While financial institutions are required to maintain a record of each advice, request, or instruction of each international funds transfer of over $10,000, they are not told exactly what they are required to keep. New regulations are being developed that should better meet law enforcement purposes and at the same time not impede the legitimate banking and payment system. This is a difficult task given the daily volume of international payments, the overwhelming majority of which are legitimate. Here in the United States, for instance, interbank payment systems clear about a trillion dollars a day in wire transfers, compared with estimated annual gross revenues generated from drug sales of only about $100 billion and estimated annual gross revenues generated worldwide of about $300 billion.
In October 1989, the Treasury Department issued an advanced notice of proposed rule-making that solicited comments from affected parties and presented a number of options to address the problem of money laundering through wire transfers.14 The options considered included requiring all international wire funds transfer messages to contain identifying information, including the name of the originator and recipient of the transaction, as well as third-party information, beneficiary information, and account information; requiring that before originating international payments on a customer’s behalf, the financial institutions apply “know your customer” procedures to verify the legitimate nature of the customer’s business and to ensure that the transfers are in amounts commensurate with the customer’s lawful business activity; and requiring financial institutions to develop, with the help of the government, profiles of suspicious wire transfers and to report suspicious payments.
There appears to be less of a problem in the United States in requiring financial institutions to provide information on outgoing wires, because the financial institution can require the information prior to initiating the transfers. Difficulties arise, however, when the wire transfer originates abroad, especially in countries where there are stringent secrecy laws, and the information may not be provided by the customer to the originating financial institution. To deal with this problem the Treasury Department is considering requiring the U.S. customer who receives the payment in the United States to provide the necessary information. Thus, the obligation would be on the recipient in the United States as opposed to the foreign originator.
Both the Vienna Convention and the Financial Action Task Force recognize that the drug problem is international in scope and that, to attack it effectively, all countries must cooperate and provide the broadest amount of legal assistance possible. One of the difficulties that the United States has encountered is an inability to identify and trace proceeds once they leave the United States. To deal with this problem, Section 4702 of the Anti-Drug Abuse Act of 1988, the Kerry Amendment, requires the Secretary of the Treasury to conduct negotiations with the appropriate authorities in foreign countries whose financial institutions do business in U.S. currency.15 The purpose of the negotiations is to reach international agreements requiring foreign banks and other financial institutions to maintain adequate records of large currency transactions, that is, currency transactions in excess of $10,000, and foreign countries to establish a mechanism to provide for the sharing of that information. Under the statute, the highest priority is to be given to those countries whose financial institutions may be engaging in transactions involving the proceeds of drug sales in the United States.
There are very stringent sanction provisions in this statute, which the administration and Congress enacted despite opposition.16 Under the statute, sanctions can be imposed against a country whose financial institutions are substantially engaging in currency transactions that affect the United States and involve international narcotics proceeds, if that country has not reached an agreement with the United States or is not negotiating with the United States in good faith to reach an agreement. Sanctions include prohibiting the financial institutions in those countries from participating in the U.S. dollar clearing or wire transfer systems or from having accounts in U.S. banks.
After consultations with federal law enforcement agencies, the intelligence community, and the Office of National Drug Control Policy, the Treasury Department has preliminarily selected 21 countries with which to negotiate agreements. The 21 countries have not been identified publicly, because the Treasury believes that disclosure of the identities of these countries could be counterproductive to fruitful negotiations. Those countries approached, however, generally have been receptive. Indeed, several countries on their own initiative have approached the United States to initiate discussions. These negotiations and discussions are at various stages and are being conducted in strict confidence.
When the Kerry Amendment was first enacted, countries around the world opposed it because of its extraterritorial application and the sanction provisions. Now, however, there seems to be a trend, as demonstrated by the Financial Action Task Force, toward similar record keeping by these same countries for their own purposes.