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Money Laundering: Fundamentals, Trends, and How It Affects You

On Friday (12/4), I delivered a presentation to over 100 lawyers during an all-day seminar they were attending for their continuing education requirements. My segment ran about 30 minutes. The rest of this blog is a reprint of my comments. My profile on LinkedIn (Paul Freeman, CPA, CAMS) has the PowerPoint presentation that accompanied it, as well as the My Blog page on my website:

So with no further delay….

Welcome. Today I am speaking about Money Laundering, its basic fundamentals, common methods, and how it, and the efforts to battle it, can and do, impact you and your clients.

Let’s start with an understanding of what Money Laundering is.

The Financial Action Task Force (FATF for short) has a 3-part working definition.

I should explain that the Financial Action Task Force is the multinational organization which sets the global tone for all Money Laundering issues.

  1. Money laundering consists of the conversion or transfer of property knowing it is derived from a criminal offense, for the purpose of concealing or disguising its illicit origin or of assisting any person who is involved in the commission of the crime to evade the legal consequences of his actions,
  2. The concealment or disguising of the true nature, source, location, disposition, movement, rights with respects to, or ownership of property knowing that it is derived from a criminal offense,
  3. The acquisition, possession, or use of property, knowing at the time of receipt that it was derived from a criminal offense or from participation in a crime.



As you heard, in each part of the definition, the word “Knowing” is used. While that is a critical element, there is the concept of…

“Willful Blindness”

You folks probably know this term even better than I do, but my understanding is basically that if the facts or circumstances surrounding a transaction would lead a reasonable person to believe, or strongly suspect, that the funds could be illicit, then you KNEW that they were illegal

This does enable law enforcement to assert – and often prevail – that one had the equivalent of knowledge and prevents someone from simply saying “I didn’t know” and getting away with it.

To me, Sgt Schultz from Hogan’s Heroes with his “I know nnnnu-ting” is the poster child for Willful Blindness

The three stages of money laundering:

Placement – this is the introduction of the illicit funds into the financial system. Since we tend to think of these funds in the form of cash, structuring is often employed here.

Layering – one or more steps of moving the funds around, from account to account, from institution to institution, in and out of trusts, shell companies, anything to confuse where the money actually originated and who actually owns it – a financial shell game

Integration – this is the final stage, where the funds appear to be legitimate and are used to purchase something the criminal can use with little fear of reproach (homes, art, cars, jewelry, influence, etc)

One of the most common methods of money laundering is structuring

Basically, it is the act of breaking down a potential deposit into smaller ones – or otherwise altering it – to avoid currency reporting requirements.

In the United States we know the main threshold is $10,000.

OVER that amount – in currency – either in, out or exchanged and a Currency Transaction Report (CTR for short) needs to be filed.

In the definition of money laundering, you kept hearing that the funds needed to be of illicit origin. But structuring is different. There is no need for a predicate crime.

Structuring IS the crime.

It is often the easiest charge to prosecute and it is often the charge “copped to” in a plea deal.

For an investigator, the easiest Suspicious Activity decision comes when he gets a report from a teller that a customer presented more than $10,000 in cash, but when told a CTR needed to be filed, he took some or all of the cash back to be below the threshold – thereby thinking he just kept the government from knowing about his business.

What he failed to realize is that he has just blatantly committed a crime and a Suspicious Activity Report WILL BE filed.

I’ll come back to that in a few minutes.

Some people interchange the terms structuring and smurfing, but that is not quite accurate.

You can structure without the use of smurfs, but smurfs, by their nature, perform the actual structured transactions.

Which brings us to smurfing

The launderer may employ a number of smurfs – usually unwitting people – to make smaller deposits into a number of accounts, with each one staying under the reporting threshold.

They can also perform other tasks, such as making withdrawals or purchasing various financial instruments (also staying under reporting thresholds), but depositing is what most people associate them with.

The name does come from the mindless, little blue creatures from Saturday morning cartoons.

While not true, AML lore is that the agent observed a bunch of old, blue-haired ladies scurrying around making all of the deposits and that’s what made him think of the Smurfs.

Another tool in the launderer’s arsenal is refining

Often leading up to bulk cash smuggling, it is the exchanging of smaller denomination bills for larger ones – in the US, into $100 bills.

With the Twenty being the most common bill used on the streets for drug deals, the launderer effectively reduces the volume of currency to transport if he can have those changed into Hundreds.

For those who wonder how big a problem this can be in the drug trade this a picture, taken in 2007 after a raid outside Mexico City.

This is $207 million dollars. Over $205 million of that was in US Benjamins.

(It was not found this way – it was packed in boxes, cabinets, in the walls, etc.)

As impressive as this picture is, it is only one EIGHTY-eth of the amount of money estimated to have been laundered in Mexico last year alone

That’s right, you would need EIGHTY (that’s eight – zero) piles like this to equal the $16 BILLION laundered in Mexico last year.

I should also mention micro-structuring. I believe it was first observed in a terrorist financing case.

With micro-structuring, the transactions are broken down into such small amounts (sometimes in the hundreds of dollars), so as to ensure that no monitoring platform will pick up these transactions.

Now let me discuss a few of the forms that are the lifeblood of a Financial Intelligence Unit, starting with The Currency Transaction Report (often simply referred to as the CTR)

It originated in 1970 with the Bank Secrecy Act that was in response to the exploding drug trade.

Prior to that, it was not uncommon for drug traffickers or their launderers to pull up behind banks, pop the trunk, and carry in six or eight large duffel bags stuffed with cash.

Since the BSA went into effect, all CASH transactions – in or out – in excess of $10,000 in a single business day requires that a CTR be filed with FinCEN – the Financial Crimes Enforcement Network (though the IRS Computing Center in Detroit physically processes them.)

This also should apply to cash exchanges as well

The CTR basically consists of the name, address, ID type and number, the date and amount of the transaction.

The personal data should be obtained for both the accountholder and the conductor – if they are different.

In 2007, there were more than 15.2 million CTRs filed by Financial Institutions.

These get processed into a massive database, which can be data-mined, but nobody just sits and reads them. So now comes The $10,000 Question.

By a show of hands, how many of you have, at one time or another, advised someone (client or not) to keep transactions below $10,000?

Yes, before I knew better I sometimes would.

Well, we all have then advised someone to actually commit a crime. So, you may ask WHY? What’s the big deal? Let’s assume your client sold his car and now has $15,000 in cash to deposit.

Instead of putting it all in the bank at once and providing the required information, he elects to split it in half, depositing $7,500 on Friday and the rest the next week.

It is probable that many monitoring platforms may pick up these transactions and the client may now become the subject of a Suspicious Activity Report (SAR, for short)

This form looks for a bit more personal info: name, address, Social Security Number, other ID, phone numbers, and occupation for each person considered a suspect.

It also wants the account numbers, date range and amount of suspicious activity. (A copy of the blank form is in your handouts.)

In addition to that, there is a narrative, often several pages in length. This will explain the whole relationship the financial institution has with the customer.

It will list all of their accounts, loans, even safe deposit boxes and prepaid gift cards.

It will name all associated signers and when the accounts were opened or closed.

It will explain when the transactions took place and why it or they are viewed as suspicious.

The report does not have to PROVE anything, only that a reasonable person would find the activity suspicious.

In 2007, there were nearly 650,000 SARs filed by financial institutions.

From conversations I have had with various law enforcement people around the country, I can tell you that virtually EVERY ONE OF THESE IS READ by a law enforcement professional.

So which would you prefer to have filed on a client – the CTR (a filled out sample is in your handouts) – or a SAR like this?

Now we come to a form that you need to be aware of and one you may need to fill out in your practice

IRS Form 8300 – I believe I have provided both a blank form with the instructions, as well as a sample filled out form – they should be in your notebooks.

This is the form you need to fill out if you receive over $10,000 in cash (or cash equivalents) in your practice for a single transaction, even if the payments take place in up to a twelve-month period.

The instructions are fairly self- explanatory. I will caution you, I am aware of businessmen who were charged and convicted – and served several YEARS – for purposely failing to file this form.

Even if you were aware of the form, you may not have noticed the wrinkle of CASH EQUIVALENTS.

You’ll see Box 32 is devoted to the breakdown of the cash and on page 4 under definitions, the second part of cash states: A cashier’s check, money order, bank draft or traveler’s check having a face amount of $10,000 or less received in a designated reporting transaction (this is where the 12 month window comes into play) or any transaction in which you know they are attempting to avoid the reporting of the transaction

A personal check from the individual’s own account is NOT reportable.

Another method is via Casinos and Gaming.

In casinos, launderers have been known to purchase large quantities of chips with cash, gamble very little, then “cash out” via a casino check, a wire transfer, or the money being put on account, especially if it is a major chain and those funds can be accessed at an foreign branch of the casino.

Setting up private table poker games has also been used – in this a drug dealer may have some people that owe him money come play. Regardless of the hands, the others will play to lose. At the end of the night, the drug dealer goes home with all the money, but it has the appearance of coming from gambling, not drug sales.

Sponsoring professional poker players – dirty money goes in, but ‘legitimate’ money comes out as the launderer collects his share of the poker player’s winnings. If the player is really good, the launderer even makes money while cleaning it.

The launderer may even buy winning lottery tickets, buying them for a bit under the winning value (since the seller will not be dealing with the taxes). The launderer redeems them and the taxes incurred are simply the price of making the money appear legitimate – as he now has a check in hand from the state lottery commission noted as winnings.

Then we have what are referred to as MSBs or Money Services Businesses, which are primarily:

Check cashers

Issuers, sellers and redeemers of Money Orders and Traveler’s checks

Money exchangers

Money remitters

As I have noted, some of these have very large agent networks, such as Western Union, Moneygram, or Sigue

You can see from the services alone how the MSB can be a great tool for the launderer: money transmission, exchanging currencies and denominations, check cashing, using money orders, travelers checks – and often with less scrutiny than a regular financial institution.

One of the major tools a launderer employs in getting funds across international borders is disguising the transaction as foreign trade – and within that, utilizing Trade Price Manipulation

It is the most efficient and economical means to move VALUE internationally.

Sometimes, the launderers are bold enough to wire money between front or shell companies in the guise of international trade when no commerce actually took place.

But when they do use the movement of goods to disguise the true intent of their actions, they manipulate the price of the goods.

Only the import / export documentation filed with Customs can expose the launderer to any additional criminal charges (and it is only the single specific Customs form that can bring these charges on)

Any other paperwork is part of the business deal and the only venue to settle those disputes is in the civil system

But since the parties on each end of the deal are complicit, there will never be a civil suit. One of these angles is Selling Something for Nothing

Let’s say the North American arm of a cartel need to get $1 million down into South America.

One of their front or shell companies buys 200 Rolex watches for $5,000 each (total: $1 million).

They then sell the watches to a South American front company for $5 each (total $1,000).

The South American firm then sells the watches locally for $5,000 each and – voila, $1 million dollars is now in South America – and in the local currency to boot.

So effectively, they have moved $1 million from the US to South America AND converted the currency – at a nominal price of $1,000 (extremely cheap in their world).

On the flip side, they can sell Nothing for Something. Say the cartel wants to get one million dollars up to the States

The US company buys 4,000 cheap gold pens for twenty-five cents each.

They then sell them to the South American company for two hundred fifty dollars each (one million total).

Frankly, nobody cares what happens to the pens.

But effectively, the cartel has moved one million dollars to the US and disguised it as international trade. With both parties complicit in the scheme, no one will be the wiser.

Now, another money transfer method that can be used by the money launderer is the Hawala and other Informal Value Transfer Systems (IVTS can also be interchanged with ARS – Alternative Remittance System).

First let me say that, in general, there is nothing wrong with these systems.

They are ethnic in nature and have been around since long before the banking system was even conceived of.

These systems are reliant upon the trust and goodwill among trading partners.

I have heard the roots go back at least to the silk and spice routes and the days of Marco Polo.

Hawalas, in particular, originated in the Middle East and Southwestern Asia.

In other parts of the world, such systems may be called: Chiti Banking, Hundi, Chop Shop Banking, or Poey Kuan

As I said, most of the use of these systems is completely legitimate and fills an important need.

Some of the advantages of these systems have over traditional banks is that they can transfer value much quicker and at less cost than banks, there are basically no records kept (something the launderer loves), and they often stretch out into regions that normal banks dare not go.

As I said, this is moving value through trading partners. So, let me give you an example of how such a transfer may take place:

For example, a Somali taxi driver in Minneapolis needs to send $200 to his mother who is back in Somalia (a country in which banks don’t exist). Well, he goes to a local hawaladar – they are well-known in their communities. He gives the hawaladar the $200 and tells him where the money needs to go. The hawaladar, in turn, gives him a code and sends him on his way. At the one end, that’s all that takes. The taxi driver KNOWS it will get there. This system is built on trust.

Should any hawaladar try to break this trust, he and his whole family would likely be killed.

Anyway, the hawaladar calls or faxes a trading partner in the region and gives them the code and amount. The taxi driver also calls his mother and tells her the code. Later, she will go to what maybe a remote trading post and give them the code.

As this post was already in possession of it, they know to provide this woman with about two hundred dollars.

Now many will say she just gets the cash, but to me, more likely, she will get some supplies and groceries, may take some currency (but who would want much cash in such a lawless region), or she may even leave some value ‘on account’ with the trading post to be used at a later time.

As far as the trading partners settling up, they will do so in some form at a later time. There may be some American goods shipped to the Somali trading post, or the hawaladar may pay a bill of the post, or a wire transfer may even be made – yes, THEY do sometimes use the formal banking system.

I hope the example gives you a better understanding of the hawala-type systems. You can obviously see how a money launderer would find tapping into such a system to be beneficial – and yet, our biggest fear with these is their use in terrorist financing. Shortly after 9/11, the largest hawala in Somalia – AL BARAKAT – was effectively shut down by the US and its allies.

Allegations were that AL QAEDA had corrupted it and was skimming monies moving through it (some hawalas have grown to be large companies with numerous branches or outposts)

Anyway, moving on another money laundering tool is the use of Jewelry and Precious Metals.

These are attractive for several obvious reasons:

They tend to be of very high value, especially in relation to size and weight. You can hold a million dollars worth of diamonds in your hand – you can’t do that with currency. There is normally no ownership paper trail. And it is much easier to move a few stones across a border than to move the equivalent in currency.

Art and Antiques are also being used in laundering. The valuation is often very subjective. It can be employed similar to trade price manipulation in that you can sell an original as a copy or you can sell pure rubbish as some form of high-end art.

Ownership records are sometimes quite loose. It can be fairly easy to move across borders and at the integration stage, a criminal can hide very high value items right in plain sight.

Other High End Goods can be used: Cars, Boats, Airplanes. Many of these are then actually used in the business, transporting drugs and cash.

Down-Trading. In this method, a drug dealer may exchange his high-end car for multiple low-end vehicles and take the balance in a dealer’s check. Some have even conspired with the dealer and taken the proceeds in a series of checks under $10,000 (a few of those knuckleheads are now doing time for being so obvious).

The Black Market Peso Exchange

Still a cartel favorite. It is nearly impossible for an individual financial institution to detect if BMPE funds are moving through their accounts.

The key to it is the Corrupt Money Dealer!

Some of the major corporations that have been caught up in this include: General Electric, Bell Helicopter and Phillip Morris.

Here is roughly how it works:

A cartel has a lot of cash in the US, these funds get deposited into a money trader’s account. You also have legitimate businesses in South America that want to do business with US companies and have orders with them.

Rather than make the purchase through the banks there, which will entail high currency exchange rates and governmental taxes and tariffs many of these South American companies will go to a money trader, who will offer better exchange rates and not report anything to the government – thereby sidestepping some of those costs.

Now the money trader, who is a lackey of the cartel, will take the local funds from the South American companies, but rather than exchange them and forward them to the American companies in payment of the South American orders, the trader will turn those funds over to the cartel and take funds from the US account (cartel drug money) and wire those funds to satisfy the purchase orders.

Effectively, the money trader has gotten the value to the cartel, in the local currency, and no funds actually ever crossed a border.

Now when discovered by the government, some of the companies I named before have had to forfeit those funds since they were illicit – and in these cases, knowledge does not appear to be much of a deciding factor.

Cuckoo Smurfing.

This functions in a manner similar to the Black Market Peso Exchange in that the key is again the corrupter in the middle of it all and the recipients have no idea the cash deposited to their accounts was illicit.

This method tends to be found within the Alternative Remittance or Informal Value Transfer Systems.

Real estate provides a unique opportunity in that it can be used equally amongst all three stages.

In the placement stage, real estate can be bought with cash. In the current blow-out market, one can buy entire homes and not have to worry about currency reporting.

One can then hire numerous contractors and laborers and sink $50k or more into the property, not only paying for it all in cash, but probably getting discounted pricing from contractors seeking to avoid their own taxes.

In the layering stage, the property can be bought and sold numerous times using legal entities, front people, nominees or straw buyers (often, the inflating of appraisals takes place here, adding an element of fraud to the equation).

The efforts in the layering stage go a long way in disguising the true ownership and blurring the paper trail

In the integration stage, the criminal now utilizes the physical property – if it’s a high end house, he may live in it; if it’s a lesser house, he may use it as rental property, generating a legitimate income stream from it; or he can sell it, with the funds received at closing appearing to be completely clean.

Another sector often used in money laundering is Insurance. Most significant laundering and terrorist financing risks in the insurance industry are found in the life insurance and annuities products.

These provide the launderer the opportunity to make a large upfront lump sum purchase of the product in exchange for periodic payments from an insurance company.

A quicker turn occurs when the launderer cancels the policy during the “cooling off” period or by other early redemptions. What better way to disguise the proceeds of criminal activity that to have them transformed into insurance company payments?

Another important tool in the launderer’s arsenal is the Securities sector.

Since most firms do not accept cash. It is predominately used in the layering and integration stages.

Some jurisdictions still allow the use of bearer shares, so there is no trail of ownership.

Among the attractive features of the Securities sector are: its international nature, its fast paced transactions, a competitive environment that can lead to a disregarding of due diligence procedures, and the common practice of maintaining securities accounts as nominees.

In addition, the funds can be parlayed by good investing, or included in “pump-and-dump” schemes.

Now the last issue I want to touch on is “Money Mules.”

Currently, these are the hottest fraud and laundering schemes floating about.

People are recruited using “work-at-home” ads or e-mails (who here doesn’t get 2-300 of these every year???).

Once, someone signs on, they will receive a check (maybe more), or a deposit will appear in their account.

They get to keep a 10% ‘commission’ – while forwarding the balance off overseas using a money transmitter like Western Union, Moneygram, or Sigue

Then reality sets in. The checks were likely counterfeit or stolen – the deposit likely originated from some fraudulent activity.

And guess who is stuck holding the bag? That’s right. Their bank is now going to charge that item back against THEIR account, so they not only have lost their great 10% commission (“Which I got for such really little effort“), but they are now responsible for the funds they sent overseas.

So where do they turn? The money they sent is long, long gone and the entity they sent it to probably never existed, so they are STUCK.

And law enforcement is not going to help, if anything, since they were an active, though ignorant, participant in the movement (laundering) of illicit funds, they can be charged with money laundering. Remember back where we started?

“Money laundering consists of the conversion or TRANSFER of property …or of ASSISTING any person who is involved in the commission of the crime…”

And then don’t forget our friend “Willful Blindness” – all they saw was the 10% commission. They turned a blind eye to any risks that a reasonable, or less desperate, person would have understood.

Thank you for your time. Any questions?