Bank Secrecy Act (BSA) Regulations - Money Laundering Schemes

Gregory J. Cook, EA, CPA+ Accredited Tax Advisor Past President Alabama Society of Enrolled Agents Past President Alabama Association of Accountants

Bank of Credit and Commerce International (BCCI)

Established in the 1970s, the Bank of Credit and Commerce International emerged in the 1980s as one of the world’s largest privately owned financial institutions, with operations in over 70 countries. During the years of its operations, BCCI employees were found to have engaged in a number of illicit activities, including money laundering. BCCI was financially distressed in the 1970s because of troubled shipping loans, but through an intricate shell game, it shuttled assets and liabilities among its subsidiaries, giving the appearance of being a well-capitalized financial institution.

Investigations resulted in the 1991 seizure of BCCI’s operations by regulators in seven countries. BCCI points out a number of important issues for financial institutions: financial institutions should be careful about knowing other institutions with which they do business. They should carefully screen potential major owners or shareholders, pay attention to the quality and extent of supervision that foreign institutions receive in their home countries, and be aware that asset forfeiture laws put institutions at risk of having assets, including bank accounts and outstanding instruments and money transfers, frozen or seized.

Operation Green Ice Law enforcement agencies in eight nations cooperated in a sting operation which resulted in the arrest of 167 people and the seizure of $54 million in cash and other assets. Operation Green Ice led to the arrest of several high-ranking financial officers of cocaine cartels, and ultimately their conviction. Accounts at banks around the world were frozen after receiving transfers and cash deposits of laundered funds. In the United States, bank accounts were frozen and seized in San Diego, Los Angeles, Chicago, Houston, Miami and New York. The U.S. banks that received the cash deposits in this case cooperated with agents of the Drug Enforcement Agency and continued to file detailed CTRs, which provided further evidence. Intermediary banks had less access to information and were more at risk of unwittingly being used as part of the money laundering chain. This case points out the need for institutions to be aware of such risks and to protect themselves by noting frequent transfers of substantial sums sent to persons or accounts in drug source countries.

Legislation

Over the years, Congress has passed many laws to combat money laundering. Perhaps the most significant of these are the Bank Secrecy Act of 1970, the Money Laundering Control Act of 1986, the Anti-Drug Abuse Act of 1988, the Annunzio-Wylie Act of 1992, the Money Laundering and Financial Crimes Strategy Act of 1998 and the USA PATRIOT Act of 2001.

The Bank Secrecy Act of 1970 (P.L. 91-508) was designed to:

*Prevent tax evasion and provide tools to fight organized crime.

*Create an investigative “paper trail” for large currency transactions by establishing reporting standards and requirements (e.g. the Currency Transaction Report requirement).

*Verify the identity of customers and keep certain basic records of customer transactions, including cancelled checks and debits, signature cards, and statements of account.

*Impose civil and criminal penalties for noncompliance with its reporting requirements.

*Improve detection and investigation of criminal, tax, and regulatory violations.

The Money Laundering Control Act of 1986 (P.L. 99-570), part of the Anti-Drug Abuse Act of 1986, made money laundering a federal crime. It created three new criminal offenses for money laundering activities by, through, or to a financial institution. These offenses are:

*Knowingly helping launder money derived from criminal activity.

*Knowingly (including being willfully blind) engaging in a transaction of more than $10,000 that involves property or funds derived from criminal activity.

*Structuring transactions to evade BSA reporting requirements.

The Anti-Drug Abuse Act of 1988 (P.L. 100-690) reinforced anti-money laundering efforts in several ways. The Act:

*Significantly increases civil and criminal penalties for money laundering and other BSA violations, including forfeiture of any property, real or personal, involved in a transaction or attempted transaction in violation of laws relating to the filing of Currency Transaction Reports, money laundering or structuring transactions.

*Requires strict identification and recording of cash purchases of certain monetary instruments, including money orders and traveler’s checks between $3,000 and $10,000, inclusive.

*Permits the Department of the Treasury to require certain financial institutions in specific geographic or “target” areas to file additional BSA reports of currency transactions in amounts less than $10,000 by use of “Geographic Targeting Orders.”

*Directs the Department of the Treasury to negotiate bilateral international agreements covering the recording of large U.S. currency transactions and the sharing of such information.

*Increases the criminal sanction for tax evasion when money from criminal activity is involved.

The Annunzio-Wylie Anti-Money Laundering Act of 1992 (P.L. 102-550) strengthened penalties for financial institutions found guilty of money laundering. Annunzio-Wylie required the Secretary of the Treasury to:

*Adopt a rule requiring all financial institutions, both banks and non-banks (including MSBs), to maintain records of domestic and international funds transfers, which can be used in law enforcement investigations.

*Establish a BSA Advisory Group (BSAAG), comprised of representatives from the Department of the Treasury and Department of Justice, Office of National Drug Control Policy and other interested persons and financial institutions, including MSBs. The BSAAG, establish in 1994, meets twice per year and informs representatives of the financial services industry about new regulatory developments and how reported information is used.

Annunzio-Wylie also permitted the Secretary of the Treasury to:

*Require any financial institution, or any financial institution employee, to report suspicious transactions relevant to any possible violation of law or regulation.

*Require any financial institution to adopt an anti- money laundering program.

In addition, Annunzio-Wylie:

*Makes it illegal for a financial institution, or an employee of a financial institution, to disclose to anyone involved in a suspicious transaction when a Suspicious Activity Report (SAR) has been filed.

*Protects any financial institution, and any director, officer, employee, or agent of a financial institution, from civil liability for reporting suspicious activity.

*Makes it a federal crime to operate an illegal money transmitting business (i.e. operating a money transmitting business without a state license in a state where such license is required under state law.)

The Money Laundering Suppression Act (MLSA) of 1994 (P.L. 103-325) specifically addressed the MSBs. The MLSA:

*Requires each MSB to be registered by an owner or controlling person of the MSB.

*Requires every MSB to maintain a list of businesses authorized to act as agents in connection with the financial services offered by the MSB.

*Makes operating an unregistered MSB a federal crime.
*Recommends that states adopt uniform laws applicable to the MSBs.

The Money Laundering and Financial Crimes Strategy Act of 1998 (P.L. 105-310) requires:

*The President, acting through the Secretary of the Treasury and in coordination with the Attorney General, to develop a national strategy for combating money laundering and related financial crimes and to submit such strategy each February 1st to Congress.

*The Secretary of the Treasury, upon consultation with the Attorney General, to designate certain areas-by geographical area, industry, sector or institution-as being vulnerable to money laundering and related financial crimes. Certain areas were subsequently designated as High Intensity Financial Crime Areas (HIFCAs).

The USA PATRIOT Act of 2001 (P.L. 107-56), which is the United and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, requires:

*Establishment of anti-money laundering compliance programs by all financial institutions. At minimum each program must include: policies procedures and controls; designation of a compliance officer; training; and an independent audit function.

*Establishment of a confidential communication system between government and the financial services industry.

*Implementation of customer identification procedures for new accounts.

*Enhanced due diligence for correspondent and private banking accounts maintained for non-U.S. persons.

*Establishment of a highly secure network by FinCEN for electronic filing of BSA reports.