December 2017
A Message from Ted Gavin
We at Gavin/Solmonese hope you all had an enjoyable Thanksgiving holiday.
 
As we return to work from the joy and stresses alike of the holiday, and as many of us travel to meet for the American Bankruptcy Institute Winter Leadership Conference, what better time to return to  Anne Eberhardt's three-part series on people doing bad things with money. In this installment, Anne looks at the history of money laundering post 9/11. As the head of the firm's forensic accounting practice, Anne's expertise includes testing compliance and strengthening anti-corruption capacity in some of the world's most difficult environments. I'm sure you will find this installment both interesting and entertaining.

And if you're in LaQuinta for the ABI conference, be sure to say hi to me, Amy, Joe, Stan, and Jeremy
The History and Enforcement of Anti-money Laundering Laws in the U.S.
by Anne Eberhardt, CFE, CAMS, Senior Director at Gavin/Solmonese
Part 2

After the September 11 terror attacks, in a glorious display of acronym-creation prowess, Congress passed the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act, that is, the USA PATRIOT Act. Almost immediately, the Financial Crimes Enforcement Network, or FinCEN, began expanding the reach of the Bank Secrecy Act and other anti-money laundering, or AML, laws. Before the end of 2001, money services businesses, such as check cashers and currency exchanges, were ordered to begin reporting suspicious activity. Over the next few years, registered broker/dealers, insurance companies, and dealers in precious metals, stones, and jewels were likewise added to the list of financial institutions required to report suspicious activity.
 
In the summer of 2004, the National Commission on Terrorist Attacks Upon the United States, better known as the 9/11 Commission, released its report and two monographs, including the Monograph on Terrorist Financing, which reported that the attacks "...cost al Qaeda somewhere in the range of $400,000-500,000, of which approximately $300,000 passed through the hijackers' bank accounts in the United States." It concluded that "...the money-laundering controls in place at the time were largely focused on drug trafficking and large-scale financial fraud and could not have detected the hijackers' transactions. The controls were never intended to, and could not, detect or disrupt the routine transactions in which the hijackers engaged."
[1]
 
Nonetheless, regulators began punishing financial institutions with record fines for lapses in their AML controls, including assessing a $25 million civil penalty against Riggs Bank for, among other activities, its suspected complicity in transactions that may have provided assistance to the 9/11 attackers. In December of 2005, ABN Amro agreed to pay what was then a record penalty of $80 million for failures of its AML system to identify suspicious transfers, many between Russia and New York, and for allowing transactions that violated U.S. sanctions against Iran and Libya. By way of comparison, only a few years prior to 9/11, FinCEN reported civil penalties totaling just $2.2 million against the twelve casinos in Atlantic City for various BSA reporting failures.
 
The post-9/11 world accompanied a revolution in data storage and analytic capacity, which augmented the ability to identify suspicious activity using sophisticated algorithms. Regulators increased their expectations that financial institutions would know their customers sufficiently well to be able to flag virtually any type of abnormal financial activity.
 
Meanwhile, following the large-scale bank failures and bailouts of the 2008 financial crisis, a number of high profile frauds and Ponzi schemes were exposed, leading many to question how these kinds of systemic risks and colossal financial crimes could have gone undetected in an environment of heightened AML vigilance. Beginning in late 2008 and through the rest of 2009, FinCEN reported nine-figure penalties for AML and sanctions violations, including $536 million against Credit Suisse, $110 million against Wachovia, $298 million against Barclay's, and $500 million against ABN Amro.  And this was only the beginning.

In 2012, FinCEN penalized ING Bank $619 million for illegal transactions with Cuban and Iranian entities, MoneyGram forfeited $100 million for AML and wire fraud violations, Standard Chartered forfeited $227 million for sanctions violations, and HSBC forfeited almost $1.3 billion for AML and sanctions violations. In 2014, JPMorganChase admitted to violating the BSA for failed Madoff oversight and was fined $461 million, while BNP Paribas agreed to pay $8.9 billion - that's right, billion with a "b" - for sanctions violations.
 
As regulators have extracted eye-watering penalties for compliance failures, and financial institutions have devoted increasing portions of their budgets to AML compliance, critics question whether strengthened AML regulations have done what they were intended to do - that is, provide a paper trail to assist with the prosecutions of criminals and terrorists. Banking industry advocates argue that soaring compliance costs have contributed to the consolidation of their industry by driving out small banks that simply cannot afford the costs of AML compliance.
 
Humanitarian aid activists point out that as banks refuse to process transactions in high-risk jurisdictions, customers with legitimate business in those locations are forced out of the established financial system. For example, Somalis who reside in the U.S. experience difficulty sending remittances to their relatives in Somalia because most banks are unwilling to participate in that market for fear they will be sanctioned by U.S. regulators. These customers' remittances are thus forced underground, and the exact opposite of what the AML regulations were intended to do has been accomplished as these transactions - along with those of criminals and terrorists - are conducted beyond the reach of law enforcement.
 
Civil libertarians continue to raise privacy concerns as technology has provided government with theoretical access to every transaction processed through a U.S. financial institution. The American Civil Liberties Union argued in its unsuccessful challenge to the BSA in 1974 that the law was an invasion of its members' right of association. In his dissent, Supreme Court Justice Thurgood Marshall agreed with the ACLU that "[t]he First Amendment gives organizations such as the ACLU the right to maintain in confidence the names of those who belong or contribute to the organization, absent a compelling governmental interest requiring disclosure....The net result of [the requirement that the ACLU's bank must make and keep a record of all the checks the ACLU receives and deposits], obviously, is an easily accessible list of all of the ACLU's contributors. And given the widespread informal access to bank records by Government agencies,...the existence of such a list surely will chill the exercise of First Amendment rights of association on the part of those who wish to have their contributions remain anonymous. [2]
 
Supporters of enhanced AML recordkeeping point out that the regulations have provided significant assistance to authorities involved in active terrorist cases by providing real-time financial information that has helped law enforcement capture accomplices within hours of a terrorist attack, thereby possibly preventing additional attacks.
 
These issues raise critical questions regarding the current state of AML enforcement, as criminals, corrupt politicians, and terrorists have grown ever more sophisticated at laundering money outside the regulated financial environment. High profile data breaches over the past couple of years have revealed a sophisticated global infrastructure seemingly devoted to concealing the identities and preserving the wealth of a global political and economic elite. In response to revelations that criminals and corrupt politicians have laundered their proceeds by creating shell companies to purchase luxury real estate in all-cash transactions, FinCEN recently expanded its AML reporting rules to require title insurance companies operating in several high-end real estate markets to report information about the beneficial owners in transactions made without external financing that exceed certain threshold amounts.
 
Expect continued - and heated - debate between those who wish for greater transparency and those who wish for decreased regulation.


TO BE CONTINUED...
[1]  The National Commission on Terrorist Attacks Upon the United States, Monograph on Terrorist Financing, Staff Report to the Commission, pg. 3, https://govinfo.library.unt.edu/911/staff_statements/911_TerrFin_Monograph.pdf
[2]  California Bankers Assn. v. Shultz , 94 S. Ct. 1494 (1974), Justice Marshall dissenting, pg. 416 U.S. 98, https://supreme.justia.com/cases/federal/us/416/21/case.html#93



Based in New York City, Anne Eberhardt is responsible for furthering the firm's forensic investigation practice. As an expert witness and forensic accountant, Anne is experienced in conducting forensic analyses, building and testing financial models, resolving economic disputes, and leading teams in large-scale investigations.
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