Let's Discuss Money Laundering

Email #2

LET'S DISCUSS MONEY LAUNDERING

To really grasp the Bank Secrecy Act and its related policy components and activities, you need to understand money laundering. It's the basis of what we are trying to help law enforcement uncover. You'll often hear the Bank Secrecy Act referred to as an "anti-money laundering" or AML program.

Money earned from illicit activities flows through financial institutions, including credit unions. Whether it is laundering funds for terrorism, drug trade, arms trafficking, income tax evasion, or other crimes, recognizing factors that may indicate the need to take a closer look at an account or investigate a member is critical.

There are regularly news stories about crimes and even well-known individuals who are under investigation for possible crimes. Pay attention because the initial charges are often money laundering or tax evasion. Whether in politics, business finances, or drug-related crimes, there is always a monetary component. Sometimes credit unions even know they assisted with uncovering part of the criminal case with their BSA reporting to law enforcement and federal agencies.

The three steps of money laundering are discussed below. Keep in mind that any or all of the steps in the process may occur in accounts at your credit union, and they may be nearly impossible to detect. Many credit unions use software to assist with picking up on patterns and activities that may point to needing to take a closer look at a member or account. You can see a list of red flags of money laundering activity in Appendix F of the FFIEC BSA examination manual to get a better understanding of what signs you might look for in your department.

If you are unsure if your credit union is using an AML software, it is a good question for your BSA compliance officer. Verafin is a common one that many mid-sized and larger credit unions currently use in Montana, but there are others on the market too.

STAGES OF MONEY LAUNDERING

***

Placement

After the collection of funds through an illegal or illicit activity, a money launderer may look to place the funds into the financial system. Cash is anonymous, but can be difficult to handle, hard to hide, and it often attracts attention. There are also required reports for cash over certain amounts. Cash might be split into multiple deposits across several financial institutions to avoid detection. Funds also come into your credit union through the ACH system, payment apps, wire transfers, or even check deposits.

Layering

One of the primary goals of money laundering is to move the funds as far from the point of origin as quickly as possible to hide the true nature. Through layering, a launderer might combine funds from a legal business or activity with their illegally gained monies to further mask the origin. The illegal money is then disassociated from the source by creating a complex web of financial transactions aimed at concealing the sources and ownership of funds while also helping to confuse the audit trail and account history.

Integration

When funds are layered sufficiently, the laundering process can be completed through integration. This simply means the money is used or invested in a legitimate purpose, or placed into another financial institution to start the cycle again. Moving funds may be accomplished by sending a wire transfer, purchasing property or a luxury asset, or by making an investment, including cryptocurrency. It might also occur with a cashier's check withdrawal, or through electronic means such as a wire transfer or payment app transaction.

Ripped from the Headlines

It can help to connect these concepts to real examples that have been covered in the news. Here are a couple examples from the news that involved money laundering and fraud.

Just last week, Changpeng Zhao, the founder and CEO of the world's largest cryptocurrency exchange, pled guilty and agreed to pay $4 billion(yes, with a 'b'!) related "to his failure to prevent money laundering on the platform." The cryptocurrency industry continues to be mostly unregulated, and many suspect it is used to facilitate criminal activity.

In June, Walmart was accused of allowing their money transfer service to be used by scammers. The FTC claimed that a lack of employee training and lax procedures allowed fraudsters to rely on the service to aid in losses for sweepstakes scams, advance-fee loan scams, IRS impersonation schemes, grandparent scams, and others. While not a direct BSA violation, the example shows the importance of vigilance and adherence to policies.

A case of embezzlement at a well-known Montana company resulted in a loss of over $700,000 when a salesman created bogus purchase orders and invoices, stole inventory, and directed payments to fictitious companies and unauthorized vendors. As questions began to arise on the activities, the man sent emails that further prolonged the fraud. He eventually pled guilty to wire fraud and money laundering-concealment and now faces a possible 20 years in prison.

The next time you read about a crime in the news, ask yourself -- where is the money trail? And, when you read local stories of this nature, ask yourself how that might have looked or been detected if the transactions had occurred at your credit union.

Lexis Nexis provides some examples of money laundering schemes in this article. While not all would involve your credit union, it can still give you an idea of the complexity of some of the movement of funds.

The popular show Breaking Bad has a great scene that explains money laundering, which is often referenced in BSA training. In it, Saul explains to Jesse how he could launder his drug proceeds through a legitimate business.

Next Topic

THE RISK ASSESSMENT

Access the 2023 BSA email series archive on our Compliance Training Tools page after each email sends. You'll also find other BSA and compliance training webinars and materials.

Donya Parrish, VP Risk Management | donya@mcun.coop | 406-459-3497