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Appendix A: Money Laundering, Terrorist Financing, Other Financial Crimes, and the Bank Secrecy Act
Appendix A: Money Laundering, Terrorist Financing, Other Financial Crimes, and the Bank Secrecy Act

Bank Secrecy Act requirements serve to deter financial crimes, to detect them when they occur, and to support attempts to bring the perpetrators to justice. This section provides an overview of major financial crimes and describes ways that Bank Secrecy Act recordkeeping and reporting requirements are helping to detect these activities and the individuals behind them.

Money Laundering
Money laundering is the disguising of funds derived from illicit activity so that they may be used without detection of the illegal activity that produced them. Money laundering may be attempted by individuals, small and large businesses, corrupt officials, and individuals involved in organized crime, such as drug dealers or Mafia members.

Money laundering poses international and national security threats. It can fuel organized crime, corrupt financial systems, undermine free enterprise by crowding out the private sector, and threaten financial stability.

Money laundering involves three stages: placement, layering, and integration.

Placement involves physically placing illegally obtained money into the financial system or the retail economy. “Dirty” money is most vulnerable to detection and seizure during placement.

Layering means separating the illegally obtained money from its source through a series of financial transactions that make it difficult to trace the origin of the funds.

Integration means converting the illicit funds into a seemingly legitimate form. Integration may include the purchase of businesses, automobiles, real estate, and other assets.

Some money laundering placement methods specifically attempt to evade Bank Secrecy Act requirements. These include:

Structuring-- An individual makes two or more cash transactions below the dollar thresholds for Bank Secrecy Act reporting and record keeping thresholds in order to avoid detection.

Smurfing-- Two or more individuals deposit cash or buy bank drafts in amounts under Bank Secrecy Act reporting requirements.

During the layering phase of money laundering, criminals often take advantage of legitimate financial mechanisms in attempts to hide the source of their funds. A few of the many mechanisms that may be misused during layering are currency exchanges, wire transmitting services, prepaid cards that offer global access to cash via automated teller machines and goods at point of sale, internet-based e-value systems, casino services, and domestic shell corporations lacking real assets and business activity that are set up to hold and move illicit funds.

Money launderers may also attempt to mix "dirty" funds with clean. For example, criminals may take over or invest in businesses that generate large cash proceeds and mix illicit funds with those of the legitimate business. In addition, money launderers may take part in criminal activity specifically designed to hide the proceeds of other criminal acts. For instance, they may set up fraudulent invoicing schemes that over- or undervalue goods being traded.
Suspicious Activity Report leads to Investigation, Sentencing of Marijuana Grower
A defendant was sentenced to prison, followed by several years' probation, after pleading guilty to narcotics trafficking charges and structuring financial transactions to evade Bank Secrecy Act currency reporting requirements in connection with a marijuana growing operation. The defendant incorporated a business falsely described in corporate documents as a real property development company. The defendant used the business to purchase acreage, set up the marijuana growing operation, and hired people to run it.

According to the plea agreement, the defendant admitted to making over 100 cash deposits to the corporate account over several years. The cash deposits totaled more than $1 million, but each deposit was less than $10,000. This investigation was initiated based on the filing of a Suspicious Activity Report. (Source: Internal Revenue Service-Criminal Investigation)
The SAR Activity Review-- Trends, Tips & Issues
Issue 8, April 2005

Terrorist Financing
Terrorists require funds to support their deadly activities and must move those funds to individuals or cells in particular target areas. The amount needed for a particular attack may be relatively small, but larger amounts are needed to recruit, transport, train, house, pay, and equip terrorist agents.

Some terrorist funding comes from illicit activity, including traditional crimes such as kidnapping for ransom, narcotics trafficking, extortion, credit card fraud, counterfeiting, and smuggling. Other funds come from the following sources:

Supporters - A significant portion of terrorists’ funding comes from supporters. Willing donors include wealthy individuals and their families, supportive social and religious organizations, and rogue nations.

Corruption of charities - Terrorist groups have created charitable fronts and have sought out corrupt or vulnerable non-profits to raise and move money, to transport operatives and materiel, to recruit and indoctrinate new members, and to support family members of operatives or deceased suicide bombers.

Terrorist financiers may use money laundering methods to hide the source, purpose, and movement of their assets. For example, they may use commodities, false invoicing, and other trade manipulation to move funds.

Criminal organizations and terrorists sometimes employ the services of the same professionals, including personal services providers such as accountants and lawyers, to help disguise their funds.

Terrorist operatives may attempt to smuggle cash - or precious metals, stones, or jewels - across borders or may use couriers to attempt to transport these items. Likewise, terrorists may rely on currency exchangers to transfer funds, especially in countries where cash is typically used to settle accounts.

Terrorists have used informal value transfer systems, such as those known as “hawala” or "hundi." These systems use trusted networks of people who move funds and settle accounts with little or no documentation. Such systems are prevalent throughout Asia and the Middle East as well as within expatriate communities in other regions. In the United States, money transmitters involved in informal value transfer systems are required, under the Bank Secrecy Act, to register as money services businesses, develop anti-money laundering programs, and report suspicious activity.

Terrorists also use traditional financial institutions and mechanisms to move their funds. The 9/11 Commission found that Al Qaeda funded the hijackers in the United States through wire transfers from overseas, by physically moving cash and traveler's checks into the country, and by accessing funds held in foreign accounts through debit or credit cards. Suspicious Activity Reports filed under the Bank Secrecy Act are a valuable source of information about potential terrorist financing activity.

Suspicious Activity Report Initiates Material Support of Terrorism Investigation
The Federal Bureau of Investigation initiated a Material Support of Terrorism investigation based on a Suspicious Activity Report filed by a bank detailing a series of overseas financial transactions totaling millions of dollars. Two of the participants in these transactions were a United States-based company and a money services business based in the Middle East. The bank was concerned by the unorthodox manner in which the transactions were executed and the disparate business operations of the participants. All of the money passed through an account held at the United States branch of a foreign bank headquartered in the Middle East.

During a seven-month period, millions of dollars passed through the money services business's bank account, immediately dispersing funds to scores of businesses and individuals around the world. Although the purpose of these payments is still under investigation, some of the recipients are known for, or suspected of, involvement in terrorist activities. (Source: Federal Bureau of Investigation)
The SAR Activity Review-- Trends, Tips & Issues
Issue 8, April 2005

Other Financial Crimes
In addition to money laundering and terrorist financing, Bank Secrecy Act reports provide valuable leads and information for law enforcement and intelligence agencies investigating a wide variety of financial crimes. Examples are tax evasion, many types of fraud, embezzlement, counterfeiting, bribery, insider trading, and identity theft. The Financial Crimes

Enforcement Network provides authorized law enforcement agencies controlled access to reported Bank Secrecy Act data so that investigators of these crimes can "follow the money." We also identify and refer to appropriate authorities potential evidence of financial crimes, provide analytical support for cases with a significant financial component, and assist in managing cases with a large number of subjects and/or large numbers of relevant Bank Secrecy Act reports.

Business owner Sentenced for Tax Evasion
A business owner was sentenced to several years in prison followed by three years supervised release and ordered to pay a fine of nearly $1 million. The defendant was convicted of three counts of tax evasion and one count of structuring a financial transaction to avoid federal currency transaction reporting requirements. According to trial evidence, the defendant reported no taxable income and paid no federal income tax during three years, although the two businesses the defendant owned and operated were profitable and the defendant was earning a substantial taxable income from their operations.

The defendant, an accountant by training, engaged in a complicated tax evasion scheme which involved diverting hundreds of thousands of dollars from the businesses into personal investment accounts held in the name of the defendant's spouse. The defendant created a phony shareholder loan account to make it appear that the corporations that owned the businesses owed the defendant money and then took false "bad debt" deductions on the defendant's own tax returns to offset the income earned personal investment accounts belonging to the defendant and the defendant's spouse. This investigation was initiated based on the filing of a Suspicious Activity Report. (Source: Internal Revenue Service-Criminal Investigation)

The SAR Activity Review - Trends, Tips & Issues
Issue 8, April 2005