As many times as you’ve seen the concept of money laundering pop up in movies and TV, do you have any idea of what it actually is and how it works?
Essentially, it’s a process used by criminals to try to hide the fact that their income comes from illegal sources. This means that the intention behind money laundering is making money (illegally gained cash or “dirty money”) appear clean (“laundering”).
By having their money go through a series of intricate transactions and transfers, or by having it move through several different businesses, its origin becomes extremely hard to detect and ultimately ends up looking like normal (and legal) profits from a business.
Let’s take a closer look at what money laundering is, what laws are in place to fight it, and how you, as an innocent citizen, can avoid getting caught up in any suspicious behavior.
How Does Money Laundering Work?
Whenever someone is managing large quantities of money that’s been obtained illegally, there’s a fair amount of risk involved. Criminal organization will likely launder money in these situations by depositing their cash into legitimate financial institutions.
When a criminal organization wants to remain discreet, they’re not likely to deposit huge amounts of money into a bank all in one go. A money launderer will typically deposit their money in small amounts over long periods of time in order to not draw suspicion. They may also try to take their illegally obtained cash to a country or region where there isn’t strict enforcement of money laundering laws.
Money laundering generally includes three specific steps:
- Placement. This involves integrating illegally obtained money into some kind of legitimate financial infrastructure.
- Layering. The money is disguised through various bookkeeping tricks and transactions.
- Integration. At this point, the money can now be taken out of the financial institution and appears to be legally obtained.
While a lot of criminals will follow these steps in a broad sense, there are all sorts of ways to launder money, with some being fairly simple and straightforward, and some being intricate and complicated. One common method is for a criminal organization to purchase a legitimate business that primarily deals in cash to funnel their dirty money through. For example, they may purchase a restaurant and fudge their daily cash receipts to pump illegally obtained cash into the bank accounts of the restaurant. From there, the money can be withdrawn and appear to be legitimate. This type of business is what’s commonly referred to as a “front”.
What are BSA/AML Laws?
Fortunately, laws have been put into place in order to combat the dangerous nature of money laundering. One of the most prominent pieces of legislation – the Currency and Foreign Transactions Reporting Act (which is commonly referred to as the Bank Secrecy Act (“BSA”) – requires any financial institutions that operate in the U.S. to aid the government in their efforts to uncover and stop the act of money laundering. How does this work? Well, one thing that’s required of financial institutions is to keep records of any purchases made in cash that exceed $10,000 (aggregated over the course of day) and to send reports of any behavior that may seem suspicious. Specifically, they must report activity that could signal the presence of money laundering, tax evasion, or any other types of criminal endeavors. This legislation is also sometimes called the anti-money laundering (“AML”) law, or sometimes the BSA/AML. Financial institutions are also allowed to share information with other institutions in order to help with the reporting and identification of potential money laundering activity.
Signs of Suspicious Behavior
From the perspective of a financial institution, there are a number of different red flags for them to look out for that could point them to the presence of money laundering. This can include things like:
- Any sort of secretive behavior surrounding money
- Large cash transactions
- Owning businesses that don’t have a clear purpose
- Conducting transactions that seem excessively complicated
- Making a long string of transactions that fall just below the reporting threshold
- A large number of money order transactions, particularly when you don’t have an extensive history of these
What are the Consequences of Displaying Suspicious Behavior?
Like we’ve mentioned, it’s the responsibility of every organization in the financial sector to play their part in helping to identify and report any behavior that may seem suspicious. This helps to contribute to the overall efforts to stem illegal activities like money laundering or the financing of terrorist activities.
So, how does an organization share this information with the necessary parties? In most cases, it’s through the submission of a Suspicious Activity Report (“SAR”). This is an official document that’s submitted by financial institutions to inform the relevant authorities of any potential nefarious activities that are detected. They can be submitted when a financial institution notices any unusual activity, usually when they suspect either an individual or business may be involved in fraud, terrorist financing, or money laundering.
In many instances, these financial institutions will need to submit SARs in order to keep up with compliance requirements. In fact, it’s a mandatory action that needs to be taken under the Financial Action Task Force’s International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation.
A SAR filing needs to be kept for five years from the date that it’s filed. If an institution doesn’t keep up with these regulations, they may face criminal and civil penalties, like regulatory restrictions, large fines, and potential imprisonment.
What to Look Out for
As a customer or client of a financial institution, you obviously wouldn’t want your name or file to be associated with money laundering in any way. So, there may be a few things you can do to avoid anything that could be deemed to be suspicious behavior.
For starters, you might want to try to avoid cash transactions, money orders, or any instruments that are difficult to trace. Try to stick with things that show a straightforward paper trail so it’s clear where your money is coming from. Also, it may be smart to take a proactive approach and inform your bank in advance of any upcoming activity that may seem unusual. Overall, make sure to stay informed about what potential suspicious activity looks like and do your best to avoid it!