The stakes are high in combating global financial crime. If criminals succeed in hiding ill-gotten gains, they can continue to commit crimes and finance terrorism. Pitted against increasingly sophisticated criminal opponents and facing numerous regulatory compliance burdens, are financial institutions an inevitable underdog? To win, financial institutions need to use all the skills and expertise available to them.
With the right strategy and tools, it is possible for banks, casinos, sportsbooks, and other financial entities to prevail. If anti-money laundering (AML) programs were like American football, organizations tasked with defeating financial crimes would need to devise a well-designed game plan, prepare for a variety of offensive schemes, and field a strong defense. They would also need to put talented players in the right positions and seek expert coaching.
Concealing illegally obtained assets has been practiced for millennia. Modern money laundering, while newer, has existed for at least a century, and nearly every criminal enterprise engages in it. The stages of money laundering—placement, layering, and integration—over time have become increasingly complex as criminals adopt different techniques to avoid detection. Financial regulations also have evolved in an effort to stay ahead of and thwart financial crimes. It’s up to financial institutions to elevate their game, and one of their first tasks is to better understand their opponents.
Sizing Up the Opposing Team
During the early 20th century, Chicago gangster Al Capone and other mob leaders famously used cash-based businesses, including laundromats, to conceal the origins of their criminal proceeds. Meyer Lansky, a New York–based financier for organized crime, was perhaps the first person to exploit gaps in banking regulations and utilize foreign banks to launder hundreds of millions of dollars in illegal income.
Since the Prohibition era, criminals have added some new tricks to the money-laundering playbook, including:
- Sophistication. Complexity is valuable to financial criminals because the more convoluted the money trail, the more difficult it is for banks and investigators to follow the money back to its original source. In a recent case, a large and sophisticated international money laundering scheme involved a government investment fund. In 2017, investigators found that the multibillion-dollar embezzlement and money laundering case involved a complex scheme of transactions and diversions of funds to personal accounts, which were used to make lavish purchases of real estate, art and a $250 million yacht. At least 10 countries are conducting investigations relating to this case.
- Teamwork. As in football, where an explosive scoring play is seldom made by an athlete on his own, a large financial crime is rarely committed by a single individual. Financial crime is generally a team sport. Another recent case of international money laundering involved complicity by individuals in at least seven countries, including bank employees. Persuading accomplices has a price; participants in such schemes usually receive a portion of the proceeds they launder.
- Shell companies. A shell company is a corporate entity in name only. Not illegal in itself, a shell company nevertheless can serve as a front or participant in transactions that mask the identity of the owner or source of funds. Shell companies can be a key element in the layering and integration phases of money laundering. In one recent case, an illegal gambling operation used a series of international shell companies to hide its proceeds. In the United States, shell companies may purchase real estate and other property. The nature of such transactions increases opportunities for financial crimes.
Rulings on the Field
Several regulatory authorities in the United States and abroad have taken steps to tighten AML regulations, responding to criminals’ attempts to evade detection.
In May 2018, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) implemented an enhanced customer due diligence (CDD) rule, which, among other things, requires financial institutions to identify and verify the identity of beneficial owners of accounts. FinCEN defines a beneficial owner as an individual who owns 25% or more of a legal entity, or who exercises significant control of the entity. Identifying and verifying beneficial ownership, however, is a major hurdle for financial institutions, few of which have the resources to undertake such actions on their own.
In November 2018, to increase transparency in deals involving shell companies, FinCEN issued a Geographic Targeting Order requiring title companies to report the beneficial owners in cash real estate transactions. The reporting requirement serves as a disincentive to illegal activity by shell companies, as their owners or controllers must be identified.
The United Kingdom, also seeking to enhance its AML rules, in early 2018 introduced “unexplained wealth orders.” These orders provide an investigative tool in cases where government agencies suspect a person’s legitimate income is inadequate to acquire certain property. A UWO, issued by the UK High Court, can compel disclosure both of property ownership and of how the owner obtained the property.
In addition to these measures, financial institutions still face the daily task of monitoring and managing the risks of money laundering.
Forming Defensive Strategies
Banks, casinos, sportsbooks, money services businesses, and other financial services entities are on the front lines in defending against financial crimes. Keys to these institutions’ success in the AML game include fundamentals—basic blocking and tackling—as well as smart defensive strategies.
Some of the defensive options available to financial institutions are similar to strong football defenses, including:
- Keep eyes on the ball. In the AML game, the ball is the money. Following the money is critical to identification and intervention in financial crimes. Actions intended to distract attraction from the money flow are fundamental to money laundering. Institutions should not be fooled by lateral passes and reverse plays.
- Control the line of scrimmage. Transaction monitoring and filtering are effective ways to keep financial criminals from gaining ground, but they are only one element in a defensive plan.
- Strengthen the pass rush. Aligning know-your-customer (KYC) and risk management programs shortens institutions’ reaction time and can disrupt criminals’ intentions. KYC and beneficial owner regulations are intended to help institutions determine who’s really wearing the numbers on the opposing team’s jerseys.
- Beware run-pass options. Football offenses today emphasize run-pass options to reliably pick up yardage. In a financial institution context, short throws and runs of a few yards equate to small placements intended to avoid suspicious activity detection. Enough of those can add up to significant amounts, without necessarily triggering a currency transaction report (CTR). The ability to spot suspicious patterns of transactions is critical to defending against this kind of offense.
Putting Your Best Team on the Field
Financial institutions need to ensure that their best resources are available to defend against financial crimes. Putting their best team on the field is a matter of making sure their AML program is up to the task, recruiting and training good “athletes” for their compliance team, and taking advantage of good coaching. Working with an expert advisory partner is an important way for financial institutions to strengthen their risk management and compliance and, if necessary, deploy an outsourced financial intelligence unit solution. A winning defense against financial crimes is attainable, but institutions need to remember: the AML season never ends.