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Anti-Money LAundering deskbook

A Practical Guide to Law and Compliance

Nicole S. Healy

Incorporating Release #4June 2018

Practising Law Institute New York City

#239407

This work is designed to provide practical and useful information on the subject matter covered. However, it is sold with the understanding that neither the publisher nor the author is engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent profes-sional should be sought.

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Copyright © 2014, 2015, 2016, 2017, 2018 by Practising Law Institute. All rights reserved.

First casebound printing 2017.

Printed in the United States of America. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written consent of Practising Law Institute.

LCCN: 2014941705ISBN: 978-1-4024-2265-2 (compression binder)

ISBN: 978-1-4024-3113-5 (casebound)

vii(Anti-Money Laundering, Rel. #4, 6/18)

About the Author

Nicole S. Healy is a partner in the Redwood City office of Ropers Majeski Kohn & Bentley. Ms. Healy has represented companies and individuals in a wide range of industries in complex matters, including claims concerning corporate governance and control; litigation alleg­ing breach of fiduciary duty and fraud, including by corporate officers and directors; complex commercial disputes; shareholder class action and derivative litigation; intellectual property rights and trade secrets; and merger and acquisition litigation. She has conducted, and has repre­sented companies and their executives in, corporate internal investiga­tions into possible violations of federal and state law. Ms. Healy has also represented companies and individuals in investigations by the Securi­ties and Exchange Commission, U.S. Attorneys’ Offices, and other gov­ernment agencies. She has tried cases to judgment in state and federal courts, and to decision in private arbitration proceedings.

Prior to entering private practice, Ms. Healy was a prosecutor for the U.S. Department of Justice, in the Fraud Section, Criminal Division, where she focused on violations of the U.S. Foreign Corrupt Practices Act (FCPA), defense procurement fraud, and international criminal matters. In addition to speaking frequently on money laundering, Ms. Healy is a frequent speaker on the FCPA and has counseled companies regarding compliance with the FCPA and the UK Bribery Act.

ix(Anti-Money Laundering, Rel. #4, 6/18)

Table of Chapters

Chapter 1 Overview

Chapter 2 Financial Institutions and Money Laundering

Chapter 3 Money Laundering in Practice

Chapter 4 Key U.S. Laws and Regulations

Chapter 5 Criminal AML Statutes and the Antiterrorism Act

Chapter 6 Reporting Requirements and Structuring

Chapter 7 Penalties

Chapter 8 Civil and Criminal Forfeiture Proceedings

Chapter 9 Forfeiture Statutes

Chapter 10 Money Laundering and the Attorney-Client Privilege

Chapter 11 U.S. Anti-Money Laundering Organizations

Chapter 12 International Organizations and Treaties

Chapter 13 FinTech and Money Laundering: New Financial Technology and AML/CFT Risks

Chapter 14 Selected Regulations Relating to FinTech

Chapter 15 Ethics and Compliance Issues for Providers of FinTech Services

Chapter 16 AML and State-Authorized Marijuana-Related Businesses

Chapter 17 Risk Assessment and Compliance

Chapter 18 Designing and Implementing an Effective Compliance Program

Chapter 19 Shadow Banking and Trade- or Service-Based Money Laundering

ANTI-MONEY LAUNDERING DESKBOOK

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Chapter 20 Money Laundering, Terrorist Finance, and the Diamond Industry

Chapter 21 Human Trafficking and Money Laundering

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Table of Contents

About the Author .............................................................................vii

Table of Chapters .............................................................................ix

List of Abbreviations ....................................................................xxiii

Preface .......................................................................................... xxv

Chapter 1 Overview

§ 1:1 Definition of Money Laundering ..................................... 1­1§ 1:2 How Money Laundering Works ....................................... 1­3§ 1:3 Overview of U.S. Anti­Money Laundering Laws .............. 1­3

Chapter 2 Financial Institutions and Money Laundering

§ 2:1 Introduction .................................................................... 2­1§ 2:2 Cautionary Tales—Money Laundering Involving

Major Financial Institutions ............................................ 2­2§ 2:2.1 HSBC Bank USA ...................................................... 2­4§ 2:2.2 Standard Chartered Bank ......................................... 2­7§ 2:2.3 ING Bank ................................................................. 2­7§ 2:2.4 AmSouth Bank ......................................................... 2­8§ 2:2.5 Riggs Bank ............................................................... 2­9

[A] Internal Controls .................................................... 2­10[B] Independent Testing ............................................... 2­10[C] Designation of Individuals to Coordinate and

Monitor Compliance .............................................. 2­10[D] Training Appropriate Personnel .............................. 2­10

§ 2:3 Conclusion .................................................................... 2­11

Chapter 3 Money Laundering in Practice

§ 3:1 Introduction .................................................................... 3­1§ 3:2 Money Laundering Mechanisms ..................................... 3­5

§ 3:2.1 Bulk Cash Smuggling and U.S. Dollar Deposits into Foreign Bank Accounts...................................... 3­5

§ 3:2.2 Black Market Peso Exchange .................................... 3­9Figure 3­1 Simplified BMPE Transactions Flow Chart ............. 3­10

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§ 3:2.3 Trade­Based Money Laundering .............................. 3­13[A] Red Flags in Trade­Based Money Laundering .......... 3­14

§ 3:2.4 Bearer Instruments ................................................. 3­16[A] Traveler’s Checks ................................................... 3­16[B] Bearer Bonds .......................................................... 3­17[C] Money Orders ........................................................ 3­17

§ 3:2.5 Casinos and Online Gambling ............................... 3­18§ 3:2.6 Luxury Goods ......................................................... 3­23§ 3:2.7 Shell Banks............................................................. 3­26§ 3:2.8 Shell Companies and Trusts ................................... 3­26

[A] Examples of Investigations and Prosecutions Involving Money Laundering Through Shell Companies ............................................................. 3­30

§ 3:2.9 Real Estate .............................................................. 3­33§ 3:2.10 Insurance and Other Investments .......................... 3­41§ 3:2.11 Check­Cashing Businesses ..................................... 3­42§ 3:2.12 Benefits Fraud ........................................................ 3­44§ 3:2.13 Health Care Fraud and Money Laundering ............. 3­45§ 3:2.14 Identity Theft ......................................................... 3­48

Chapter 4 Key U.S. Laws and Regulations

§ 4:1 Anti­Money Laundering Laws ......................................... 4­2§ 4:1.1 Bank Secrecy Act (1970) (BSA) ................................. 4­2

[A] Legislative History .................................................... 4­2[B] Organization ............................................................ 4­4

§ 4:1.2 Money Laundering Control Act (1986) ..................... 4­6§ 4:1.3 Anti­Drug Abuse Act of 1988 ................................... 4­9§ 4:1.4 Annunzio­Wylie Anti­Money Laundering Act

(1992) ..................................................................... 4­10§ 4:1.5 Money Laundering Suppression Act (1994) ............ 4­11§ 4:1.6 Money Laundering and Financial Crimes

Strategy Act (1998) ................................................. 4­12§ 4:1.7 Intelligence Reform & Terrorism Prevention

Act of 2004............................................................. 4­12§ 4:2 Major Overhaul of U.S. AML/CFT Laws: The USA

PATRIOT Act ................................................................ 4­12§ 4:3 The PATRIOT Act’s Anti­Money Laundering

Provisions: In General ................................................... 4­13§ 4:4 The PATRIOT Act’s Anti­Money Laundering

Provisions: Specific Sections .......................................... 4­18§ 4:4.1 Section 311—Special Measures for Jurisdictions,

Financial Institutions, or International Transactions of Primary Money Laundering Concern ................................................................. 4­18

Table of Contents

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§ 4:4.2 Section 312—Special Due Diligence for Correspondent Accounts and Private Banking Accounts ................................................................ 4­24

§ 4:4.3 Section 313—Prohibiting U.S. Correspondent Accounts with Shell Banks ..................................... 4­26

§ 4:4.4 Section 315—Additional Predicate Offenses ........... 4­27§ 4:4.5 Section 318—Expansion of the Definition of

Financial Institution ............................................... 4­27§ 4:4.6 Section 326—Customer Identification

Verification ............................................................. 4­27§ 4:4.7 Section 352—AML Programs ................................. 4­28§ 4:4.8 Section 358—Reports to the Intelligence

Community............................................................ 4­29§ 4:4.9 Section 359—Reporting Suspicious Activity by

Underground Banking System ................................ 4­30§ 4:4.10 Section 371—Prohibition on Bulk Cash

Smuggling .............................................................. 4­30

Chapter 5 Criminal AML Statutes and the Antiterrorism Act

§ 5:1 Overview ......................................................................... 5­3§ 5:2 18 U.S.C. § 1956—Domestic Money Laundering,

International Money Laundering, and “Sting” Operations ...................................................................... 5­4

§ 5:3 Domestic Money Laundering—18 U.S.C. § 1956(a)(1) ....... 5­4§ 5:3.1 Elements of the Crime: Summary ............................ 5­6§ 5:3.2 Elements of the Crime: Specific Issues ................... 5­10

[A] Distinct Offenses ................................................... 5­10[B] Merger .................................................................... 5­10[C] Proceeds ................................................................. 5­14[D] Intent ..................................................................... 5­21[E] Promotion—18 U.S.C. § 1956(a)(1)(A)(i) ................ 5­22[E][1] Elements ............................................................. 5­22[E][2] Intent to Promote ........................................... 5­22[E][3] Continuing Offense ............................................ 5­25[F] Concealment—18 U.S.C. § 1956(a)(1)(B)(i) ............ 5­25[F][1] Elements ............................................................. 5­25[F][2] Evidence of Concealment .................................... 5­26[F][2][a] Intent to Conceal a Listed Attribute ................ 5­28[F][2][b] Source of the Proceeds..................................... 5­30[G] Concealment—Avoiding a Reporting

Requirement—18 U.S.C. § 1956(a)(1)(B)(ii) ........... 5­31[G][1] Elements ............................................................. 5­31[G][2] Venue .................................................................. 5­32[G][3] Evidence of Intent to Avoid Reporting

Requirements ...................................................... 5­32

ANTI-MONEY LAUNDERING DESKBOOK

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§ 5:4 International Money Laundering—18 U.S.C. § 1956(a)(2) ................................................................... 5­33

§ 5:4.1 Elements—Summary ............................................. 5­33§ 5:4.2 Elements ................................................................ 5­35

[A] Specified Unlawful Activity .................................... 5­35[B] Transfer/Transportation .......................................... 5­35[C] Insufficient Evidence of Concealment .................... 5­36

§ 5:5 Money Laundering Stings—18 U.S.C. § 1956(a)(3) ....... 5­36§ 5:5.1 Elements—Summary ............................................. 5­36§ 5:5.2 Elements ................................................................ 5­38

[A] Knowledge and Intent ............................................. 5­38§ 5:5.3 Defenses to Sting Operations ................................. 5­39

[A] Entrapment ............................................................ 5­39[B] Outrageous Government Conduct ......................... 5­42[C] Other Asserted Defenses ........................................ 5­44

§ 5:6 Extraterritorial Jurisdiction—18 U.S.C. § 1956(f) .......... 5­44§ 5:6.1 Extraterritorial Jurisdiction—Predicate Offenses ....... 5­46

§ 5:7 Money Laundering Conspiracy—18 U.S.C. § 1956(h) ....................................................................... 5­52

§ 5:7.1 Elements—Summary ............................................. 5­52§ 5:7.2 Elements ................................................................ 5­53

[A] Mental State ........................................................... 5­53[B] No Overt Act Required ........................................... 5­54[C] Personal Jurisdiction............................................... 5­54[D] Multiple Objectives ................................................ 5­54[E] No Requirement to Prove Elements of

Substantive Money Laundering Offense ................. 5­55[F] Statute of Limitations............................................. 5­56

§ 5:8 18 U.S.C. § 1957—Transactions in Criminally Derived Property Over $10,000 ..................................... 5­56

§ 5:8.1 Elements—Summary ............................................. 5­56§ 5:8.2 Elements ................................................................ 5­57

[A] Separate Crime ....................................................... 5­57[B] Knowledge and Intent ............................................. 5­58[C] Commingling ......................................................... 5­58

§ 5:9 Conducting an Unlicensed Money Transfer Business—18 U.S.C. § 1960 ............................................... 5­59

§ 5:9.1 Elements ................................................................ 5­59§ 5:9.2 U.S. Jurisdiction Over Foreign Money Service

Business ................................................................. 5­60§ 5:9.3 Cryptocurrency Exchanges Are Money

Transmitters and Must Be Licensed ....................... 5­62§ 5:10 Bulk Cash Smuggling—31 U.S.C. § 5332 ..................... 5­65

§ 5:10.1 Elements ................................................................ 5­65

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§ 5:11 Terrorist Finance: Antiterrorism Act of 1990, as amended, 18 U.S.C. § 2331 et seq. ........................... 5­67

§ 5:11.1 Prohibitions on the Financing of Terrorism ............ 5­67§ 5:11.2 Key Elements in Pleading Private Civil Actions:

Standing and Causation ......................................... 5­68[A] As of 2015, the ATA Provides for Secondary

Liability .................................................................. 5­78§ 5:11.3 Financial Institutions and Terrorist Finance ........... 5­80

[A] Selected Cases Involving Terrorist Finance Claims Against Financial Institutions .................... 5­81

[B] The Dark Ages Meet the Digital Age: Cryptocurrency and Terrorist Finance .................... 5­94

[C] FATF Report—Terrorist Finance Mechanisms ........ 5­94

Chapter 6 Reporting Requirements and Structuring

§ 6:1 Required Reports ............................................................. 6­2§ 6:1.1 Suspicious Activity Reports (SAR) ............................ 6­3

[A] SARs—Confidentiality ............................................. 6­4§ 6:1.2 Currency Transaction Reports (CTR) ....................... 6­7§ 6:1.3 Currency Monetary Instrument Reports (CMIR) ..... 6­7§ 6:1.4 Other Reports—Filed with the IRS ........................... 6­8

[A] Form 8300................................................................ 6­8[B] Foreign Bank Accounts Report (F­BAR) .................... 6­9

§ 6:2 Structuring Transactions to Evade Reporting Requirements—31 U.S.C. § 5324 ................................. 6­13

§ 6:2.1 Statutory Prohibition—31 U.S.C. § 5324(a) and (b) .................................................................... 6­13

§ 6:2.2 Implementing Regulations—31 C.F.R. § 1010.314 ............................................................. 6­13

§ 6:2.3 Structuring—Cases and Issues ............................... 6­14[A] Elements ................................................................ 6­14[B] Separate Offense from Money Laundering .............. 6­14[C] Mental State ........................................................... 6­15[D] Evidence That Defendant Intended to Evade

the Reporting Requirements ................................... 6­15[E] No Requirement That the Structured Funds

Were Criminally Derived ........................................ 6­17[F] Defendant Cannot Be Criminally Liable Where

the Institution Did Not Have an Obligation to File a Report ........................................................... 6­17

ANTI-MONEY LAUNDERING DESKBOOK

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Chapter 7 Penalties

§ 7:1 Criminal Penalties: Statutory Bases ................................. 7­2§ 7:2 Criminal Penalties: U.S. Sentencing Guidelines .............. 7­3

§ 7:2.1 Background .............................................................. 7­3§ 7:2.2 Organization of the Guidelines ................................ 7­5§ 7:2.3 Application of the Guidelines to Individuals

and Companies ........................................................ 7­7[A] Guidelines Calculations for a Sample Individual

Offender ................................................................... 7­8§ 7:2.4 Organizational Sentencing Guidelines—U.S.S.G.

Chapter Eight ......................................................... 7­11[A] Structure and Purpose ............................................ 7­11[B] Compliance Programs and Sentencing ................... 7­13[C] Recent Failures of Compliance Programs and

Remedial Measures ................................................ 7­13[D] Elements and Objectives of an Effective

Compliance Program .............................................. 7­16[E] Application Notes .................................................. 7­20

§ 7:3 Civil Penalties ............................................................... 7­21§ 7:3.1 Statutory Basis ....................................................... 7­21§ 7:3.2 Cases Interpreting the Statute ................................ 7­21

Chapter 8 Civil and Criminal Forfeiture Proceedings

§ 8:1 Differences Between Civil and Criminal Forfeiture ......... 8­1§ 8:2 Relation Back Principle .................................................... 8­3§ 8:3 The Forfeiture Process ..................................................... 8­4

§ 8:3.1 What May Be Forfeited ............................................. 8­4§ 8:3.2 Forfeiture Proceedings .............................................. 8­5

[A] Administrative Forfeiture ......................................... 8­5[B] Criminal Forfeiture .................................................. 8­6[C] Civil Forfeiture ....................................................... 8­10

Figure 8­1 Comparison of Civil and Criminal Forfeiture in AML Cases ........................................................ 8­12

§ 8:4 Civil Asset Forfeiture Reform Act of 2000 ..................... 8­18§ 8:5 Changes to DOJ’s Asset Forfeiture Policy ...................... 8­20

Chapter 9 Forfeiture Statutes

§ 9:1 Civil Forfeiture in Money Laundering Cases— 18 U.S.C. § 981............................................................... 9­2

§ 9:1.1 Burden of Proof ........................................................ 9­3§ 9:1.2 Challenges to Civil Forfeitures ................................. 9­4

[A] Interbank Accounts .................................................. 9­4

Table of Contents

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§ 9:1.3 Third­Party Challenges to Civil Forfeitures .............. 9­9[A] Tracing and Fungible Assets ..................................... 9­9[B] Standing to Challenge Forfeiture ............................ 9­10

§ 9:2 Criminal Forfeiture—18 U.S.C. § 982 ........................... 9­13§ 9:2.1 Criminal Forfeiture Generally ................................ 9­13§ 9:2.2 Forfeiture Judgment in an Amount Greater

Than Defendant’s Assets ....................................... 9­17[A] Tracing ................................................................... 9­18[B] Property “Involved in” an Offense .......................... 9­20[C] Facilitation ............................................................. 9­21

§ 9:3 Forfeiture of Substitute Assets ....................................... 9­22§ 9:4 Forfeitures Based on Specific Violations ........................ 9­24

§ 9:4.1 Reporting Violations Generally ............................... 9­24§ 9:4.2 Forfeiture of Monetary Instruments—31 U.S.C.

§ 5317(c) ................................................................ 9­25§ 9:4.3 Bulk Cash Smuggling—31 U.S.C. § 5332 .............. 9­26

§ 9:5 Constitutional Issues .................................................... 9­28§ 9:5.1 Double Jeopardy and Parallel Proceedings:

Criminal Convictions and Civil Forfeiture ............. 9­28§ 9:5.2 Eighth Amendment—Limitations on Amount

to Be Forfeited ........................................................ 9­29[A] Proportionality and Bulk Cash Smuggling .............. 9­30[B] The Eighth Amendment’s Excessive Fines

Clause and Proportionality Analysis ....................... 9­33§ 9:6 Challenges to Criminal Forfeitures ................................ 9­37

§ 9:6.1 Third­Party Challenges in Ancillary Proceedings ............................................................ 9­37

§ 9:6.2 Challenges by the Defendant .................................. 9­40[A] No Exemption to Forfeiture Laws for

Attorneys’ Fees ....................................................... 9­40[B] Due Process and Pretrial Restraint of Assets .......... 9­41[C] Pre­Seizure Notice and Delay ................................. 9­51[D] Section 1957 and Restraint of Assets to

Be Used to Pay Attorneys’ Fees ............................... 9­52§ 9:7 Kleptocracy Asset Recovery Initiative ............................ 9­55

§ 9:7.1 Selected Investigations—1MDB ............................. 9­56§ 9:7.2 Other Investigations and Prosecutions ................... 9­61

Chapter 10 Money Laundering and the Attorney-Client Privilege

§ 10:1 Attorney­Client Privileged Communications ................. 10­1§ 10:1.1 Disqualification of Counsel Based on a Prior

Representation ....................................................... 10­3

ANTI-MONEY LAUNDERING DESKBOOK

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§ 10:2 Information Not Protected by the Privilege ................... 10­7§ 10:2.1 Client Identity or Fee Information ......................... 10­7§ 10:2.2 The Crime­Fraud Exception ................................... 10­8

§ 10:3 Misuse of the Attorney­Client Privilege ......................... 10­8§ 10:4 Voluntary Disclosure ................................................... 10­12§ 10:5 The Gatekeeper Initiative and Other Efforts at

Mandatory Disclosures ............................................... 10­16

Chapter 11 U.S. Anti-Money Laundering Organizations

§ 11:1 Overview ....................................................................... 11­1§ 11:2 U.S. Departments and Agencies with AML/CFT

Responsibility ................................................................ 11­3§ 11:3 U.S. Department of the Treasury ................................... 11­3

§ 11:3.1 Financial Crimes Enforcement Network ................ 11­4§ 11:3.2 Office of Foreign Assets Control ............................. 11­7§ 11:3.3 Internal Revenue Service ........................................ 11­8

§ 11:4 U.S. Securities and Exchange Commission ................... 11­9§ 11:5 U.S. Department of Justice .......................................... 11­10§ 11:6 U.S. Department of State ............................................ 11­11§ 11:7 U.S. Department of Homeland Security ...................... 11­13§ 11:8 U.S. Intelligence Agencies ........................................... 11­13

Chapter 12 International Organizations and Treaties

§ 12:1 In General ..................................................................... 12­1§ 12:2 Financial Action Task Force ........................................... 12­2§ 12:3 International Monetary Fund ........................................ 12­7§ 12:4 United Nations ............................................................. 12­8§ 12:5 European Union ............................................................ 12­9§ 12:6 Egmont Group of Financial Intelligence Units ............ 12­15

Chapter 13 FinTech and Money Laundering: New Financial Technology and AML/CFT Risks

§ 13:1 FinTech Overview: New Technologies for Transferring and Storing Funds and Value ......................................... 13­1

§ 13:2 Making Payments, and Transferring and Storing Value ................................................................. 13­8

Figure 13­1 Examples of Online, Stored Value, and Mobile Payment and Funds Transfer Technologies ........... 13­10

§ 13:3 Prepaid Access ............................................................. 13­12§ 13:3.1 AML Risks of Prepaid Access Cards and

Devices ................................................................. 13­13§ 13:3.2 Misuse of Prepaid Access ...................................... 13­15

Table of Contents

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§ 13:4 Online Value Transfer and Payment Systems ............... 13­19§ 13:4.1 Online Payments and Funds Transfers ................. 13­19§ 13:4.2 Mobile Payment Services ...................................... 13­20

§ 13:5 Cybercurrency and Blockchain Technology .................. 13­25§ 13:5.1 Bitcoin .................................................................. 13­28§ 13:5.2 Cryptocurrency and Money Laundering ............... 13­34

[A] Liberty Reserve ..................................................... 13­35[B] Silk Road .............................................................. 13­39

Chapter 14 Selected Regulations Relating to FinTech

§ 14:1 Overview ....................................................................... 14­1§ 14:2 U.S. Regulation ............................................................. 14­3

§ 14:2.1 U.S. Regulation of “Prepaid Access” ....................... 14­3§ 14:2.2 Cryptocurrency Regulation ..................................... 14­8§ 14:2.3 FinCEN Guidance Regarding Virtual

Currencies ............................................................ 14­10§ 14:2.4 FinCEN Administrative Rulings on Virtual

Currency Businesses ............................................ 14­13[A] Proposed Virtual Currency Trading Platform

Would Need to Register As an MSB ...................... 14­14[B] Proposed Virtual Currency Payment System

Was an MSB ......................................................... 14­16§ 14:2.5 Cryptocurrency Regulation: Regulatory

Actions ................................................................. 14­18§ 14:3 European Union Regulation ........................................ 14­19

§ 14:3.1 EU Payment Services Directive ............................ 14­20§ 14:3.2 E­Money Directive ............................................... 14­21§ 14:3.3 EU Anti­Money Laundering Directives ................ 14­23

§ 14:4 U.K. Regulation ........................................................... 14­23

Chapter 15 Ethics and Compliance Issues for Providers of FinTech Services

§ 15:1 Overview ....................................................................... 15­1§ 15:2 AML Risks Relating to FinTech ..................................... 15­2§ 15:3 Addressing AML Risks in FinTech ................................. 15­5

§ 15:3.1 Written AML Program and Policy Statement .......... 15­5§ 15:3.2 Customer Due Diligence ........................................ 15­7§ 15:3.3 Training and Implementation ............................... 15­10§ 15:3.4 Prevention and Detection ..................................... 15­11§ 15:3.5 Recordkeeping ...................................................... 15­13

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§ 15:4 Ethical Concerns—Providing Services and Balancing Risks ........................................................... 15­14

§ 15:4.1 Balancing AML/CFT Objectives with Expanding Financial Inclusion ............................. 15­14

§ 15:4.2 Unintended Consequences of Multinational AML/CFT Enforcement Regimes: The Economic Effects of De­Risking ............................................ 15­17

Chapter 16 AML and State-Authorized Marijuana-Related Businesses

§ 16:1 Overview ....................................................................... 16­1§ 16:2 FinCEN Guidance ......................................................... 16­2§ 16:3 FinCEN Potential “Red Flags” ....................................... 16­4

Chapter 17 Risk Assessment and Compliance

§ 17:1 The Interplay of Ethics, Risks, and Compliance ............ 17­1§ 17:2 Assessing and Addressing Risks .................................... 17­3§ 17:3 Developing a Profile of the Company or Business

As a Tool to Identifying Risk ......................................... 17­5

Chapter 18 Designing and Implementing an Effective Compliance Program

§ 18:1 An AML/CFT Compliance Program Is Only One Element in a Broader Compliance Program ................... 18­2

§ 18:2 Codes of Conduct/Ethics ............................................... 18­6§ 18:3 Compliance Programs ................................................... 18­7

§ 18:3.1 The Company Must Fully Commit to Implementing an Effective Compliance Program .... 18­8

§ 18:3.2 Compliance Programs Must Be Designed and Periodically Reevaluated to Address Risks Specific to the Company ...................................... 18­11

§ 18:3.3 A Compliance Program Should Be Readily Available and Written and Communicated in Language Understandable to a Layperson ............. 18­11

§ 18:3.4 Compliance Training and Evaluation Should Be Provided at Hire or Retention and Periodically Thereafter ............................................................ 18­12

§ 18:3.5 The Compliance Officer or Department Must Have Adequate Resources and Authority .............. 18­13

Table of Contents

xxi(Anti-Money Laundering, Rel. #4, 6/18)

§ 18:3.6 Starting at the Top, the Company Should Develop a Strong Culture of Compliance ............. 18­14

§ 18:3.7 Periodic Testing, Auditing, and Improvements ...... 18­19Figure 18­1 Checklist for an Effective Compliance Program ...... 18­20§ 18:4 Designing an Effective AML Program .......................... 18­21

§ 18:4.1 AML Program—Key Elements .............................. 18­21[A] Sources of Information Regarding AML

Requirements ....................................................... 18­23[B] Designing and Managing the AML Program—

In­House Versus Outside Vendors ........................ 18­24§ 18:4.2 Key Components of an AML Program .................. 18­26

[A] Written Policies, Procedures, and Controls ........... 18­26[A][1] Customer Due Diligence .................................. 18­27[A][2] CDD: Additional Requirements for Financial

Institutions ....................................................... 18­28[A][3] Recordkeeping ................................................... 18­29[A][4] Data Management and Analysis ....................... 18­29[B] Designated AML Program Officer ......................... 18­30[C] Employee Training ................................................ 18­31[D] Auditing and Testing ............................................ 18­31

Figure 18­2 AML/CFT Program Checklist ............................... 18­32§ 18:4.3 Specific Examples of AML Risks ........................... 18­33

[A] Example 1: Trade­Based Money Laundering ......... 18­33[B] Example 2: Laundering Funds Used to

Pay Bribes ............................................................. 18­37§ 18:5 What to Do If Money Laundering or Structuring or

Other Violations Are Suspected or Discovered ............ 18­39

Chapter 19 Shadow Banking and Trade- or Service-Based Money Laundering

§ 19:1 Overview ....................................................................... 19­1§ 19:2 Shadow Banking and Money Laundering/Terrorist

Finance .......................................................................... 19­2§ 19:2.1 Shadow Banking and AML Criminal Laws ............. 19­8§ 19:2.2 Dark Pools .............................................................. 19­9

§ 19:3 Transparency, Beneficial Ownership, and Capital Flow ................................................................ 19­14

§ 19:3.1 Beneficial Ownership and Transparency ............... 19­14§ 19:3.2 Misuse of Offshore Entities and Shell Companies:

The “Panama Papers” ........................................... 19­15§ 19:3.3 Capital Flow and Money Laundering .................... 19­17

§ 19:4 Trade­ and Service­Based Money Laundering ............... 19­18

ANTI-MONEY LAUNDERING DESKBOOK

xxii

Chapter 20 Money Laundering, Terrorist Finance, and the Diamond Industry

§ 20:1 The Unique Role of Diamonds ...................................... 20­1§ 20:2 The Diamond Business: A Brief Introduction................ 20­5

§ 20:2.1 Diamond Mining and Cutting ................................ 20­9§ 20:2.2 Diamond Sales and Trading.................................. 20­11§ 20:2.3 Diamond Import and Export ................................ 20­12§ 20:2.4 Retail Sales ........................................................... 20­14

§ 20:3 Money Laundering Vulnerabilities Unique to the Diamond Trade ........................................................... 20­15

Chapter 21 Human Trafficking and Money Laundering

§ 21:1 Human Trafficking: Background .................................... 21­1§ 21:2 U.S. Law: Human Trafficking and Money

Laundering .................................................................... 21­6§ 21:3 Federal Contracts and AML Amendments to the

Federal Acquisition Regulations................................... 21­15§ 21:3.1 Executive Order 13627 ......................................... 21­15§ 21:3.2 Subsequent FAR Amendments ............................. 21­19

§ 21:4 Human Trafficking Claims Against U.S. Businesses ................................................................... 21­31

§ 21:5 Extraterritorial Jurisdiction .......................................... 21­32§ 21:6 Money Laundering and Other Labor and

Immigration Violations ............................................... 21­37

Index ............................................................................................... I­1

xxiii(Anti-Money Laundering, Rel. #4, 6/18)

List of Abbreviations

AML Anti-Money Laundering

AMLD Anti-Money Laundering Directive (EU)

BMPE Black Market Peso Exchange

BSA Bank Secrecy Act of 1970

CAFRA Civil Asset Forfeiture Reform Act (2000)

CBP Customs and Border Protection

CDD Customer Due Diligence

CFT Counter-Terrorism Financing

CMIR Currency and Monetary Instrument Report

CTR Currency Transaction Report

DHS Department of Homeland Security

DNFBP Designated Non-Financial Businesses and Professions

DNI Director of National Intelligence

DPA Deferred Prosecution Agreement

FARA Foreign Agents Registration Act

FATF Financial Action Task Force

F-BAR Foreign Bank Account Report

FCPA Foreign Corrupt Practices Act

FinCEN Financial Crimes Enforcement Network

FINRA Financial Industry Regulatory Authority

FIU Financial Intelligence Unit

GPML Global Programme Against Money-Laundering (UN)

HIFCA High Intensity Money Laundering and Related Financial Crime Area

ICE Immigration and Customs Enforcement

IEEPA International Emergency Economic Powers Act

IRS Internal Revenue Service

KYC Know Your Customer

MLCA Money Laundering Control Act (1986)

MSB Money Service Business

ANTI-MONEY LAUNDERING DESKBOOK

xxiv

MVTS Money or Value Transfer Services

NPM New Payments Methods

NYDFS New York State Department of Financial Services

OCC Office of the Controller of the Currency

OFAC Office of Foreign Assets Control (U.S. Treasury Department)

PEP Politically Exposed Person

SAR Suspicious Activity Report

SDN Specially Designated Nationals

SUA Specified Unlawful Activity

TBML Trade-Based Money Laundering

TWEA Trading with the Enemy Act

U.S.S.G. U.S. Sentencing Guidelines

xxv(Anti-Money Laundering, Rel. #4, 6/18)

Preface

The term “money laundering” often conjures up images of Miami Vice–era drug lords employing teams of “smurfs” to launder paper bags of cocaine­tainted cash. More recent television viewers may think of Walter White buying a car wash to commingle his methamphetamine proceeds with the cash receipts. While both of these images have a basis in reality, in fact, money laundering and the related offense of structuring are not limited to turning drug money into spendable cash. Instead, they involve a much broader range of predicate offenses and often more sophisticated mechanisms to introduce the proceeds of those crimes into the legitimate financial system.

The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN)1 defines money laundering as “the process of mak ing illegally­gained proceeds (i.e. ‘dirty money’) appear legal (i.e. ‘clean’).”2 It further identifies the traditional three­step process of laundering funds as: “placement, layering and integration.”3 As FinCEN explains, first “illegitimate funds are furtively introduced into the legitimate finan­cial system. Then, the money is moved around to create confusion, sometimes by wiring or transferring through numerous accounts. Finally, it is integrated into the financial system through additional transactions until the ‘dirty money’ appears ‘clean.’”

4

As a result of the growing recognition of the importance of money laundering to a variety of criminal activities, the effects of money laun­dering on the financial system, and the interplay between money laundering and terrorist finance, U.S. laws concerning money laun­dering, structuring, terrorist finance, and related offenses have evolved substantially over the last few decades.5 Surprisingly, the proscription

1. FinCEN is a bureau of the U.S. Treasury Department whose “mission is to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities.” See www.fincen.gov/.

2. FinCEN, History of Anti­Money Laundering Laws, https://www.fincen.gov/history­anti­money­laundering­laws.

3. Id. 4. Id. 5. Not long ago, money laundering was not an offense but was seen as part

of the underlying crime. Moreover, courts appeared bemused by the idea that criminals needed to transform dirty money into usable funds. See

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ANTI-MONEY LAUNDERING DESKBOOK

of money laundering as an independent offense is a relatively recent occurrence. Until October 27, 1986, with the passage of the Money Laundering Control Act (MLCA),6 money laundering was not illegal.7 Nor was the related offense of “structuring” financial transactions in amounts under $10,000 to cause a financial institution not to submit cash transaction reports (CTRs) to the government.8

Until 1986, money launderers were prosecuted for participating in or aiding and abetting drug trafficking or other substantive offenses and structuring was sometimes prosecuted as a conspiracy to defraud

United States v. Barnes, 604 F.2d 121, 132 (2d Cir. 1979) (“‘Money­ washing’ is apparently an important step in the narcotics business. It involves the conversion of many small bills into larger denominations.”). See also id. at 154–55 (“Importers, wholesalers, purchasers of cutting mate­rials, and persons who ‘wash’ money are all as necessary to the success of the venture as is the retailer. They can all be held to have agreed with one another in what has been called a ‘chain’ conspiracy”).

6. The conduct loosely described as “money laundering” was prohibited by a melange of statutes pre­1986 . . . the specific statutes criminalizing money laundering, and upon which the Government relies for the instant forfeiture, 18 U.S.C. §§ 1956 and 1957 [and 18 U.S.C. § 981], were enacted by the Money Laundering Control Act of 1986, Pub. L. No. 99­570, §§ 1351­1367, 100 Stat. 3207, 3207­18 to ­39 (1986), with the statutes becoming effective on the date of enactment, October 27, 1986.

United States v. Eleven Vehicles, 836 F. Supp. 1147 (E.D. Pa. 1993) (internal citation omitted).

7. Of course, money laundering itself is not a crime, and the mere fact that a person launders monies derived from narcotics activities does not make the launderer part of a conspiracy to violate the narcotics laws.” United States v. Dela Espriella, 781 F.2d 1432, 1436 (9th Cir. 1986) (reversing convictions where appellants converted millions in drug proceeds into cashier’s checks and other negotiable instruments using “runners” to deliver the cash to banks in amounts under $10,000; and affirming one appellant’s conviction for conspiracy to aid and abet cocaine possession and distribution where his guilty plea was an admission that by launder­ing proceeds he facilitated their transfer abroad). Cases such as this led to the MLCA’s criminalization of both money laundering and structuring.

8. Federal law requires banks and other financial institutions to file reports with the Secretary of the Treasury concerning any cash transaction over $10,000. See 31 U.S.C. § 5313; 31 C.F.R. § 103.22(a). “It is illegal to ‘structure’ transactions—i.e., to break up a single transaction above the reporting threshold into two or more separate transactions—for the pur­pose of evading a financial institution’s reporting requirement.” United States v. $9,980 Seized from Cmty. Bank, 859 F. Supp. 2d 1281, 1281–82 (M.D. Fla. 2012) (citing 31 U.S.C. § 5324); United States v. Scanio, 705 F. Supp. 768, 777 (W.D.N.Y. 1988) (to violate 31 U.S.C. § 5324, “an accused must act (i.e., ‘structure’ the currency transaction) specifically ‘for the pur­pose of evading the reporting requirements of [31 U.S.C.] section 5313(a) with respect to such transaction.’”), citing 31 U.S.C. § 5324, preamble.

xxvii

Preface

(Anti-Money Laundering, Rel. #4, 6/18)

the government.9 Following the enactment of the MLCA, and spe­cifically the primary criminal money laundering statutes (18 U.S.C. §§ 1956 and 1957), and the amendment of the 1970 Bank Secrecy Act’s reporting requirements to include the anti­structuring provisions (31 U.S.C. § 5324), the government has prosecuted these violations as independent offenses. Over time, a wider variety of crimes (referred to as “specified unlawful activities” or SUAs) have been identified as predicate offenses for money laundering violations, and a broader range of activity has been captured by federal law.10

Following the attacks on the United States on 9/11, the money laundering laws were further revised and expanded under the USA PATRIOT Act,11 including with respect to the financing of terrorism. Accordingly, money laundering and terrorist finance and anti­money laundering and counter­financing of terrorism are generally referred to, respectively, as “ML/TF” and “AML/CFT.”

While individuals convicted of laundering offenses may be subject to substantial prison time, fines, and penalties, the federal govern­ment also has broad civil and criminal powers to seize and forfeit tainted funds and property, that is, property “involved in,” or which “facilitates,” or is “traceable to,” an offense for which civil forfeiture is authorized, and proceeds as well as property “derived from” proceeds

9. Before 1986, money laundering and structuring were at times prosecuted under the general conspiracy statute, 18 U.S.C. § 371. See United States v. Winfield, 997 F.2d 1076, 1082–83 (4th Cir. 1993) (although money laundering statutes were then in effect, and evidence demonstrated that defendants laundered drug proceeds, government charged conspiracy to defraud the United States under section 371; court affirmed conviction as to one defendant but reversed as to the other); United States v. Nersesian, 824 F.2d 1294, 1309–13 (2d Cir. 1987) (multiple defendants were con­victed of conspiring to import and distribute heroin, and distributing her­oin, as well as other offenses; affirming conviction under 18 U.S.C. § 371 for conspiracy to defraud the United States and to conceal material facts from the IRS by causing banks to fail to file CTRs). At that time, some but not all federal appellate courts permitted the government to charge individuals with substantive violations of the Bank Secrecy Act’s reporting requirements, 31 U.S.C. §§ 5313 and 5322, along with 18 U.S.C. § 1001 (materially false statements), and 18 U.S.C. § 2(b) (causing another to commit an offense against the United States), for causing banks to fail to file CTRs by not disclosing the structured nature of currency transactions. See id. at 1310, citing cases.

10. The list of predicate offenses, which has been modified over time, is found at 18 U.S.C. § 1956(c)(7), which also incorporates the predicate offenses identified in the Racketeer Influenced and Corrupt Organizations Act (RICO) statutes at 18 U.S.C. § 1961(1) (see 18 U.S.C. § 1956(c)(7)(A)).

11. The anti­money laundering (AML) and counter­terrorist finance (CFT) provisions of the PATRIOT Act are found at Title III. See Pub. L. No. 107­56, tit. III, Oct. 26, 2001.

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ANTI-MONEY LAUNDERING DESKBOOK

of an offense for which civil or criminal forfeiture is authorized. Civil forfeiture proceedings are brought against the tainted property and are intended to determine whether the property is in fact subject to forfeiture. If so, the government has title to and a possessory interest in the property superior to the defendant’s, but is subject to challenge by third parties. Criminal forfeiture is imposed only following a con­viction, as an element of a defendant’s sentence.

Federal law authorizes forfeiture not only for money laundering violations, but also for many other related offenses, including struc­turing. Unlike money laundering violations, which prohibit financial transactions in the proceeds of a predicate offense, structuring is a fed­eral offense regardless of whether the funds are derived from illicit or entirely legal activity. The defendant’s motive in avoiding the report­ing requirements may have been to conceal funds from a spouse,12 or from creditors,13 or from the IRS,14 rather than to launder illicit proceeds, yet if she is aware of the bank’s reporting obligations, the defendant is liable for a structuring violation and the funds may be forfeited.

Money launderers have shown themselves to be remarkably adapt­able, and AML/CFT efforts have often appeared to be like the game of whack­a­mole, in which the government criminalizes and prosecutes some activity only to find that the perpetrators have modified their operations in response and popped up elsewhere. For example, when U.S. authorities cracked down on the use of financial service providers to transfer money cross­border, money launderers began resorting to smuggling bulk cash from the United States to Mexico and elsewhere.

Money is also being laundered in much more sophisticated ways, including through international trade in which imports may be under­invoiced and exports over­invoiced and passed through multiple

12. See United States v. $9,980 Seized from Cmty. Bank, 859 F. Supp. 2d 1281 (M.D. Fla. 2012) (granting government’s motion for summary judg­ment and ordering forfeiture of funds where defendant claimed she did not have the intent to violate federal anti­structuring laws, specifically 31 U.S.C. § 5324, but instead intended to conceal a large sum of money from her ex­husband, when she deposited just under $10,000 into her account each day for a period of time).

13. See, e.g., United States v. MacPherson, 424 F.3d 183 (2d Cir. 2005) (defen­dant, a New York City police officer who owned various rental proper­ties, structured deposits amounting to over $250,000 into three different banks, initially apparently to shield his assets from a possible judgment in a civil suit filed by someone injured at one of his properties).

14. See United States v. Davenport, 929 F.2d 1169 (7th Cir. 1991) (defendants violated 31 U.S.C. § 5324 where they structured deposits of purported “inheritance” in amounts under $10,000 to avoid banks’ filing CTRs and alerting the IRS).

xxix

Preface

(Anti-Money Laundering, Rel. #4, 6/18)

intermediaries in as many jurisdictions. With the increasing glob­alization of trade, “trade­based money laundering,” or TBML, has been identified as an emerging methodology.15 Because no single transac­tion—in isolation—may appear questionable, but together the chain of transactions adds up to money laundering or other illicit activity such as tax evasion or terrorist financing, TBML is particularly hard to spot, and so, especially worrying. Moreover, the use of shell com­panies, trusts, and beneficial ownership makes tracing a sequence of transactions from start to finish extraordinarily difficult.

While there may be legitimate privacy, business, and security inter­ests that argue for masking the ownership and control of entities, concealing such information from legitimate inquiry benefits corrupt individuals and regimes, money launderers, terrorists, drug cartels, and others.16 The European Union and the United Kingdom are cur­rently grappling with this issue; Britain has committed to publicizing beneficial ownership of companies and the EU’s Parliament is con­sidering adopting a controversial directive that would require the dis­closure of identifying information for beneficial owners (who own or control 25% or more) of any entity, including trusts and foundations, not only to tax authorities or law enforcement, but also to anyone who completes a basic online registration.17 By contrast, in the United States, company registration is handled at the state level, and some

15. See Trade and money laundering; uncontained; trade is the weakest link in the fight against dirty money, Economist (May 3, 2014), at p. 53; see also Financial Action Task Force (FATF), Trade­Based Money Laundering, June 23, 2006, www.fatf­gafi.org/documents/documents/trade­basedmoney launderingtypologies.html.

16. See FATF, Laundering the Proceeds of Corruption, July 2011, www.fatf­ gafi.org/media/fatf/documents/reports/Laundering%20the%20Proceeds %20of%20Corruption.pdf.

17. The European Union does not move quickly, and the legislation adopted by its Parliament must be implemented by the member states. Accord­ingly, any changes are not likely to be felt for some time.

On March 11, 2014, the European Parliament voted to require dis­closure of beneficial ownership. See adopted text: European Parliament legislative resolution of 11 March 2014 on the proposal for a directive of the European Parliament and of the Council on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing (COM(2013)0045)–C7­0032/2013–2013/0025(COD), www. europarl.europa.eu/sides/getDoc.do?type=TA&reference=P7­TA­2014­ 0191&language=EN; see also Press Release, European Parliament, Money laundering: MEPs vote to end anonymity of owners of companies and trusts, Feb. 2, 2014, www.europarl.europa.eu/news/en/news­room/content/ 20140210IPR35562/html/Money­laundering­MEPs­vote­to­end­anony mity­of­owners­of­companies­and­trusts (reporting that the Economic Affairs and the Justice and Home Affairs committees had overwhelmingly

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ANTI-MONEY LAUNDERING DESKBOOK

states, notably Delaware and Nevada, do not require companies orga­nized under their laws to disclose their ownership.18

Finally, new financial technologies or “FinTech,” including online and mobile payment systems, reloadable prepaid cards, and crypto­currencies, are reshaping the landscape for financial services, chang­ing the ways in which people make payments and investments, trans­fer funds — and launder money and finance terrorism. Policy makers, regulators, law enforcement authorities, and judges are grappling with the application of current law to FinTech to encourage innovation while deterring, preventing, and prohibiting its misuse.

This Deskbook is designed to provide an introduction to the com­plex and dynamic law of money laundering, structuring, and forfei­ture for lawyers whose practice does not primarily involve criminal prosecution or defense, and for executives and managers of compa­nies, to assist them to understand, identify, and avoid potential risks both inside and outside their organizations. This Deskbook also is intended to be an introduction to this area of law; it is not a substitute for qualified legal advice. Moreover, the focus is on U.S. federal law in this area; individual states and foreign jurisdictions have their own anti­money laundering regimes. If your business or practice involves state or foreign law, you should contact experienced counsel for guid­ance or undertake your own research.

Furthermore, among other things, this Deskbook is intended to provide an overview of the laws and regulations addressing money laundering, terrorist finance, structuring, and forfeiture, including their history, elements, interpretations, and penalties. Chapters 1 through 3 provide background and context for the reader’s under­standing of money laundering, structuring, forfeiture, and terrorist finance, which are discussed in greater detail in the following chapters. Chapters 4 through 9 outline the history of the key statutes and reg­ulations governing money laundering, structuring, and forfeiture, and discuss certain illustrative cases. Chapter 10 discusses issues relating

voted to increase disclosure requirements; proposed amendments were to be voted upon by Parliament in March, and the new Parliament to be elected in May would begin negotiating with the European Commis­sion and the Council of Ministers in the second half of 2014); Own up, owners, Economist (May 12, 2014), www.economist.com/blogs/schum peter/2014/03/money­laundering.

18. To date, federal efforts to require disclosure of beneficial ownership have not been successful. The proposed “Incorporation Transparency and Law Enforcement Assistance Act,” S. 1465 and H.R. 3331, appears to be stuck in committee. Information concerning the text and status of federal bills is available at http://thomas.loc.gov/cgi­bin/thomas.

xxxi

Preface

(Anti-Money Laundering, Rel. #4, 6/18)

to money laundering and the attorney­client privilege. Because money laundering and, in particular, terrorist finance, are transnational in scope, chapters 11 and 12 address certain U.S. and international AML/CFT efforts. As new technologies for making payments and transferring and storing value have been developed—some of which are transitional and experimental while others are here to stay, at least in some form—they have been adopted by money launderers and ter­rorist financiers. Chapter 13 discusses some of these new technolo­gies, focusing on their AML/CFT implications. Chapters 14 and 15 address some of the regulatory, ethical, and compliance issues regard­ing electronic transfers of value. Chapter 16 briefly addresses certain issues relating to the tension between state laws decriminalizing or legalizing marijuana for medical or recreational use and federal law, particularly as it applies to financial institutions. Chapters 17 and 18 address AML/CFT risk assessment and compliance programs in the context of corporate compliance programs generally and outline the elements of an effective program. Chapter 19 discusses shadow banking and trade­based money laundering, which have become areas of increased concern for AML regulators and experts. Chapter 20 addresses the interplay between money laundering, terrorist finance, and the diamond trade. Finally, chapter 21 addresses money laun­dering and human trafficking, which has tragically become a growth industry for criminal enterprise.

This Deskbook is intended to be current and accurate as of the date of publication, however, money laundering methodologies change fre­quently, and the laws and regulations addressing them change period­ically as well. Although care has been taken to ensure that legal and factual references are accurate, it is possible that some errors have slipped into the text. If so, they are mine alone and will be corrected in later revisions.

Finally, I want to thank my husband, James Healy, for putting up with many early morning weekend writing sessions, and Titus and Reilly, our two golden footwarmers, for keeping me company while this book was being written.