Money Laundering Trends and Typologies

As in previous years, money launderers have demonstrated great creativity in combining traditional money laundering techniques into complex money laundering schemes designed to thwart the ability of authorities to prevent, detect and prosecute money laundering. Below are some of examples of the various money laundering typologies and a review of U.S. money laundering trends in 2001.

The U.S. Suspicious Activity Report System (SARs) plays a critical role in U.S. anti-money laundering efforts. Similar types of reporting throughout the world are key to global efforts to combat money laundering. The aggregate totals for U.S. SARs help illustrate the nature of illegal proceeds and relative scale of the problem. The following statistics provide aggregate totals for SARs) filed by depository institutions (i.e., banks, thrifts, savings and loans, and credit unions) since implementation of the U.S. SAR system in April 1, 1996 through April 30, 2001. A small part of the total volume relates to reports filed by affiliates of depository institutions or, in some cases, filed voluntarily by brokers and dealers in securities who are not affiliated with banks, money services businesses, or gaming businesses, that, at this time, are not yet required under the Bank Secrecy Act (BSA) to file SARs.

Money Laundering Trends in 2001

The following were some of the key trends and areas of high activity in money laundering in 2001:

Suspicious Activity Reports (SARs) filed by U.S. based banks have cited suspicious wire transfer activity transpiring through U.S. correspondent accounts maintained by foreign banks. The SARS typically reference possible shell entities as parties to the wire transfer activity. Many of these shell companies are domestically based.

Reports filed on correspondent accounts revealed large dollar volumes of suspicious wire transfer activity transpiring through U.S. correspondent accounts maintained by foreign banks. This activity has often involved so-called "unsubstantiated entities" (companies who do not appear as listed on the Internet or through other research). These "unsubstantiated" entities have been involved as parties to the suspicious wire transfer activity transpiring through the correspondent accounts maintained by foreign banks with the U.S. reporting bank.

Some reports also referenced suspected "shell banks" as parties to the suspicious wire transfer activity through foreign correspondent bank accounts. Other suspicious factors cited by the reporting banks, beyond the detection of suspected shell entities, include: large dollar volume wire transfers; repetitive patterns of frequent wire transfers; and unusual directional flows considered by the reporting banks to be deviations from normal legitimate business transaction flows.

Several U.S. based banks have the ability to detect and report this suspicious activity through monitoring of the correspondent accounts that they maintain for foreign banks Some U.S. based banks have also closed correspondent accounts maintained by foreign banks due to continuous suspicions that many of the foreign banks’ customers are possible shell entities.

Law enforcement has identified computer intrusion as a new type of suspicious activity as a result of reports from financial institutions regarding possible attempts to intrude into their computer systems. Computer Intrusion is defined as gaining access to a computer system of a financial institution to: remove, steal, procure or otherwise affect funds of the institution or the institution’s customers; remove, steal, procure or otherwise affect critical information of the institution including customer account information; or damage, disable or otherwise affect critical systems of the institution. For purposes of this reporting, computer intrusion does not mean attempted intrusions of web-sites or other non-critical information systems of the institution that provide no access to institution or customer financial data or other critical information.

From June 1, 2000 to May 31, 2001, 147 suspicious activity reports on computer intrusion were filed by financial institutions in 34 states and Puerto Rico. All were filed by depository institutions, with those in New York, California and Illinois accounting for nearly 30 percent.

The majority of companies in the United States that make up the money services businesses (MSB) industry recognize that the products and services that they provide may be vulnerable to abuse. Some of the national MSBs, including the leading money transmission services, money order and travelers’ checks issuers, check cashing businesses and currency exchange providers have developed internal systems to detect suspicious activity.

Reports filed by money transmitter companies, both primary companies (companies that own a money transmitter business) and agent businesses (companies that act as agents), indicate that there are many varied patterns of suspicious activity involving money transmitter companies. Primary among those are customer attempts to disperse transactions and circumvent record keeping dollar amount thresholds.

Identity theft and related fraudulent activities have been reported by financial institutions since 1996. In the June 2001 Issue of the SAR Activity Review, identity theft was selected as the Highlighted Trend based on the financial industry’s perception of increases in both the incidence of identity theft-based fraud and increased SAR reporting.

Since December 1, 2000, filing of reports related to identity theft have increased by 50 percent from the same period a year before. Because the rate of identity theft incidents continues to increase, the Federal Trade Commission has developed a pamphlet to assist consumers in avoiding identity theft and, in instances of abuse, to give steps to take in addressing stolen identities. Federal bank supervisors also recently released guidance to banking organizations on identity theft.

U.S. law enforcement conducted a review of investigative case files to provide guidance to financial institutions on indicators of activity that could be linked to various criminal activities including terrorism. The following patterns of activity indicate collection and movement of funds that could be associated with terrorist financing:

• Use of multiple personal and business accounts to collect and funnel funds to a small number of foreign beneficiaries;
• Deposits are followed within a short period of time by wire transfers of funds;
• Beneficiaries are located in a problematic foreign jurisdiction;
• Structuring of cash deposits in small amounts in an apparent attempt to circumvent Federal Currency Transaction Report requirements;
• Mixing of cash deposits and monetary instruments;
• Deposits of a combination of monetary instruments atypical of legitimate business activity (business checks, payroll checks and social security checks);
• Stated occupations of those engaging in transactions that are not commensurate with the level of activity (e.g., student, unemployed, self-employed);
• Large currency withdrawals from a business account not normally associated with cash transactions.
• Movement of funds through a FATF "non-cooperative country or territory"; and,
• Involvement of multiple individuals from the same country or community.

Alternative remittance systems, sometimes also referred to as informal value transfer systems (IVTS), are a family of monetary remittance systems that provide for the transfer of value outside of the regulated financial industry. These systems are known by a variety of names reflecting ethnic and national origins, predominantly South Asian and Chinese. They operate throughout the world, especially in countries with large expatriate populations from Africa and Asia. Included, among others, are such systems as hawala (India), hundi (Pakistan), fei ch’ien (China), phoe kuan (Thailand), hui k’uan (Mandarin Chinese), ch’iao hui (Mandarin Chinese) and nging sing kek (Cantonese Chinese). Most of these systems pre-date the emergence of modern banking and other financial institutions. The Colombian Black Market Peso Exchange can also be characterized as a form of alternative remittance system.

These systems provide mechanisms for the remittance of currency or other forms of monetary value—most commonly gold—without physical transportation or use of contemporary monetary instruments. These systems are used extensively as a means for expatriates, such as foreign laborers, to have funds delivered to families in the home country without contact with authorities on either the sending or receiving end. The systems rely on a pairing of brokers, one who orders a disbursement on behalf of a sender and another that makes the disbursement to the receiver, followed at some point in time with a clearing process to settle account imbalances between the brokers. The systems operate on the basis of a trusted relationship established in the context of narrowly defined ethnic and national ties. Records are not typically kept about the identities of the transactors or details of the transactions.

Because of the anonymity and secrecy of the remittance transactions, these systems are known to have been used in a variety of criminal activities including money laundering, terrorist financing, alien smuggling, drug trafficking, arms trafficking, corruption of government officials, currency controls evasion and tax evasion. Although these systems operate outside of the regulated financial industry, they may intersect with banks and other traditional financial institutions in order to either obtain currency needed to make disbursements, or as links in the account clearing process involving wire transfers, imports and exports of goods such as electronics, securities transactions etc. It is at these links that the brokers or their representatives may become known to financial institutions, and their transactions reviewed for indications of unusual activity in countries that require the reporting of suspicious transactions.

The Black Market Peso Exchange System (BMPE) is a trade-based system that depends on commercial traffic between the U.S. and Colombia to launder profits from the sale of illegal drugs in the United States. The BMPE is a significant money laundering conduit used by Colombian narcotics traffickers in repatriating revenues to Colombia. The process begins when a Colombian drug organization arranges the shipment of drugs to the United States. The drugs are sold in the U.S. in exchange for U.S. currency that is then sold to a Colombian black market peso broker’s agent in the United States. The U.S. currency is sold at a discount because the broker and his agent must assume the risk of evading the Bank Secrecy Act reporting requirements when later placing the dollars into the U.S. financial system.

Once the dollars are delivered to the U.S.-based agent of the peso broker, the peso broker in Colombia deposits the agreed upon equivalent in Colombian pesos into the organization’s account in Colombia. At this point, the organization has laundered its money because it has successfully converted its drug dollars into pesos, and the Colombian broker and his agent now assume the risk for introducing the laundered drug dollars into the U.S. banking system, usually through a variety of surreptitious transactions. Having introduced the dollars into the U.S. banking system, the Colombian black market peso broker now has a pool of laundered dollars to sell to Colombian importers. These importers then use the dollars to purchase goods, either from the U.S. or from other markets, which are transported to Colombia, often via smuggling in order to avoid applicable Colombian law.

The exact size and structure of the BMPE system cannot be determined with any degree of precision. However, based on anecdotal law enforcement evidence, informants’ statements, and Colombian law enforcement and intelligence officials, it is believed that between $3 billion and $6 billion is laundered annually. Other sources of demand for BMPE dollars include capital outflows by Colombian residents, who seek either to conceal the funds from the Colombian authorities or simply to take advantage of the favorable BMPE exchange rate.

To combat the BMPE, the U.S. Department of Treasury instituted an interagency working group whose aggressive attack on this problem has resulted in enhanced coordination of anti-BMPE investigations and increased successful prosecutions. Treasury’s outreach programs to educate U.S. exporters of the operations of and their vulnerability to the BMPE have also achieved success. During the past year, high-level U.S. Government officials met with senior officials of U.S. companies whose products are vulnerable to the BMPE to explain the system and to encourage them to develop programs to counter the BMPE. Subsequently, company officials and government experts developed draft best practice guidelines to help U.S. importers and exporters identify BMPE-related transactions and institute protective measures. These draft guidelines are now under study by U.S. companies and are being adapted to fit business practices in various industries. These guidelines are expected to be implemented by June 2002.

In addition to domestic outreach efforts, the United States, Colombia, Panama, Venezuela and Aruba formed an international working group of experts to combat this money laundering system. This working group is to study the BMPE, report its findings, and recommend policy options and actions that can be taken by the governments against the BMPE.

On October 21, 2000, U.S. Treasury Department and Department of Justice officials and government officials from Aruba, Colombia, Panama, and Venezuela participated in the first meeting of this working group. At the meeting, the 30 experts discussed how the BMPE money laundering system affected each of their respective countries. Topics of discussion included the BMPE steps, documentation of international commercial transactions, the problems with existing paper trails and laws, and ways to improve international cooperation.

During 2001, the BMPE Multilateral Working Group met in Panama, Colombia, and the United States and conducted studies of day-to-day operations and regulation of free trade zones, the relationship between merchants in and operators of these zones and zone authorities including Customs. As a result of these meetings, experts from the participating countries formulated policies and actions as recommendations to their respective governments.

These wide ranging recommendations included improving international cooperation through the design and implementation of standardized recording and reporting of international shipments to facilitate information exchange between governments, The Experts Group also recommended adequate screening and regulation of free trade zone merchants and operators, and expanded efforts to educate international commerce merchants to the risks of trade-based money laundering and methods to combat it. Recognizing that contraband trade and related money laundering is endemic to the economies of certain regions, the experts of the Multilateral Group also recommended conducting studies of economic, social, political and/or legal issues to find comprehensive responses to problems. The Multilateral Working Group is expected to reconvene in 2003 to review progress in implementing these recommendations and to report on results achieved in combating trade-based money laundering,

The hawala (or hundi) alternative remittance system (sometimes also known as parallel or underground banking) continues to be a key factor in money laundering and financial crimes associated with South Asia. It is used in both the huge "underground" economies of the region and is also widely used in everyday transactions involving legitimate commerce. Hawala has been called "the poor man’s banking system." Unfortunately, criminal organizations take advantage of hawala networks to launder illegally derived proceeds or transfer funds for the financing of criminal activities. In 2001, the use of hawala was noted in terrorist financing investigations. Moreover, because of changing immigration patterns, the use of hawala is no longer confined to South Asia but has spread around the world.

Hawala operates on trust and connections. In fact "trust" is one of several meanings associated with the word hawala. Customers trust hawala operators or "hawaladars" to use their connections to facilitate money movement or more accurately transfer value around the world. The hawala money transfer system is generally much more rapid and inexpensive then the use of traditional banking institutions. Hawala transactions are often based on the trade of a commodity such as electronics or gold. Fictitious, under-or over-invoicing are often used to "balance the books." The actual hawala records themselves provide little paper trail and often the records are written in code. Most hawala networks are based on ethnic and family ties. This facilitates the trust necessary for hawala, and also makes it very difficult for law enforcement to penetrate the networks.

Dubai in the United Arab Emirates has often surfaced as the conduit for hawala transfers involving India, Pakistan, Afghanistan, Somalia, and other countries in the region. The UAE is beginning to study possible countermeasures to hawala transactions. However, any solution must also address the underlying causes of hawala in South Asia such as severe foreign exchange restrictions, inefficient and costly banking channels, and tax and duty policies.

United States law enforcement authorities have observed that as money laundering schemes become more complex, the perpetrators turn to the learned expertise of attorneys, accountants, consultants and agent representatives to aid them in the movement of illegal currency. These professionals, using shell corporations, nominees and fictitious records, devise elaborate paper trails to disguise the true source of illegal income.

Gold is known to play a significant role in international money laundering. Gold, just like certain currencies (e.g., the U.S. dollar, Swiss franc, and British pound, the Euro) is a nearly universal commodity for international commerce. The attractiveness and value of a particular currency depend on a complex and often unstable variety of political and economic conditions. Gold has been a key medium of exchange since antiquity and will, in fact, most likely always enjoy this position, as it appears nearly immune to the consequences of changing global fortunes.

Gold serves as both a commodity and, to a lesser extent, a medium of exchange in money laundering conducted in Latin America, the United States, Europe and Asia. In this cycle, for example, gold bullion makes its way to Italy via Swiss brokers. There it is made into jewelry, much of which is then shipped to Latin America. In Latin America, this jewelry (or the raw gold from which it was made) then becomes one, if not the most important, of the commodities in the black market peso exchange.

Criminals may be using traveler’s checks as a money laundering tool. Although traveler’s checks can be the preferred mechanism for conducting large business transactions in some countries, the use of traveler’s checks can offer the opportunity to commingle illicit funds with legitimate funds. Several major U.S. banks and traveler’s check issuers have detected and reported suspicious practices involving the use of hundreds of thousands of dollars in traveler’s checks per instance, often in strings of sequentially numbered thousand-dollar traveler’s checks. In some cases, the payee was a numbered account in a foreign bank. Frequently the name and/or address on the purchase agreement were left blank, unverifiable, illegible, or not matching the signature name on the corresponding traveler’s checks.

Mexico, Nigeria, Israel, and a number of East Asian countries have been frequently cited as the point of origin or negotiation for instruments involved in this type of activity. An example was the purchase of traveler’s checks from an investment house/travel agency in Asia, where one employee of the traveler’s check seller personally signed the purchase agreements for $27 million worth of traveler’s checks. When the traveler’s check issuer told the seller to have the buyer sign the purchase agreement, the traveler’s check seller started producing purchase agreements with many different names, but frequent similarities in handwriting.

Increased reporting on the sale of pre-paid telephone cards led to the May 2001 issuance of FinCEN’s Bulletin on suspicious activity related to phone card businesses. Over 160 reports indicating suspicious financial activity were filed related to businesses involved in phone card sales. Some of the companies or businesses involved in the reported activity offer other services such as check cashing, money orders, beepers, cellular phones, faxes, lottery tickets, and travel tickets. Financial institutions in fourteen states, particularly in New York, New Jersey, Texas, California and Florida, reported this suspicious activity.

Phone card sale businesses routinely generate significant legitimate cash flow. Information reported by financial institutions shows problematic transactions suggestive of money laundering or other illicit financial activity such as large and unexplained cash flow increases or transactions structured to stay below CTR reporting requirements associated with illegitimate use of these businesses. Additionally, law enforcement information suggests the use of phone cards may be a possible mechanism to launder illicit funds. The reported dollar volumes associated with this activity range from $300,000 to $50 million. In one instance, a bank reported 370 cash deposits by a prepaid phone card business totaling more than $3 million in approximately three months, exceeding the business’ expected cash flow.

U.S. Money Laundering Countermeasures

On October 15, 1998, Congress passed the Money Laundering and Financial Crimes Strategy Act of 1998. The Act called upon the President, acting through the Secretary of the Treasury and in consultation with the Attorney General, to develop a national strategy for combating money laundering and related financial crimes. The Act called for the first national strategy to be sent to Congress in 1999, and updated annually for the following four consecutive years. The 2001 National Money Laundering Strategy was released in September 2001.

The 2001 Strategy identifies five goals: (1) focus law enforcement efforts on the prosecution of major money laundering organizations and systems; (2) measure the effectiveness of anti-money laundering efforts; (3) prevent money laundering through cooperative public-private efforts and necessary regulatory measures; (4) coordinate law enforcement efforts with state and local governments to fight money laundering throughout the United States; and (5) strengthen international cooperation to combat the global problem of money laundering.

The following are summaries of the most significant priority issues:

• Refocus Efforts of High Intensity Financial Crime Areas (HIFCAs). HIFCAs are special, high-risk areas or sectors where law enforcement will concentrate its resources and energy to combat money laundering. The 2001 Strategy mandated that the HIFCA task forces become operational and conduct investigations designed to result in indictments, convictions, and seizures, rather than focus primarily on intelligence gathering. Each of the six HIFCA Task Forces is now actively working cases. HIFCA Task Forces are composed of, and draw upon, all relevant federal, state, and local agencies. The Departments of Treasury and Justice jointly supervise the HIFCA Task Forces, and the 2001 Strategy primarily tasks the Federal Law Enforcement Training Center (FLETC) and Justice’s Asset Forfeiture and Money Laundering Section to develop an advanced money laundering training program to enhance the HIFCA Task Forces’ ability to investigate sophisticated money laundering schemes.
• Broker-Dealers in Securities Suspicious Activity Report Reporting. Although banks are subject to the suspicious activity reporting requirements of the Bank Secrecy Act (BSA), many non-bank financial institutions—including brokers and dealers in securities—have not been subject to the reporting provisions of the BSA. On December 31, 2001, Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a proposed rule that would "level the playing field" by requiring securities brokers and dealers to file suspicious activity reports in connection with customer activity that indicates possible violations of law or regulation, including violations of the Bank Secrecy Act. The SAR broker-dealer rule closely mirrors the reporting regime currently in place for banks, and sets the SAR reporting level at $5,000.
• Money Service Business Suspicious Activity Report Reporting. The Treasury Department issued final regulations, effective December 31, 2001, mandating that money transmitters, issuers, sellers, and redeemers of money orders and traveler’s checks must report suspicious transactions to the Treasury Department beginning January 1, 2002. The principal focus will be to ensure that law enforcement fully utilizes reported information. The 2001 Strategy requires that law enforcement agencies using SAR information evaluate the usefulness of this information and provide FinCEN with operational feedback FinCEN will use the feedback to increase the usefulness of reported information to law enforcement agencies.
• Reduce the threat of money laundering posed by foreign correspondent banks. On December 20, 2001, Treasury issued a proposed rule to codify interim guidance Treasury issued in November pursuant to the USA PATRIOT Act concerning how financial institutions could make sure that their correspondent accounts were not being used to move proceeds directly or indirectly from foreign "shell banks." For purposes of the proposed rule, foreign shell banks are defined, with a limited exception, as foreign banks without a physical presence in any country. The proposed rule also covers securities brokers and dealers, and broadens the existing definition of correspondent accounts to include "any account (broker-dealers) provide in the U.S. to a foreign bank that permits the foreign bank to engage in securities transactions, funds transfers, or other financial transactions through that account." The proposed rule also requires banks that offer correspondent accounts to foreign banks to require those banks to appoint an agent with authority to accept service of legal process for information relating to the correspondent account in the U.S. and keep records of the identity of the agent as well as the owner of the foreign bank.
• International. The Strategy seeks to remove all barriers that inhibit international cooperation, and called on appropriate U.S. Government officials to review extradition and mutual legal assistance relationships that are key for money laundering investigations and prosecutions and to recommend that coverage of money laundering offenses be considered an important objective in assessing U.S. Government priorities for future treaty negotiations. The 2001 Strategy sets as its goal increased use of the international asset-sharing program, which provides an incentive for international cooperation. Further, the Departments of the Treasury and Justice will explore the feasibility of establishing model international financial task forces to plan and coordinate significant multilateral money laundering investigations. The United States will continue to actively participate within the Financial Action Task Force (FATF), and seek to revise the Forty Recommendations to reflect new issues and concerns.
• Evaluation and Accountability. The 2001 Strategy seeks to institutionalize systems to measure the success of money laundering enforcement efforts and results to provide law enforcement with an accurate picture of its anti-money laundering programs. Measured evaluation will allow for the identification of money laundering "hot spots," indicate areas where law enforcement must enhance or prioritize its investigations and prosecutions, and allow law enforcement to articulate measurable goals. Treasury has convened a high-level working group to consider the establishment of standardized reporting procedures for each federal law enforcement agency involved in money laundering investigations and prosecutions.
• Legislation. An aggressive anti-money laundering attack requires that law enforcement utilize all available statutory authorities to dismantle large-scale criminal enterprises. Treasury, the White House, and Department of Justice worked closely with the Congress on a variety of anti-money laundering proposals that were contained in Title III of the USA PATRIOT Act, which Congress passed and the President signed into law in October 2001. The anti-money laundering provisions of the USA PATRIOT Act addressed various deficiencies in current money laundering laws and enhanced criminal money laundering enforcement and asset forfeiture capabilities. A number of interagency task forces are working to implement the various provisions of the USA PATRIOT Act.
• Financial Crime-Free Communities Support Program. The 2000 Strategy announced the launching of the Financial Crime-Free Communities Support (C-FIC) Program. The C-FIC program is the result of a legislative mandate to establish a federal grant program to provide seed capital for emerging state and local anti-money laundering enforcement efforts. The Bureau of Justice Assistance (BJA) assists the Treasury Department in administering this grant program. In September 2001 Treasury awarded $2.1 million in grant funds to a variety of programs proposed by eight state and local law enforcement agencies in New York, Illinois, Wisconsin, Iowa, Washington, and California. The 2001 Strategy calls for Treasury to conduct evaluations of existing C-FIC grant recipients to assess their progress.

Prior to the September 11 terrorist attacks, efforts to enhance the federal government’s ability to combat international money laundering were already underway. The Senate and House were considering money laundering legislation, and the Bush Administration was hinting at increasing prosecutorial and regulatory resources to fight significant money laundering organizations and complicit financial institutions. The events of September 11 launched anti-money laundering, as well as terrorist financing initiatives, as top priorities in the war on terrorism.

On October 26, 2001 the President signed into law the Money Laundering Abatement and Anti-Terrorist Financing Act of 2001, as Title III of the "United and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism ("USA PATRIOT") Act of 2001." The most significant legislation of its kind since 1970, Title III contains comprehensive regulatory and enforcement provisions that will impact financial institutions’ daily operations. The legislation both systematically targets known risks to the financial system as well as provides the U.S. Government with new authority and tools to identify and eliminate specific problems as they arise.

Key provisions of Title III include:

Section 311 provides the United States with authority to apply graduated, proportionate measures against a foreign jurisdiction, foreign financial institution, type of transaction, or account that the Secretary of the Treasury determines to be a "primary money laundering concern." (A finding by the Secretary of the Treasury pursuant to this section that a jurisdiction is of "primary money laundering concern" is wholly distinct from and should not be confused with the INCSR characterization of countries or jurisdictions as being of "primary money laundering concern") The five special measures include such steps as requiring domestic financial institutions to keep records and report certain transactions, take reasonable steps to obtain beneficial ownership information, obtain information about certain types of accounts, including correspondent accounts, and, if necessary terminate such accounts. The designation of primary money laundering concerns, the selection of particular special measures, and the imposition of certain of the special measures, require consultation with various agencies and departments including in all cases the Department of State. Treasury will issue regulations defining key terms.

Section 312 requires financial institutions that establish, maintain, administer, or manage a private banking account or a correspondent account for a non-U.S. person to apply appropriate, specific and, where necessary, enhanced due diligence policies, procedures and controls reasonably designed to detect and report instances of money laundering through those accounts. The provision imposes additional requirements for such accounts held by foreign banks operating under offshore licenses or licenses from jurisdictions designated as non-cooperative with international anti-money laundering principles or procedures by an intergovernmental group or organization of which the United States is a member, with which designation the United States representative to the group or organization concurs, or by the Secretary of the Treasury as warranting special measures due to money laundering concerns. Treasury will issue regulations further defining the due diligence required.

Section 313 generally prohibits U.S. financial institutions from maintaining a correspondent account in the United States for a foreign shell bank, that is, a foreign bank that does not have a physical presence in any country. The provision also generally requires financial institutions to take reasonable steps to ensure that foreign banks with correspondent accounts do not use those accounts to indirectly provide banking services to a foreign shell bank. Limited exceptions apply to both requirements. Treasury has issued interim guidance and a proposed rule outlining methods for financial institutions to comply with this provision.

Section 314 requires Treasury to adopt regulations encouraging information sharing between law enforcement, regulators, and financial institutions concerning known or suspected terrorists or money launderers. Also permits financial institutions, after providing notice to Treasury, to share information with each other regarding suspected terrorists or money launderers.

Section 315 adds additional predicate offenses to the U.S. money laundering statutes, including foreign official corruption and certain foreign smuggling and export control violations.

Section 319 authorizes the seizure of funds held by foreign banks in U.S. correspondent accounts to satisfy certain types of seizure orders against funds deposited in the foreign bank, regardless of whether those funds can be traced to the foreign bank’s correspondent account in the United States. Section 319 also allows the Secretary of the Treasury or the Attorney General to subpoena records of a foreign bank that maintains a correspondent account in the United. States. The subpoena can request any records relating to the account, including records located in a foreign country relating to the deposit of funds into the foreign bank. To facilitate the service of subpoenas, foreign banks must designate a registered agent in the U.S. to accept service, and U.S. financial institutions maintaining such accounts must keep records of the identity of the agent as well as the owners of the foreign bank. If the foreign bank fails to comply with or contest the subpoena, the Secretary or the Attorney General can order the U.S. financial institution to close the correspondent account. Treasury has issued interim guidance and a proposed rule concerning the record-keeping requirements.

Section 325 permits but does not require the Secretary of the Treasury to promulgate regulations governing maintenance of concentration accounts, that is, accounts used to aggregate funds from different clients’ accounts for various transactions. If funds are commingled and not linked to individual clients, this presents a money laundering risk.

Section 326 requires the Secretary of the Treasury to issue regulations establishing minimum standards for the identification of customers of financial institutions during the opening of an account. The provision also requires the Secretary to report to Congress on ways to enable domestic financial institutions to confirm the identity of foreign nationals who seek to open accounts.

Section 352 requires all financial institutions to have an anti-money laundering program by April 24, 2002. The provision permits the Secretary of the Treasury to issue regulations prescribing minimum standards for the programs and to exempt certain financial institutions from the requirement. The Secretary must also issue regulations evaluating whether the requirement of an anti-money laundering program is commensurate with the size, location, and activities of the financial institution to which it applies.

Section 356 requires the Secretary of the Treasury to issue a final rule requiring brokers and dealers to file SARs by July 1, 2002. Treasury issued a proposed rule as directed on December 31, 2001. The provision also authorizes the Secretary to require futures commission merchants and other commodities investment advisors to file SARs. Finally, it requires Treasury to draft a report along with the SEC and the CFTC recommending ways to apply the Bank Secrecy Act to investment companies.

Section 358 includes three provisions facilitating the sharing of information to combat international terrorism:

Section 359 brings informal banking systems, such as hawalas, under the Bank Secrecy Act.

Section 362 requires the Secretary of the Treasury to establish a secure network in FinCEN to allow financial institutions to file Bank Secrecy Act reports electronically through the secure network and provide financial institutions with alerts regarding suspicious activities.

Section 365 requires non-financial businesses to file transaction reports with FinCEN for all transactions involving the receipt of more than $10,000 in coins or currency. Treasury issued an interim final rule in December implementing this provision. Because this rule is nearly identical to the reporting provision of the Internal Revenue Code, Treasury’s rule permits the filing of a single form to satisfy both reporting requirements.

Section 371 criminalizes the smuggling of more than $10,000 in bulk currency across U.S. borders, and makes the property involved in the offense subject to civil and criminal forfeiture.

Section 1006 amends the Immigration and Nationality Act to exclude aliens engaged or seeking to engage in money laundering as described in U.S. law, or those that aid, abet, assist or collude in such activity. This section also requires the Secretary of State to establish a watch list identifying persons worldwide who are known or suspected of money laundering. In developing the required watch list, the State Department consulted with the CIA and relevant offices within the Departments of Justice and Treasury. In January 2002, the Secretary of State certified to the Congress that such a list had been put into place.

An investigation conducted by the Colombian Departamento de Investigaciones (DAS) with DEA targeted a Colombian money laundering organization connected to the Colon Free Zone, Panama. This organization was allegedly involved in the black market peso exchange through importation of precious metal and jewels into Colombia in exchange for drug related proceeds.

On February 1, 2001, acting on DEA information, the DAS arrested four pilots and seized two airplanes in of Medellin, Colombia, upon their arrival from Panama. A search of the aircraft revealed approximately $600,000 worth of gold and silver concealed within the planes.

On February 19, 2001, the DAS conducted a roundup of defendants implicated in money laundering violations as a result of this investigation. Twenty-one persons were arrested with seizures of two additional airplanes, approximately $100,000 in currency, $110,000 worth of jewelry and 12 weapons.

On December 18, 2001, the United States Postal Service seized $1,637,574.21 in connection with the prosecution of James R. Gibson and Marjorie Gibson on fraud and money laundering charges. This seizure, together with a related seizure of $54,000 in November, resulted from the first successful application of new authority under Section 319(a) of the USA PATRIOT Act (18 U.S.C. §981(k)) to seize for forfeiture funds a foreign bank has on deposit in a correspondent account at a financial institution in the United States in order to satisfy a seizure order against funds held on deposit in the bank abroad.

Gibson’s criminal scheme involved the diversion of approximately $37 million from structured settlement agreements for roughly 150 victims, including widows, orphans and persons in need of expensive, on-going medical care. Gibson and his wife fled to Belize with $2.4 million and a luxury yacht. Despite repeated efforts, the USG had previously been unable to get custody of assets Gibson had removed to Belize due to local statutory limitations on the ability of the Government of Belize to provide international assistance to the United States. The decision to use Section 319(a) authority by the Department of Justice occurred after inquiries to the Departments of Treasury and State.

Sixteen members of a cocaine trafficking ring were charged in a nine-count indictment for conspiracy, possession and distribution of controlled substances and money laundering as a result of a criminal investigation by the Internal Revenue Service. According to the indictment, the operation was as follows:

The group participated in the distribution of narcotics from Los Angeles to Milwaukee and Chicago. The flow of cash moved from Chicago and Milwaukee back to Los Angeles.

The organization used couriers to transport the cash to Los Angeles. The cash was packed within clothing and hidden in the couriers’ luggage. Often the accumulated cash was concealed in commercial storage sheds in the Chicago area before it was spent on personal items.

To facilitate the cocaine distribution and to conceal the nature, source and ownership of the narcotics proceeds, the group employed several methods to disguise the financial transactions: obtaining false driver’s licenses; using nominee names to purchase personal items; creating false loan documents; and using artificial business names.

Several members of the group used fake business names to obtain corporate credit cards. Automobiles were purchased and financed under false identities. Several individuals and couriers applied for and received frequent flyer benefit cards under the false identities.

Cash parcels, containing more than $50,000, were also mailed through the U.S. Postal Service with the bulk cash transported exceeding $6 million dollars.

After two years of investigation, the government seized over $1 million dollars, charged the 16 individuals and was seeking forfeiture of an additional $5 million in assets. The lead defendant later admitted a leading role and was sentenced to 25 years in prison and an additional 5 years of supervised release.

Solicitors at the Los Angeles International Airport ("LAX") asked travelers and others to donate money to the Committee for Human Rights ("CHR"), an entity which the solicitors are alleged to have known was a front organization for the Mujahedin-e Khalq ("MEK"), a designated foreign terrorist organization. Based on the results of a federal investigation, it is believed that the funds were collected on behalf of and for the purpose of financing the activities of the MEK. Seven individuals, including those who are believed to have knowingly donated and raised money for the MEK, were charged in a 59-count indictment with providing and conspiring to provide material support or resources to a foreign terrorist organization in violation of Title 18 U.S.C. §2339B(a)(1).

The indictment alleges that:

• One defendant coordinated the fundraising activities for the MEK.
• Several defendants solicited donations to the CHR, a front organization for the MEK, at LAX, knowing and intending that those donated funds would go to the MEK.
• Other defendants donated money to the MEK.
• One defendant wire transferred money from a CHR bank account to bank accounts in Turkey for the benefit of the MEK.
• Several defendants participated in conference calls during which fundraising for the MEK was discussed. During one such conference call with an MEK leader, several defendants learned that the MEK had been designated as a foreign terrorist organization and were nonetheless instructed to and did continue to raise funds for the MEK.

The trial in this matter is scheduled to commence on May 28, 2002.

In January 1999, the Financial Crimes Division (FCD) of the Texas Office of Attorney General (OAG) initiated an investigation into money laundering allegations based on information received from a Suspicious Activity Report (SAR) filed by a Texas bank. This investigation centered on the operation of an illegal casa de cambio in Dallas and Kaufman Counties, Texas. The subjects of the investigation allegedly operated an illegal currency exchange business in violation of the Texas Financial Code, a third degree felony.

Currency exchange and transmission businesses like casas de cambio may be used by criminals to launder funds in connection with exchanging U.S. dollars for currencies of other countries prior to the funds being transmitted. Money orders in U.S. dollars that are sent to other countries can be difficult to redeem. Many currency exchange and transmission businesses are not licensed to conduct wire transmissions, as is required in many states.

Texas OAG, FCD, researched Bank Secrecy Act reports and located a total of 115 Currency Transaction Reports (CTRs), 14 Reports of International Transportation of Currency or Monetary Instruments (CMIRs), two Currency Transaction Reports by Casino (CTRCs) and 11 Suspicious Activity Reports (SARs). The documents helped the investigator by providing specific banking transactions and account information. That information was added to search warrants to establish probable cause and presented to a state grand jury.

The investigation concluded that money orders were received from various senders across the U.S. at the home addresses or post office boxes of the subject. According to the investigation, the subject then deposited the money orders into one or more local bank accounts and the banks were then instructed to wire transfer the funds to another out-of-state bank. Information gathered through the use of search warrants indicated that from August 1998 through March 1999, banking activity by the casa de cambio included deposits of $5,593,185 and wire transmissions of $5,122,460.

A multi-agency investigation, led by the U.S. Customs Service, of several subjects allegedly engaged in a fraud scheme, in which 5,000 investors were defrauded of $67 million, was aided by the filing of a Suspicious Activity Report by a financial institution in Hawaii. According to investigators, proceeds of the scheme were deposited into numerous accounts at various business locations in Hawaii and then wire transferred to offshore accounts in Antigua, Bahamas and Vanuatu. Investors were told that their money would be invested with the Cayman Islands Government, which would pay the principals 20 percent interest per week. The principals, in turn, promised a return of 8 percent per week, plus 3 percent referral fee for investors who enrolled new investors. The investment was to run on a 13-week cycle. In reality, there was no such investment with the Cayman Government, and the defendants kept substantial profits.

One of the defendants deposited $100,000 that was subsequently wire transferred to Ireland. The cash consisted of $95,000 in one hundred dollar bills and $5,000 in twenty dollar bills. The customer represented himself as an investment consultant and a self-employed educational systems marketer. The customer provided bank officials with useful identification documents, and even inquired of bank employees if they wanted to invest with him promising to pay them a high rate of return. The transaction indicated that the customer was working as a middle person to hide illegitimate income from investors who may have been under his control.

Thus far $1,473,536 has been seized. One defendant pled guilty to six counts of money laundering, mail fraud, wire fraud, conspiracy to launder monetary instruments, and conspiracy to defraud the United States. Six additional defendants were named in a 100-count indictment charging them with mail fraud, wire fraud, money laundering, structuring, and conspiracy.

Bilateral Activities

During 2001, a number of U.S. law enforcement and regulatory agencies provided training and technical assistance on money laundering countermeasures and financial investigations to their law enforcement, financial regulatory, and prosecutorial counterparts around the globe. These courses have been designed to give financial investigators, bank regulators, and prosecutors the necessary tools to recognize, investigate, and prosecute money laundering, financial crimes, and related criminal activity. Courses have been provided in the U.S. as well as in the jurisdictions where the programs are targeted.

The Department of State’s Bureau of International Narcotics and Law Enforcement Affairs (INL) developed a $2.7 million program for fiscal year 2001 to provide law enforcement, prosecutorial and central bank training to countries around the globe. A prime focus of the training program was a multi-agency approach to develop or enhance financial crime and anti-money laundering regimes in selected jurisdictions.