Money laundering is the process of making criminal proceeds appear legitimate by obscuring their illicit origin. This allows the funds to be used freely, without fear of detection or punishment for the underlying criminal act.
Although the practice of cleaning dirty money has been around for a long time, efforts to combat it are more recent. And while banks were required to follow record-keeping and reporting requirements as early as 1970 when the Bank Secrecy Act (BSA) was enacted, it wasn’t until 1986 that money laundering was criminalized in the United States.
The Impetus for the Money Laundering Control Act
The 1980s was a decade where illicit cash flooded U.S. banks. Vast amounts of cocaine were being shipped into the U.S. from Columbia, ultimately resulting in the crack epidemic. And the failure of savings and loan associations resulted in a financial crisis that contributed to an increase in white-collar crime, including various types of fraud.
By this time, launderers had also found new ways to circumvent the BSA. This was done primarily through structuring, a process that entails breaking up large cash deposits into smaller amounts of less than $10,000 in order to avoid bank reporting requirements, such as the filing of Currency Transaction Reports (CTRs).
As a result of the influx of illicit cash and in an effort to curb accompanying crime, Congress passed the Money Laundering Control Act (MLCA) in 1986. The MLCA made money laundering a federal offense and the Act constitutes a significant development in AML legislation. With the passage of the MLCA, the United States became one of the first countries to criminalize money laundering.
For additional information on AML legislation, view our Timeline of BSA/AML Regulations.
Requirements Under the Money Laundering Control Act
The MLCA consists of two separate and distinct sections, both of which are contained within Title 18 of the United States Code (U.S.C.), the main criminal code of the federal government, which deals with federal crimes and criminal procedure. These sections include 18 U.S.C. § 1956 and 18 U.S.C. § 1957.
Section 1956 criminalizes active engagement in money laundering. More specifically, section 1956 pertains to the laundering of monetary instruments, including currency, personal checks, and money orders. This section prohibits anyone from conducting or attempting to conduct a financial transaction that involves the proceeds from a number of specified unlawful activities, or predicate crimes. This section applies to both natural persons as well as legal persons (e.g., financial institutions).
Section 1957 makes it a crime to knowingly engage in a financial transaction in property derived from specified unlawful activity through a U.S. bank or other U.S. financial institution, or a foreign bank (in an amount greater than $10,000). This section specifically prohibits structuring transactions to avoid the filing of CTRs and in so doing, seeks to preclude circumvention of BSA requirements. Like its companion section, it also applies to individuals as well as entities.
In addition to criminalizing money laundering and structuring, the MLCA also introduced criminal and civil forfeiture for BSA violations. This includes criminal forfeiture following a conviction for money laundering, and civil forfeiture against the assets involved in, or traceable to, money laundering criminal conduct.
Additionally, the MLCA directed banks to establish and maintain procedures that are reasonably designed to ensure and monitor compliance with the reporting and record-keeping requirements of the BSA.
Jurisdiction and Enforcement of the Money Laundering Control Act
Unlike the BSA, which generally does not have extraterritorial application, there is extensive extraterritorial jurisdiction under the criminal provisions of the MLCA. Section 1956 applies to U.S. citizens involved in money laundering anywhere in the world as well as to noncitizens if any part of the crime takes place in the United States. Similarly, under section 1957, extraterritorial jurisdiction over money laundering conducted outside of the United States applies to both Americans as well as non-U.S. persons if any part of the transaction occurred in the United States.
When it comes to enforcement of the MLCA, except in rare cases where collusion with money launderers or other criminals has been established, very few directors, officers, or employees have been convicted of money laundering. However, there have been recent criminal resolutions of money laundering cases involving the principals of virtual currency exchanges who were alleged to have engaged in money laundering or violations of AML requirements.
In most money laundering cases that involved criminal settlements with banks and other financial institutions, the settlements have been based on alleged violations of the BSA, rather than the MLCA.
Steps That Financial Institutions Should Take to Prevent Money Laundering
As the point of entry for illicit funds, banks and other financial institutions are highly vulnerable to money laundering. Therefore, it is essential that financial institutions implement solid measures and controls to prevent financial crime, avoid fines and penalties, protect their reputation, and safeguard the integrity of the financial system. The list below outlines nine key items that will help fortify your institution against potential threats.
- Keep up with federal laws and ensure compliance with BSA/AML regulations.
- Establish effective internal controls, including risk-based AML policies and procedures, and revisit them periodically.
- Ensure robust and ongoing Customer Due Diligence (CDD) and Know Your Customer (KYC) processes, including identification of beneficial owners, transaction monitoring and screening of sanction lists and applicable watchlists.
- Understand red flags and continuously monitor for suspicious activity.
- Keep up with staff training, including when updates are made to company policies and procedures and when new laws and regulations are released.
- Ensure a clear and consistent “tone at the top,” and that managers at all levels within the organization also promote it.
- Conduct independent testing of the AML compliance program to ensure the program is operating as designed.
- Perform risk assessments to identify, assess, and understand your institution’s exposure to money laundering and terrorist financing risks.
- Make sure that security systems, software, and technology are up to date to prevent criminals from taking advantage of vulnerabilities.
Conclusion
Money laundering is a serious threat that results in devastating consequences for the financial system and for national security because it provides funds for terrorist groups, drug traffickers, arms dealers, criminal organizations, and other bad actors.
Legislation, such as the MLCA, is the first step of a comprehensive strategy to effectively combat money laundering. For this reason, banks and other financial institutions are subject to a number of laws and regulations specifically designed to prevent and detect money laundering. Compliance professionals can assist in these efforts as well as fortify their organization’s security infrastructure with sound AML compliance practices. In order to assist compliance professionals and financial institutions, Alessa’s AML software offers a variety of features, including:
- ID Verification and KYC Solutions
- Transaction Monitoring Software
- Watchlist and Sanctions Screening
- Risk Scoring
- Case Management
- Automated Regulatory Reporting
To learn how Alessa can help your organization combat money laundering, contact an Alessa representative today.
Sources
Tucker, O. M. (2022). The Flow of Illicit Funds: A Case Study Approach to Anti-Money Laundering Compliance. Georgetown University Press.
