ANTI-MONEY LAUNDERING;  WHAT DRIVES OUR GOVERNMENT?

By Mike Riess

Presented at the 29^th International Precious Metals Conference, June 11, 2005

This paper is to give you some background about our anti-money laundering and anti-terrorist finance laws.  I think that, by understanding what’s behind the laws and what motivates the Government, you’ll get a better sense of the Government’s expectations and direction. 

Organized Crime and Terrorism

There is one, central driver, which is to:

The other motivators are means to the end.  They include:

Major Criminal Enterprises     

•          Italian Organized Crime (U.S. & Italian families).                

•          Russian and Eastern European Mafiya                            

•          Japanese Yakuza                     

•          Chinese Triads              

•          Colombian Drug Cartels 

•          Mexican Federation

Organized but Smaller Franchisees

•          Nigeria

•          South Africa

•          Panama

•          Kurdish groups

•          Hells Angels

•          Etc. etc

If you’re a committed enforcement officer, you have to man the barricades, no-holds barred, against organized crime and terrorist finance.   That commitment is intensified by the vast size and the increasing complexity of the problem.  Organized crime and money laundering  have become very much intertwined with terrorist organizations and terrorist finance. 

Today’s emphasis is on terrorism and terrorist finance, but the AML laws began as a way to fight organized crime.  Organized crime has been growing exponentially with drug trafficking since the ‘60’s.  Growth accelerated even more in the ‘90’s with the break up of the Soviet and with the economic expansion in Asia.  There are 6 major crime groups and hundreds of franchisees that specialize in, say, smuggling or money laundering that work for them.  Together, they employ well over a million people worldwide.

•          60% to 80% of organized crime revenues and profits are from Drug trafficking . 

•           U.N. and U.S. Government reports routinely use 2.5% to 5% a year of world GDP as being laundered.  $1 trillion to $3 trillion. 

•           U.S. drug trade accounts for $400 billion.

Their revenues are hundreds of billions of dollars. These numbers give you an idea of the orders of magnitude.   It’s for sure that organized crime groups are powerful commercial, political and in some cases, military organizations.  

Terrorist organizations are getting more and more difficult to distinguish from organized crime.  The literature that compares the two stresses that organized crime is for profit and terrorist finance is for political purpose.  But that distinction applies only to how the net profits are spent.  Most of the revenues go to operating overheads.  In terms of their revenue sources and their operating methods, terrorist finance and money laundering are getting very hard to tell apart.

Terrorist organizations used to get a lot of their funding from countries.  State sponsored terrorism still exists, but it dropped off sharply with the end of the Soviet Union.  To earn the revenues they need, terrorist groups have gotten into some of the same businesses as organized crime, such as kidnapping, extortion, prostitution, trafficking in people and all the rest. 

Terrorist organizations also market their networks and their connections to organized crime.  For instance, they smuggle contraband and they launder money for themselves, and also for organized crime grouops.  They also sell their military, political and organizational skills to organized crime.  A few months ago some IRA operatives were captured in Colombia.  They were there to train the FARC, a paramilitary group closely tied to the drug business.  It operates in a gold producing area and it’s committed to overthrow the Colombian government.

So, organized crime, terrorist finance and money laundering overlap and support one another. 

AML Statutes:  New and Radical

To fight organized crime and terrorist finance, we passed a series of anti-money laundering statutes.  They were a new and radical departure from any other kind of law we’ve known. 

The laws are new in the sense that, although anti-money laundering laws have been around for 35 years, they weren’t enforced for the first ten or fifteen years and they weren’t clearly defined until the Annunzio Wylie Act of 1992.  And they are still taking shape.  

They are radical because law enforcement had always been left to the enforcement agencies.  The private sector was not involved, and both the law enforcement bodies and the private sector liked it that way.  The anti-money laundering laws changed all that by requiring financial institutions to participate proactively in the law enforcement process.

When the drug business started to explode in the‘60’s, law enforcement developed a theory that, by following the money, it would lead them to the criminals.  The problem was, and still is, that it required a vast data base—one that law enforcement recognized it could never develop, much less keep current. 

The only way was to enlist the banks and other financial institutions.  The banks had to get the information anyway, so to the Government, it made perfectly good sense to get the banks to do the legwork. 

The banks, didn’t share that view.  So, the tension between the public and private sectors is a key factor that is always in the background.  It means the ground rules are highly politicized and are constantly under negotiation.  

1970                 Bank Secrecy Act

1986                      Money Laundering Control Act

1988                      Money Laundering Prosecution Improvement Act

1989                      Anti-Drug Abuse Act

1990                      FincCEN established

1990                 Bank Fraud Prosecution and Taxpayer Recovery Act (Crime Control Act)

1991                 Money laundering section established in Justice Department

1992                 Annunzio-Wylie Money Laundering Suppression Act

1994                      Money Laundering Suppression Act

1995                      Asset Forfeiture section established in Justice Department

1995                 Terrorism Prevention Act

1998                 Money Laundering and Financial Crimes Strategy Act

2001                      USA PATRIOT Act

2004                 Intelligence Reform and Terrorism Prevention Act

The first anti-money laundering law was the Bank Secrecy Act in 1970.  It didn’t make money laundering illegal, but it was supposed to deter money laundering by having banks file reports relating to cash transactions.  For the next 15 years, the banks resisted, passively and with law suits, saying the law violated customer privacy. 

That all changed with Ronald Reagan’s war on drugs.  From 1984 on, we have had one anti-money laundering law after another.  Events such as the BCCI or BONY scandals, and of course 9/11, accelerated the process. 

So, for those of you who think of the USA PATRIOT Act as unique and transitory, don’t count on it.  It’s one episode in what has now become a well-established trend.

The Government’s first anti-money laundering effort was to deputize the banks to collect identification and transaction information.  The next major initiative was to get them to monitor their customers’ transactions, then to spot suspicious activity, then to detect and prevent laundering and then to report the suspicious activity to FinCEN, which is Treasury’s financial intelligence unit.   So the requirements expanded from making identification and transaction information available—to analyzing the information and reporting conclusions proactively.

Suspicious Activity Reports

Meanwhile, with all the new laws, the basic customer identification and transaction information is still as important as ever.  So, you can safely assume that over time, the enforcement agencies will need more, not less information and analysis.   And you can count on a steady drumbeat of new laws and regulations to get that information.

I do want to spend just a minute on the last item, Suspicious Activity Reports.  Suspicious Activity Reports became a requirement in 1992 with the Annunzio Wylie Act.  That wasn’t very long ago, yet SAR’s are now a fundamental AML administrative tool. 

According to the Interim Final Rule, the precious metals industry is not required to file Suspicious Activity Reports, but the law “encourages” us to do so.  We should not take the Government’s encouragement lightly.  If there’s a problem, Filing a SAR might help you avoid becoming an investigation target.  And by not filing, you might cross the line into willful blindness.  I’d stress that, for us, there’s a middle ground:  internal documentation.  Banks are taking SAR’s very seriously:  in 2003, filings increased 30%; in 2004, 60%.

Consolidating and Extending Compliance

Between statutes, you can also count on the enforcement agencies to systematically consolidate the ground they gain.  It’s an important motivator.  For example, when John Ashcroft took office, it was one of his priorities to push the banks into stricter compliance with laws that were already on the books. 

Here’s one way he did it.  Because of their size, it’s inevitable that the larger banks will have periodic compliance hiccups.  Some of these result in money laundering problems.  For years, the practice in the Justice Department was for the US Attorneys in the different states to clear prosecutions of these problems with Washington.   A Deputy Attorney General in Washington would decide:  “Yes, this case is important enough to prosecute,”  or  “No, it isn’t consistent with our current emphasis.”  So, there were guidelines that evolved and that the banks could recognize and apply in their compliance programs.

Then, the Attorney General decentralized the process and gave the U.S. Attorneys discretion as to which cases to pursue.  The result was uneven, inconsistent enforcement. 

This wreaked havoc with the larger banks that have offices and branches nationwide.  Without consistent standards, they had to apply compliance procedures and standards that would meet every contingency. This is exactly what the Attorney General was hoping for.

We should take the cue as to where the Government is coming from.  When you are planning your AML procedures, and when you are trying to decide what customer information and verification to include and what to leave out, you should keep in mind:

Irresistables: Forfeiture and Sentencing

The last driver I want to talk about is picking the low-hanging fruit, or the “irresistables.”   That is, laws that offer the Justice Department and the regulatory agencies such easy pickings that they cannot be expected to resist.  The two I want to discuss are:

When the Money Laundering Control Act of 1986 made money laundering a crime, the assets involved became subject to our forfeiture laws.  That changed the Government’s basic anti-money laundering strategy.  In addition to following the money to get to the criminals, the strategy was expanded to:  follow the money and interdict it to deny the criminals their ill-gotten gains.  The objective was, and still is, to reduce criminal enterprise by making it less profitable.

How does forfeiture motivate the Government?

The Justice Department and Treasury Department both have executive offices to allocate forfeited funds and assets.  Some go to cover Department overheads, some to the state and local authorities that participated in the investigation.  The balance is distributed to the Federal enforcement agencies involved.   That’s a powerful incentive for aggressive enforcement.  

The precious metals industry is especially vulnerable to seizure and forfeiture because:

Let me give you an example:  You are a refiner and you take in a customer’s precious metal scrap for refining.  As it turns out, your customer sent you the material to change its form as part of a money-laundering scheme.   You advanced him $175,000.  An enforcement agency seizes the refining lot and initiates forfeiture proceedings because it was “involved” in a money laundering transaction.

Even if you had no idea the material was part of a laundering scheme, it can be forfeited in an  In rem civil proceeding.   Here, the right to forfeiture is embedded in the forfeited item.   If an asset can be shown to have been “involved” in a crime—in this case, money laundering—it is subject to forfeiture.  Even if there is no arrest, even if the asset has changed hands several times, even if you bought it in good faith, it can be subject to forfeiture.  Criminal derivation follows the asset, just like buying stolen property.  The objective is to be able to deny a criminal the proceeds of a crime, even if the criminal cannot be arrested.  For instance, if he flees the country—or was never in the country. 

Now, say you blend or melt the laundered scrap with untainted material to create a larger lot, or to get better refining terms or, if you’re complicit, to cause the dirty material to lose its identity.  The entire commingled lot, now worth $500,000, can be seized for forfeiture. 

Not only your assets but also your customers’ can be confiscated.  In 1989,  $100million of Banco Occidente’s assets were seized.  The bank’s own capital was $5 million; the rest belonged to customers.  So there are severe implications for pool accounts and credit relationships.

Now, let’s say you’ve got a great reputation and that any material leaving your plant will find ready acceptance for sale or further refining.  That could mean your $4 million plant facilitated the laundering process and could also be seized and forfeited.

Well, you say, anything that miserable has to be unconstitutional.  And, in fact, there is an excessive fines clause in the Eighth Amendment.

Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.

Forfeitures are supposed to be proportionate to the offense.  But the courts don’t look at just the numbers.  They consider things like the scope and duration of the scheme, the harm caused and the relationship of the property to the offense. 

The numbers I mentioned a minute ago are real.   In 1999, the Fifth Circuit upheld forfeiture of a $4 million business for a $175,000 money laundering offense.  (United States v. Wyly)  And generally speaking, since 9/11, the Courts have been reluctant to address the question of proportionality.  Instead, they look at how closely an asset is involved in a crime.

I should mention that there is an appeals process if you were an innocent buyer.  The problem is, it generally involves a judicial procedure, which means months or years and heavy legal expenses.

If you’d like to learn more about the forfeiture laws, I’d urge you to read Steffan Cassella’s  The Forfeiture of Property Involved in Money Laundering Offenses     (Buffalo Criminal Law Review, Volume 7, Issue 2) 

The second item is the sentencing for money-laundering.   Even if you are innocent, you might feel you have to accept a plea-bargain if the downside of losing is calamitous.  And that seems to be what is happening.  In January, 2003, Larry Thompson, Deputy Attorney General under John Ashcroft, issued a memo to the U.S. Attorneys on the Principles of Federal Prosecution of Business Organizations.  It defines the standard for the Government to negotiate plea agreements as  “… the most serious, readily provable offense charged.” 

Superimposing the severe penalties for money laundering onto the sentences for the underlying predicate crimes gives new meaning to “serious.”  The USA PATRIOT Act doubled the sentences for money laundering from ten years to 20, and $500,000 to $1 million per count.  If you commit a fraud, you might be sentenced to ten years.  If you hide the source of proceeds, you could also be charged with money laundering, which doubles or triples the sentence.  Rather than risk calamitous sentences, individuals and companies settle. 

The result is that in the last three years, the Justice Department has been able to get pre-trial diversions and large settlements much more readily—$20 million from Banco Popular, $25 million from Riggs Bank, $40 million from AmSouth.  Certainly, it has thrown the banks into disarray and caused them to apply compliance standards that cover all contingencies.  And our industry has seen it, too.

I’ve emphasized that, since 1986, the enforcement agencies have succeeded in establishing a trend toward full regulatory compliance and proactive participation by financial institutions.  Organized crime and terrorist finance have each grown bigger and stronger on their own.   And as they merge, the challenge for law enforcement is becoming exponentially larger—and the regulations will probably get more contentious.  It means more rules, more constraints and more time and effort spent on compliance.