My posting last week on "high level" tips on commercial real estate fraud (relaying information from Mike O’Neal) was one of the most highly read topics in the last month. So, with that your interest giving me important guidance, below is a follow up by Mike on specific tips and red flags about money laundering and terrorism financing.
You’ll quickly realize that this topic requires real expertise and experience.
Money Laundering:
Money laundering is the criminal practice of processing ill-gotten gains, or “dirty” money, through a series of transactions; in this way the funds are “cleaned” so that they appear to be proceeds from legal activities. Money laundering generally does not involve currency at every stage of the laundering process.
Although money laundering is a diverse and often complex process, Mike notes that it basically involves three independent steps that can occur simultaneously:
- Placement. The first and most vulnerable stage of laundering money is placement. The goal is to introduce the unlawful proceeds into the financial system without attracting the attention of financial institutions or law enforcement. Placement techniques include structuring currency deposits in amounts to evade reporting requirements or commingling currency deposits of legal and illegal enterprises.
- Layering. The second stage of the money laundering process is layering, which involves moving funds around the financial system, often in a complex series of transactions to create confusion and complicate the paper trail.
- Integration. The ultimate goal of the money laundering process is integration. Once the funds are in the financial system and insulated through the layering stage, the integration stage is used to create the appearance of legality through additional transactions. These transactions further shield the criminal from a recorded connection to the funds by providing a plausible explanation for the source of the funds.
In the late 2006, FinCEN issued a study highlighting money laundering trends in the commercial real estate industry. In the information reviewed for this study, the most commonly reported suspected illicit financial activity associated with the commercial real estate sector is -
- money laundering to promote tax evasion
The information indicated that individuals engaged in the following money laundering schemes (to avoid audit trails and evade taxes) -
- cash out checks payable to their businesses
- pay cash for construction materials
- trade negotiable instruments with other business people to understate business receipts and actual business volumes
This should NOT be a surprise: Federal examiners have issued a 439 page manual on this topic. One good way to jump into the topic is to examine Appendix F to the manual, which contains a nice list of red flags for money laundering and terrorist financing. Here are some of the topics covered in the list -
Potentially Suspicious Activity That May Indicate Money Laundering
- Customers who provide insufficient or suspicious information
- Efforts to avoid reporting or record keeping requirements
- Funds transfers
- Automated clearing house transactions
- Activities inconsistent with the customer’s business
- Lending activity
- Changes in bank-to-bank transactions
- Cross-border financial institution transactions
- Bulk currency shipments
- Trade finance
- Insurance activity
- Shell company activity
- Employee behavior
- Other unusual or suspicious behaviors and factors
Potentially Suspicious Activity That May Indicate Terrorist Financing
- Activities inconsistent with the customer’s business
- Funds transfers
- Other unusual or suspicious behaviors and factors
Terrorist List
And, of course, Executive Order 13224, signed by President Bush on September 23, 2001. The Executive Order mandated that no U.S. company may do business with any person whom the Order prohibits, including persons who have committed, or pose a risk of committing or supporting, terrorist acts, and specifically those identified on the SDN List ("specially designated nationals" list). The SDN List is continually maintained by the Treasury’s Office of Foreign Assets Control (OFAC).
This topic calls for genuine expertise and experience.
If you have other sources or other comments, please post them below.
Pingback: New Name, New Look, Same Financial Community | Lenders 360