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ANTI-MONEYLAUNDERINGDESKBOOK

A Practical Guide toLaw and Compliance

Nicole S. Healy

Incorporating Release #3June 2017

Practising Law InstituteNew York City

#217943

This work is designed to provide practical and usefulinformation on the subject matter covered. However, it issold with the understanding that neither the publisher northe author is engaged in rendering legal, accounting, orother professional services. If legal advice or other expertassistance is required, the services of a competent profes-sional should be sought.

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About the Author

NICOLE S. HEALY is a partner in the Redwood City office of RopersMajeski Kohn & Bentley. Ms. Healy has represented companiesand individuals in a wide range of industries in complex mattersincluding claims concerning corporate governance and control; litiga-tion alleging breach of fiduciary duty and fraud, including by corporateofficers and directors; complex commercial disputes; shareholder classaction and derivative litigation; intellectual property rights and tradesecrets; and merger and acquisition litigation. She has conducted, andhas represented companies and their executives in, corporate internalinvestigations into possible violations of federal and state law. Ms. Healyhas also represented companies and individuals in investigations by theSecurities and Exchange Commission, U.S. Attorneys’ Offices, andother government agencies. She has tried cases to judgment in stateand federal courts, and to decision in private arbitration proceedings.

Prior to entering private practice, Ms. Healy was a prosecutor for theU.S. Department of Justice, in the Fraud Section, Criminal Division,where she focused on violations of the U.S. Foreign Corrupt PracticesAct (FCPA), defense procurement fraud, and international criminalmatters. She is a frequent speaker on the FCPA and has counseled com-panies regarding compliance with the FCPA and the U.K. Bribery Act.

vii(Anti-Money Laundering, Rel. #3, 6/17)

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 Evolving Payment and Funds Transfer Technologies

Chapter 14 Selected Regulations Relating to E-Transfers

Chapter 15 Ethics and Compliance Issues for Providers ofE-Transfer Services

Chapter 16 AML and State-Authorized Marijuana-RelatedBusinesses

Chapter 17 Risk Assessment and Compliance

Chapter 18 Designing and Implementing an EffectiveCompliance Program

(Anti-Money Laundering, Rel. #3, 6/17) ix

Chapter 19 Shadow Banking and Trade- or Service-BasedMoney Laundering

Chapter 20 Money Laundering, Terrorist Finance and theDiamond Industry

Chapter 21 Human Trafficking and Money Laundering

ANTI-MONEY LAUNDERING DESKBOOK

x

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...................................... 1-1§ 1:2 How Money Laundering Works........................................ 1-3§ 1:3 Overview of U.S. Anti-Money Laundering Laws .............. 1-4

Chapter 2 Financial Institutions and Money Laundering

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

Major Financial Institutions ............................................ 2-2§ 2:2.1 HSBC Bank USA........................................................ 2-2§ 2:2.2 Standard Chartered Bank ........................................... 2-5§ 2:2.3 ING Bank ................................................................... 2-5§ 2:2.4 AmSouth Bank ........................................................... 2-6§ 2:2.5 Riggs Bank.................................................................. 2-7

[A] Internal Controls........................................................ 2-8[B] Independent Testing ................................................... 2-9[C] Designation of Individuals to Coordinate and

Monitor Compliance .................................................. 2-9[D] Training Appropriate Personnel.................................. 2-9

§ 2:3 Conclusion ..................................................................... 2-10

Chapter 3 Money Laundering in Practice

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

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

§ 3:2.2 Black Market Peso Exchange ...................................... 3-8Figure 3-1 Simplified BMPE Transactions Flow Chart .............. 3-10

(Anti-Money Laundering, Rel. #3, 6/17) xi

§ 3:2.3 Trade-Based Money Laundering ............................... 3-13[A] Red Flags in Trade-Based Money Laundering ........... 3-14

§ 3:2.4 Bearer Instruments................................................... 3-15[A] Traveler ’s Checks ..................................................... 3-15[B] Bearer Bonds............................................................. 3-16[C] Money Orders........................................................... 3-17

§ 3:2.5 Casinos and Online Gambling................................. 3-17§ 3:2.6 Luxury Goods ........................................................... 3-22§ 3:2.7 Shell Banks............................................................... 3-25§ 3:2.8 Shell Companies and Trusts..................................... 3-25

[A] Recent Investigations and Prosecutions InvolvingMoney Laundering Through Shell Companies......... 3-28

§ 3:2.9 Real Estate ................................................................ 3-31§ 3:2.10 Insurance and Other Investments ............................ 3-38§ 3:2.11 Check-Cashing Businesses ....................................... 3-38§ 3:2.12 Benefits Fraud........................................................... 3-41§ 3:2.13 Health Care Fraud and Money Laundering.............. 3-42

Chapter 4 Key U.S. Laws and Regulations

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

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

§ 4:1.2 Money Laundering Control Act (1986) ...................... 4-5§ 4:1.3 Anti-Drug Abuse Act of 1988 .................................... 4-9§ 4:1.4 Annunzio-Wylie Anti-Money Laundering

Act (1992)................................................................... 4-9§ 4:1.5 Money Laundering Suppression Act (1994) ............. 4-11§ 4:1.6 Money Laundering and Financial Crimes

Strategy Act (1998) ................................................... 4-11§ 4:1.7 Intelligence Reform & Terrorism Prevention

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

The USA PATRIOT Act ................................................. 4-12§ 4:3 The PATRIOT Act’s Anti-Money Laundering

Provisions: In General .................................................... 4-13§ 4:4 The PATRIOT Act’s Anti-Money Laundering

Provisions: Specific Sections........................................... 4-17§ 4:4.1 Section 311—Special Measures for Jurisdictions,

Financial Institutions, or InternationalTransactions of Primary Money LaunderingConcern.................................................................... 4-17

§ 4:4.2 Section 312—Special Due Diligence forCorrespondent Accounts and Private BankingAccounts................................................................... 4-23


xii

(Anti-Money Laundering, Rel. #3, 6/17)

§ 4:4.3 Section 313—Prohibiting U.S. CorrespondentAccounts with Shell Banks....................................... 4-25

§ 4:4.4 Section 315—Additional Predicate Offenses ............ 4-26§ 4:4.5 Section 318—Expansion of the Definition of

Financial Institution................................................. 4-26§ 4:4.6 Section 326—Customer Identification

Verification ............................................................... 4-26§ 4:4.7 Section 352—AML Programs ................................... 4-27§ 4:4.8 Section 358—Reports to the Intelligence

Community .............................................................. 4-28§ 4:4.9 Section 359—Reporting Suspicious Activity by

Underground Banking System.................................. 4-29§ 4:4.10 Section 371—Prohibition on Bulk Cash

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

Chapter 5 Criminal AML Statutes andthe Antiterrorism Act

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

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

§ 5:3 Domestic Money Laundering—18 U.S.C.§ 1956(a)(1) ...................................................................... 5-4

§ 5:3.1 Elements of the Crime: Summary.............................. 5-6§ 5:3.2 Elements of the Crime: Specific Issues ...................... 5-9

[A] Distinct Offenses........................................................ 5-9[B] Merger ...................................................................... 5-10[C] Proceeds.................................................................... 5-13[D] Intent........................................................................ 5-20[E] Promotion—18 U.S.C. § 1956(a)(1)(A)(i) ................. 5-21[E][1] Elements ............................................................. 5-21[E][2] Intent to Promote ............................................... 5-21[E][3] Continuing Offense............................................. 5-24[F] Concealment—18 U.S.C. § 1956(a)(1)(B)(i) ............. 5-24[F][1] Elements ............................................................. 5-24[F][2] Evidence of Concealment.................................... 5-25[F][2][a] Intent to Conceal a Listed Attribute................. 5-27[F][2][b] Source of the Proceeds...................................... 5-29[G] Concealment—Avoiding a Reporting

Requirement—18 U.S.C. § 1956(a)(1)(B)(ii) ............. 5-30[G][1] Elements ............................................................. 5-30[G][2] Venue .................................................................. 5-31[G][3] Illustrative Cases Demonstrating Sufficient

Evidence of Intent to Avoid ReportingRequirements ...................................................... 5-31

Table of Contents

xiii

§ 5:4 International Money Laundering—18 U.S.C.§ 1956(a)(2) .................................................................... 5-32

§ 5:4.1 Elements—Summary................................................ 5-32§ 5:4.2 Elements................................................................... 5-33

[A] Specified Unlawful Activity ...................................... 5-33[B] Transfer/Transportation ............................................ 5-34[C] Insufficient Evidence of Concealment ...................... 5-35

§ 5:5 Money Laundering Stings—18 U.S.C. § 1956(a)(3) ....... 5-35§ 5:5.1 Elements—Summary................................................ 5-35§ 5:5.2 Elements................................................................... 5-36

[A] Knowledge and Intent .............................................. 5-36§ 5:5.3 Defenses to Sting Operations ................................... 5-38

[A] Entrapment............................................................... 5-38[B] Outrageous Government Conduct ........................... 5-41

§ 5:6 Extraterritorial Jurisdiction—18 U.S.C. § 1956(f) .......... 5-42§ 5:6.1 Extraterritorial Jurisdiction—Predicate Offenses ...... 5-44

§ 5:7 Money Laundering Conspiracy—18 U.S.C. § 1956(h)........5-48§ 5:7.1 Elements—Summary................................................ 5-49§ 5:7.2 Elements................................................................... 5-50

[A] Mental State ............................................................. 5-50[B] No Overt Act Required ............................................. 5-50[C] Personal Jurisdiction................................................. 5-50[D] Multiple Objectives .................................................. 5-51[E] No Requirement to Prove Elements of

Substantive Money Laundering Offense ................... 5-51[F] Statute of Limitations............................................... 5-52

§ 5:8 18 U.S.C. § 1957—Transactions in CriminallyDerived Property Over $10,000...................................... 5-52

§ 5:8.1 Elements—Summary................................................ 5-52§ 5:8.2 Elements................................................................... 5-53

[A] Separate Crime......................................................... 5-53[B] Knowledge and Intent .............................................. 5-54[C] Commingling ........................................................... 5-54

§ 5:9 Conducting an Unlicensed Money TransferBusiness—18 U.S.C. § 1960 .......................................... 5-55

§ 5:9.1 Elements................................................................... 5-55§ 5:9.2 U.S. Jurisdiction Over Foreign Person

Conducting U.S. Money Service Transactions ......... 5-56§ 5:9.3 Cryptocurrency Exchanges Are Money

Transmitters and Must Be Licensed ......................... 5-58§ 5:10 Bulk Cash Smuggling—31 U.S.C. § 5332...................... 5-60

§ 5:10.1 Elements................................................................... 5-60§ 5:11 Terrorist Finance: Antiterrorism Act of 1990, as

amended, 18 U.S.C. § 2331 et seq. ............................... 5-62§ 5:11.1 Prohibitions on the Financing of Terrorism ............. 5-62


xiv


§ 5:11.2 Key Elements in Pleading Private CivilActions: Standing and Causation..............................5-64

[A] As of 2015, the ATA Provides for SecondaryLiability .....................................................................5-71

§ 5:11.3 Financial Institutions and Terrorist Finance .............5-74[A] Selected Cases Involving Terrorist Finance

Claims Against Financial Institutions.......................5-75[B] The Dark Ages Meet the Digital Age:

Cryptocurrency and Terrorist Finance .......................5-87[C] FATF Report—Terrorist Finance Mechanisms...........5-88

Chapter 6 Reporting Requirements and Structuring

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

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

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

§ 6:2 Structuring Transactions to Evade ReportingRequirements—31 U.S.C. § 5324 ...................................6-12

§ 6:2.1 Statutory Prohibition—31 U.S.C. § 5324(a) and (b) .....6-13§ 6:2.2 Implementing Regulations—31 C.F.R.

§ 1010.314 ................................................................6-13§ 6:2.3 Structuring—Cases and Issues ..................................6-14

[A] Elements....................................................................6-14[B] Separate Offense from Money Laundering ................6-14[C] Mental State ..............................................................6-14[D] Evidence That Defendant Intended to Evade the

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

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

Institution Did Not Have an Obligation toFile a Report................................................................6-17

§ 6:3 Banking Regulators—Guidance to FinancialInstitutions......................................................................6-17

Chapter 7 Penalties

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

§ 7:2.1 Background..................................................................7-3§ 7:2.2 Organization of the Guidelines ...................................7-5

Table of Contents

xv

§ 7:2.3 Application of the Guidelines to Individualsand Companies .......................................................... 7-7

[A] Guidelines Calculations for a Sample IndividualOffender...................................................................... 7-7

§ 7:2.4 Organizational Sentencing Guidelines—U.S.S.G.Chapter Eight ........................................................... 7-10

[A] Structure and Purpose .............................................. 7-10[B] Compliance Programs and Sentencing ..................... 7-12[C] Recent Failures of Compliance Programs and

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

Compliance Program................................................ 7-15[E] Application Notes..................................................... 7-19

§ 7:3 Civil Penalties ................................................................ 7-19§ 7:3.1 Statutory Basis.......................................................... 7-19§ 7:3.2 Cases Interpreting the Statute.................................. 7-20

Chapter 8 Civil and Criminal Forfeiture Proceedings

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

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

[A] Administrative Forfeiture ........................................... 8-5[B] Criminal Forfeiture..................................................... 8-6[C] Civil Forfeiture ........................................................... 8-9

Figure 8-1 Comparison of Civil and Criminal Forfeiture inAML Cases................................................................ 8-11

§ 8:4 Civil Asset Forfeiture Reform Act of 2000 ..................... 8-17§ 8:5 Changes to DOJ’s Asset Forfeiture Policy—

January 2015 .................................................................. 8-19

Chapter 9 Forfeiture Statutes

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

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

[A] Interbank Accounts .................................................... 9-4§ 9:1.3 Third-Party Challenges to Civil Forfeitures................ 9-8

[A] Tracing and Fungible Assets ....................................... 9-9[B] Standing to Challenge Forfeiture.............................. 9-10

§ 9:2 Criminal Forfeiture—18 U.S.C. § 982 ........................... 9-13§ 9:2.1 Criminal Forfeiture Generally .................................. 9-13


xvi

§ 9:2.2 Forfeiture Judgment in an Amount GreaterThan Defendant’s Assets ......................................... 9-17

[A] Tracing...................................................................... 9-17[B] Property “Involved in” an Offense............................ 9-19[C] Facilitation................................................................ 9-21

§ 9:3 Forfeiture of Substitute Assets........................................ 9-21§ 9:4 Forfeitures Based on Specific Violations ......................... 9-23

§ 9:4.1 Reporting Violations Generally................................. 9-23§ 9:4.2 Forfeiture of Monetary Instruments— 31 U.S.C.

§ 5317(c)................................................................... 9-24§ 9:4.3 Bulk Cash Smuggling—31 U.S.C. § 5332................ 9-25

§ 9:5 Constitutional Issues ..................................................... 9-27§ 9:5.1 Double Jeopardy and Parallel Proceedings:

Criminal Convictions and Civil Forfeiture............... 9-27§ 9:5.2 Eighth Amendment—Limitations on Amount

to Be Forfeited .......................................................... 9-28[A] Bulk Cash Smuggling ............................................... 9-29[B] Proportionality and Civil Forfeiture ......................... 9-32

§ 9:6 Challenges to Criminal Forfeitures ................................ 9-33§ 9:6.1 Third-Party Challenges in Ancillary Proceedings ..... 9-33§ 9:6.2 Challenges by the Defendant ................................... 9-36

[A] No Exemption to Forfeiture Laws for Attorneys’Fees........................................................................... 9-36

[B] Due Process and Pretrial Restraint of Assets............ 9-37[C] Pre-Seizure Notice and Delay ................................... 9-46[D] Section 1957 and Restraint of Assets to Be

Used to Pay Attorneys’ Fees ..................................... 9-47§ 9:7 Kleptocracy Asset Recovery Initiative ............................. 9-50

§ 9:7.1 Selected Investigations—1MDB ............................... 9-50§ 9:7.2 Other Investigations and Prosecutions..................... 9-55

Chapter 10 Money Laundering and the Attorney-ClientPrivilege

§ 10:1 Attorney-Client Privileged Communications ................. 10-1§ 10:1.1 Disqualification of Counsel Based on a

Prior Representation ................................................. 10-3§ 10:2 Information Not Protected by the Privilege.................... 10-6

§ 10:2.1 Client Identity or Fee Information ........................... 10-6§ 10:2.2 The Crime-Fraud Exception ..................................... 10-8

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

Mandatory Disclosures................................................. 10-15


Table of Contents

xvii

Chapter 11 U.S. Anti-Money Laundering Organizations

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

Responsibility ................................................................. 11-3§ 11:3 U.S. Department of the Treasury ................................... 11-4

§ 11:3.1 Financial Crimes Enforcement Network .................. 11-4§ 11:3.2 Office of Foreign Assets Control .............................. 11-7§ 11:3.3 Internal Revenue Service .......................................... 11-9

§ 11:4 U.S. Securities and Exchange Commission.................... 11-9§ 11:5 U.S. Department of Justice .......................................... 11-10§ 11:6 U.S. Department of State ............................................. 11-12§ 11:7 U.S. Department of Homeland Security ...................... 11-14§ 11:8 U.S. Intelligence Agencies ............................................ 11-15

Chapter 12 International Organizations and Treaties

§ 12:1 In General ...................................................................... 12-1§ 12:2 Financial Action Task Force ........................................... 12-2§ 12:3 International Monetary Fund......................................... 12-7§ 12:4 United Nations............................................................... 12-7§ 12:5 European Union ............................................................. 12-9§ 12:6 Egmont Group of Financial Intelligence Units ............ 12-14§ 12:7 Unintended Consequences of Multinational

AML/CFT Enforcement Regimes: The EconomicEffects of De-Risking .................................................... 12-15

Chapter 13 Evolving Payment and Funds TransferTechnologies

§ 13:1 Overview of E-Transfer Systems ..................................... 13-1§ 13:2 Online, Stored Value, and Mobile Payment and

Funds Transfer Systems.................................................. 13-6Figure 13-1 Examples of E-Transfers Mechanisms ...................... 13-7§ 13:3 Prepaid Access Cards and Devices ............................... 13-10

§ 13:3.1 How Prepaid Access Works .................................... 13-11§ 13:3.2 Misuse of Prepaid Access ....................................... 13-13

§ 13:4 Online Value Transfer and Payment Systems............... 13-17§ 13:4.1 Online Payments and Funds Transfers................... 13-18§ 13:4.2 Mobile Payment Services........................................ 13-20

§ 13:5 Electronic Currencies ................................................... 13-25§ 13:5.1 Bitcoin .................................................................... 13-26§ 13:5.2 E-Currency and Money Laundering ....................... 13-32§ 13:5.3 Liberty Reserve ....................................................... 13-34§ 13:5.4 Silk Road ................................................................ 13-38

§ 13:6 FinCEN Guidance Regarding Virtual Currencies ......... 13-44


xviii


§ 13:7 FinCEN Administrative Rulings on VirtualCurrency Businesses..................................................... 13-47

§ 13:7.1 Proposed Virtual Currency Trading PlatformWould Need to Register As an MSB....................... 13-48

§ 13:7.2 Proposed Virtual Currency Payment SystemWas an MSB ........................................................... 13-51

§ 13:8 Cryptocurrency Regulation: Regulatory Actions........... 13-52

Chapter 14 Selected Regulations Relating to E-Transfers

§ 14:1 Overview......................................................................... 14-1§ 14:2 U.S. Regulation of “Prepaid Access” Providers and

Sellers ............................................................................. 14-3§ 14:3 European Union Regulation ........................................... 14-8

§ 14:3.1 EU Payment Services Directive ................................ 14-8§ 14:3.2 E-Money Directive.................................................... 14-9

§ 14:4 U.K. Regulation ............................................................ 14-11

Chapter 15 Ethics and Compliance Issues for Providers ofE-Transfer Services

§ 15:1 Overview......................................................................... 15-1§ 15:2 AML Risks Relating to E-Transfers................................. 15-2§ 15:3 Addressing AML Risks in E-Transfer Systems................ 15-5

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

§ 15:4 Balancing AML/CFT Objectives with ExpandingFinancial Inclusion....................................................... 15-15

Chapter 16 AML and State-Authorized Marijuana-RelatedBusinesses

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

Chapter 17 Risk Assessment and Compliance

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

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

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Chapter 18 Designing and Implementing an EffectiveCompliance Program

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

§ 18:2 Codes of Conduct/Ethics ................................................ 18-5§ 18:3 Compliance Programs .................................................... 18-6

§ 18:3.1 The Company Must Fully Commit toImplementing an Effective Compliance Program .......18-8

§ 18:3.2 Compliance Programs Must Be Designed andPeriodically Reevaluated to Address Risks Specificto the Company ..................................................... 18-10

§ 18:3.3 A Compliance Program Should Be Readily Availableand Written and Communicated in LanguageUnderstandable to a Layperson ................................18-10

§ 18:3.4 Compliance Training and Evaluation Should BeProvided at Hire or Retention and PeriodicallyThereafter ............................................................... 18-11

§ 18:3.5 The Compliance Officer or Department MustHave Adequate Resources and Authority................ 18-12

§ 18:3.6 Starting at the Top, the Company ShouldDevelop a Strong Culture of Compliance............... 18-13

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

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

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

In-House Versus Outside Vendors .......................... 18-23§ 18:4.2 Key Components of an AML Program ................... 18-26

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

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

Figure 18-2 AML Program Checklist ........................................ 18-31§ 18:4.3 Specific Examples of AML Risks ............................ 18-33

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

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

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


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Chapter 19 Shadow Banking and Trade- or Service-BasedMoney Laundering

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

Finance ........................................................................... 19-2§ 19:2.1 Securitization and AML Criminal Laws................... 19-8§ 19:2.2 Dark Pools.............................................................. 19-10

§ 19:3 Transparency, Beneficial Ownership, andCapital Flow ................................................................. 19-14

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

Companies: The “Panama Papers” ...........................19-14§ 19:3.3 Capital Flow and Money Laundering ..................... 19-16

§ 19:4 Trade- and Service-Based Money Laundering ............... 19-17

Chapter 20 Money Laundering, Terrorist Finance and theDiamond Industry

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

§ 20:2.1 Diamond Mining and Cutting ................................. 20-8§ 20:2.2 Diamond Sales and Trading ................................... 20-10§ 20:2.3 Diamond Import and Export.................................. 20-11§ 20:2.4 Retail Sales ............................................................. 20-13

§ 20:3 Money Laundering Vulnerabilities Unique to theDiamond Trade ............................................................ 20-14

Chapter 21 Human Trafficking and Money Laundering

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

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

Federal Acquisition Regulations ................................... 21-13§ 21:3.1 Executive Order 13627........................................... 21-13§ 21:3.2 Subsequent FAR Amendments............................... 21-17

§ 21:4 Human Trafficking Claims Against U.S. Businesses ......21-29§ 21:5 Extraterritorial Jurisdiction........................................... 21-30§ 21:6 Money Laundering and Other Labor and

Immigration Violations ................................................ 21-34

Index ................................................................................................ I-1


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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 RelatedFinancial 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

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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. TreasuryDepartment)

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


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Preface

The term “money laundering” often conjures up images ofMiami Vice–era drug lords employing teams of “smurfs” to launderpaper bags of cocaine-tainted cash. More recent television viewersmay think of Walter White buying a car wash to commingle hismethamphetamine proceeds with the cash receipts. While both ofthese images have a basis in reality, in fact, money laundering andthe related offense of structuring are not limited to turning drugmoney into spendable cash. Instead, they involve a much broaderrange of predicate offenses and more sophisticated mechanisms tointroduce the proceeds of those crimes into the legitimate financialsystem.

The U.S. Treasury Department’s Financial Crimes EnforcementNetwork (FinCEN)1 defines money laundering as “the process ofmaking illegally-gained proceeds (i.e. ‘dirty money ’) appear legal(i.e. ‘clean’).”2 It further identifies the traditional three-step processof laundering funds as: “placement, layering and integration.”3 AsFinCEN explains, first “illegitimate funds are furtively introducedinto the legitimate financial system. Then, the money is moved aroundto create confusion, sometimes by wiring or transferring throughnumerous accounts. Finally, it is integrated into the financial systemthrough additional transactions until the ‘dirty money ’ appears‘clean.’”4

As a result of the growing recognition of the importance ofmoney laundering to a variety of criminal activities, and the effectsof money laundering on the financial system, U.S. laws concerningmoney laundering, structuring and related offenses have evolved


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1. FinCEN is a bureau of the U.S. Treasury Department whose “mission is tosafeguard the financial system from illicit use and combat money launderingand promote national security through the collection, analysis, and dis-semination of financial intelligence and strategic use of financial authori-ties.” See www.fincen.gov/.

2. FinCEN, History of Anti-Money Laundering Laws, www.fincen.gov/news_room/aml_history.html.

3. Ibid.4. Ibid.

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substantially over the last few decades.5 Surprisingly, the proscriptionof money laundering as an independent offense is a relatively recentoccurrence. Until October 27, 1986, with the passage of the MoneyLaundering Control Act (MLCA),6 money laundering was not illegal.7

Nor was the related offense of “structuring” financial transactionsin amounts under $10,000 to cause a financial institution not tosubmit cash transaction reports (CTRs) to the government.8

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5. Only a few decades ago, money laundering was not an offense but was seenas part of the underlying crime. Moreover, courts appeared bemused by theidea that criminals needed to transform dirty money into usable funds. SeeUnited States v. Barnes, 604 F.2d 121, 132 (2d Cir. 1979) (“‘Money-washing’is apparently an important step in the narcotics business. It involves theconversion of many small bills into larger denominations.”). See also id. at154–55 (“Importers, wholesalers, purchasers of cutting materials, andpersons who ‘wash’ money are all as necessary to the success of the ventureas is the retailer. They can all be held to have agreed with one another inwhat has been called a ‘chain’ conspiracy”).

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

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

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

8. Federal law requires banks and other financial institutions to file reportswith 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 thereporting threshold into two or more separate transactions—for the purposeof 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 evadingthe reporting requirements of [31 U.S.C.] section 5313(a) with respect tosuch transaction.’”), citing 31 U.S.C. § 5324, preamble.

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Until 1986, money launderers were prosecuted for participatingin or aiding and abetting drug trafficking or other substantive offensesand structuring was sometimes prosecuted as a conspiracy to defraudthe government.9 Following the enactment of the MLCA, and specif-ically the primary criminal money laundering statutes (18 U.S.C.§§ 1956 and 1957), and the amendment of the 1970 Bank SecrecyAct’s reporting requirements to include the anti-structuring provi-sions (31 U.S.C. § 5324), the government has prosecuted these asindependent offenses. Over time, a wider variety of crimes (referred toas “specified unlawful activities” or SUAs) have been identified aspredicate offenses for money laundering violations, and a broaderrange of activity has been captured by federal law.10

Following the attacks on the United States on 9/11, the moneylaundering laws were further revised and expanded under the USAPATRIOT Act,11 including with respect to the financing of terrorism.Accordingly, money laundering and terrorist finance and anti-moneylaundering and counter-financing of terrorism are generally referredto, respectively, as “ML/TF” and “AML/CFT.”

While individuals convicted of laundering offenses may be subjectto substantial prison time, fines and penalties, the federal governmentalso has broad civil and criminal powers to seize and forfeit taintedfunds and property, that is, property “involved in” or “traceable to” an


Preface

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9. Before 1986, money laundering and structuring were at times prosecutedunder 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 launder-ing statutes were then in effect, and evidence demonstrated that defendantslaundered drug proceeds, government charged conspiracy to defraud theUnited States under section 371; court affirmed conviction as to onedefendant but reversed as to the other); United States v. Nersesian, 824F.2d 1294, 1309–13 (2d Cir. 1987) (multiple defendants were convicted ofconspiring to import and distribute heroin, and distributing heroin, as wellas other offenses; affirming conviction under 18 U.S.C. § 371 for conspiracyto defraud the U.S. and to conceal material facts from the IRS by causingbanks to fail to file CTRs). At that time, some but not all federal appellatecourts permitted the government to charge individuals with substantiveviolations of the Bank Secrecy Act’s reporting requirements, 31 U.S.C.§§ 5313 and 5322, along with 18 U.S.C. § 1001 (materially false state-ments), and 18 U.S.C. § 2(b) (causing another to commit an offense againstthe United States), for causing banks to fail to file CTRs by not disclosingthe 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 at18 U.S.C. § 1956(c)(7), which also incorporates the predicate offensesidentified in the Racketeer Influenced and Corrupt Offenses (RICO) statutesat 18 U.S.C. § 1961(1) (see 18 U.S.C. § 1956(c)(7)(A)).

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

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offense for which civil forfeiture is authorized, and proceeds as well asproperty “derived from” proceeds of an offense for which civil orcriminal forfeiture is authorized. Further, structuring is a federaloffense regardless of whether the funds are derived from illicit orentirely legal activity. The defendant’s motive in avoiding the reportingrequirements may have been to conceal funds from a spouse,12 or fromcreditors,13 or from the IRS,14 rather than to launder illicit proceeds,yet if she is aware of the bank’s reporting obligations, the defendantis liable for a structuring violation and the funds may be forfeited.

Money launderers have shown themselves to be remarkably adapt-able, and AML/CFT efforts have often appeared to be like the game ofwhack-a-mole, in which the government criminalizes and prosecutessome activity only to find that the perpetrators have modified theiroperations in response and popped up elsewhere. For example, whenU.S. authorities cracked down on the use of financial service providersto transfer money cross-border, money launderers began resorting tosmuggling bulk cash from the United States to Mexico and elsewhere.

Money is also being laundered in much more sophisticatedways, including through international trade in which imports maybe under-invoiced and exports over-invoiced and passed throughmultiple intermediaries in as many jurisdictions. With the increasingglobalization of trade, “trade-based money laundering,” or TBML, hasbeen identified as an emerging methodology.15 Because no singletransaction—in isolation—may appear questionable, but togetherthe chain of transactions adds up to money laundering or other illicitactivity such as tax evasion or terrorist financing, TBML is particularly

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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 andordering forfeiture of funds where defendant claimed she did not have theintent to violate federal anti-structuring laws, specifically 31 U.S.C. § 5324,but instead intended to conceal a large sum of money from her ex-husband,when she deposited just under $10,000 into her account each day for aperiod 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 rentalproperties, structured deposits amounting to over $250,000 into threedifferent banks, initially apparently to shield his assets from a possiblejudgment 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) (defendantsviolated 31 U.S.C. § 5324 where they structured deposits of purported“inheritance” in amounts under $10,000 to avoid banks’ filing CTRs andalerting the IRS).

15. See The Economist, Trade and money laundering; uncontained; trade is theweakest link in the fight against dirty money, May 3, 2014, at p.53; see alsoFinancial Action Task Force (FATF), Trade-Based Money Laundering, June 23,2006, www.fatf-gafi.org/documents/documents/trade-basedmoneylaunderingtypologies.html.

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hard to spot, and so, especially worrying. Moreover, the use of shellcompanies, trusts, and beneficial ownership makes tracing a sequenceof transactions from start to finish extraordinarily difficult.

While there may be legitimate privacy, business, and securityinterests that argue for masking the ownership and control of entities,concealing such information from legitimate inquiry benefits corruptindividuals and regimes, money launderers, terrorists, drug cartels,and others.16 The European Union and the United Kingdom arecurrently grappling with this issue; Britain has committed to publi-cizing beneficial ownership of companies and the EU’s Parliamentis considering adopting a controversial directive that would requirethe disclosure of identifying information for beneficial owners (whoown or control 25% or more) of any entity, including trusts andfoundations, not only to tax authorities or law enforcement, but alsoto anyone who completes a basic online registration.17 By contrast, inthe United States, company registration is handled at the state level,and some states, notably Delaware and Nevada, do not requirecompanies organized under their laws to disclose their ownership.18


Preface

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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 byits Parliament must be implemented by the member states. Accordingly, anychanges are not likely to be felt for some time.

On March 11, 2014, the European Parliament voted to require disclosureof beneficial ownership. See adopted text: European Parliament legislativeresolution of 11 March 2014 on the proposal for a directive of the EuropeanParliament and of the Council on the prevention of the use of the financialsystem for the purpose of money laundering and terrorist financing (COM(2013)0045) – C7-0032/2013 – 2013/0025(COD), www.europarl.europa.eu/sides/getDoc.do?type=TA&reference=P7-TA-2014-0191&language=EN; see also Press Release, European Parliament, Money laundering: MEPsvote to end anonymity of owners of companies and trusts, February 2, 2014,www.europarl.europa.eu/news/en/news-room/content/20140210IPR35562/html/Money-laundering-MEPs-vote-to-end-anonymity-of-owners-of-companies-and-trusts (reporting that the Economic Affairs and the Justiceand Home Affairs committees had overwhelmingly voted to increasedisclosure requirements; proposed amendments were to be voted upon byParliament in March, and the new Parliament to be elected in May wouldbegin negotiating with the European Commission and the Council ofMinisters in the second half of 2014); The Economist, Own up, owners,May 12, 2014, www.economist.com/blogs/schumpeter/2014/03/money-laundering.

18. To date, federal efforts to require disclosure of beneficial ownership havenot been successful. The proposed “Incorporation Transparency and LawEnforcement Assistance Act,” S. 1465 and H.R. 3331, appears to be stuck incommittee. Information concerning the text and status of federal bills isavailable at http://thomas.loc.gov/cgi-bin/thomas.

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This Deskbook is designed to provide an introduction to thecomplex and dynamic law of money laundering, structuring, andforfeiture, for lawyers whose practice does not primarily involvecriminal prosecution or defense, and for executives and managers ofcompanies, to assist them to understand, identify, and avoid potentialrisks both inside and outside their organizations. This Deskbook isintended to be an introduction to this area of law; it is not a substitutefor qualified legal advice. Moreover, the focus is on U.S. federal law inthis area; individual states and foreign jurisdictions have their ownanti-money laundering regimes. If your business or practice involvesstate or foreign law, you should contact experienced counsel forguidance or undertake your own research.

Among other things, this Deskbook is intended to provide anoverview of the laws and regulations addressing money laundering,terrorist finance, structuring, and forfeiture, including their history,elements, interpretations, and penalties. Chapters 1 through 3 providebackground and context for the reader ’s understanding of moneylaundering, structuring, forfeiture, and terrorist finance, which arediscussed in greater detail in the following chapters. Chapters 4through 9 outline the history of the key statutes and regulationsgoverning money laundering, structuring, and forfeiture, and discusscertain illustrative cases. Chapter 10 discusses issues relating tomoney laundering and the attorney-client privilege. Because moneylaundering and, in particular, terrorist finance, are transnational inscope, chapters 11 and 12 address certain U.S. and international AML/CFT efforts. As new technologies for making payments and transfer-ring and storing value have been developed—some of which aretransitional and experimental while others are here to stay, at leastin some form—they have been adopted by money launderers andterrorist financiers. Chapter 13 discusses some of these new technolo-gies, focusing on their AML/CFT implications. Chapters 14 and 15address some of the regulatory, ethical and compliance issues regard-ing electronic transfers of value. Chapter 16 briefly addresses certainissues relating to the tension between state laws decriminalizing orlegalizing marijuana for medical or recreational use and federal law,particularly as it applies to financial institutions. Chapters 17 and 18addresses AML/CFT risk assessment and compliance programs in thecontext of corporate compliance programs generally and outline theelements of an effective program. Chapter 19 discusses shadow bank-ing and trade-based money laundering, which have become areas ofincreased concern for AML regulators and experts. Chapter 20 ad-dresses the interplay between money laundering, terrorist finance, andthe diamond trade. Finally, Chapter 21 addresses money launderingand human trafficking, which has tragically become a growth industryfor criminal enterprise.

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Although this Deskbook is intended to be current and accurate asof the date of publication, money laundering methodologies changefrequently, and the laws and regulations addressing them changeperiodically as well. Although care has been taken to ensure that legaland factual references are accurate, it is possible that some errors haveslipped into the text. If so, they are mine alone and will be corrected inlater revisions.

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


Preface

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