Money Laundering- Structuring, Reporting2011 Texas Land Title Institute – Money Laundering Money Laundering- Structuring, Reporting IRS/FBI, Mortgage Fraud Richard Melamed 6750 West

2011 Texas Land Title Institute – Money Laundering

Money Laundering- Structuring, Reporting

IRS/FBI, Mortgage Fraud

Richard Melamed

6750 West Loop South, Suite 615

Bellaire, Texas 77401

Telephone: (713) 839-8800

Facsimile: (713) 839-0142

21st Annual Robert C. Snead Texas Land Title Institute

December 1-2 , 2011

Hyatt Hill Country Resort and Spa

San Antonio, Texas


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INTRODUCTION ............................................................................................................................................. 1

WHAT IS MONEY LAUNDERING? .................................................................................................................. 1

HOW IT WORKS ............................................................................................................................................. 2

BEYOND MONEY LAUNDERING ..................................................................................................................... 4

A. Promotes other Criminal Enterprises ............................................................................................... 4

Promotes other Criminal Enterprises ....................................................................................................... 4

B. Organized Crime................................................................................................................................ 4

Organized Crime ....................................................................................................................................... 4

C. All Crime in General .......................................................................................................................... 5

All Crime in General .................................................................................................................................. 5

D. Ability to Corrupt the System............................................................................................................ 5

Ability to Corrupt the System ................................................................................................................... 5

E. Unfair Competition ........................................................................................................................... 5

Unfair Competition ................................................................................................................................... 5

F. Drugs and Terrorists .............................................................................................................................. 5

Drugs and Terrorists .................................................................................................................................. 5

Regulation and Enforcement- Agencies ........................................................................................................ 6

FinCen ....................................................................................................................................................... 6

OFAC.......................................................................................................................................................... 6

FATF........................................................................................................................................................... 7

FINRA ......................................................................................................................................................... 8

FBI ............................................................................................................................................................. 8

IRS ............................................................................................................................................................... 12

SEC........................................................................................................................................................... 13

DEA .......................................................................................................................................................... 14


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Laws and Legislation ................................................................................................................................... 14

A. Historical View ................................................................................................................................. 14

Bank Secrecy Act (1970) .......................................................................................................................... 15

Money Laundering Control Act (1986) ................................................................................................... 15

Anti-Drug Abuse Act of 1988 .................................................................................................................. 16

Annunzio-Wylie Anti-Money Laundering Act (1992) .............................................................................. 16

Money Laundering Suppression Act (1994) ............................................................................................ 16

Money Laundering and Financial Crimes Strategy Act (1998) ................................................................ 17

Executive Order 13224 (2001) ................................................................................................................ 17

Uniting and Strengthening America by Providing Appropriate Tools to Restrict, Intercept and Obstruct

Terrorism Act of 2001 (USA PATRIOT Act) .............................................................................................. 18

Intelligence Reform & Terrorism Prevention Act of 2004 ...................................................................... 18

OUR ROLE OR POTENTIAL ROLE .................................................................................................................. 19

Title Companies ...................................................................................................................................... 19

Dodging the Bullet .................................................................................................................................. 20

Involved in Real Estate Closings and Settlements” ................................................................................ 21\

Lawyers ................................................................................................................................................... 21

Forfeiture of Attorney Fees .................................................................................................................... 22

Professional Standards of Conduct ....................................................................................................... 23

Confidentiality and the Attorney-Client Privilege ................................................................................ 23

Unwitting Money Laundering ..................................................................................................................... 24

Cases ........................................................................................................................................................... 25

SUMMARY ................................................................................................................................................... 30


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I. INTRODUCTION

In October 2005, U.S. congressman Tom DeLay was indicted on money laundering charges, and

conspiracy to violate election codes, forcing him to step down as House Majority Leader. (The

conspiracy charge was later thrown out.)

At that time, in Texas, candidates for the legislature were not allowed to receive corporate

campaign donations. The prosecution asserted that DeLay took part in an alleged scheme to

bypass that rule and hide the corporate origins of money that ended up in the hands of

Republican candidates in Texas. The alleged laundering scheme involved sending corporate

donations from Texas to the Republican National Committee headquarters in Washington D.C.,

and the RNC then sending an equal amount of money back to Texas for use in campaigning.

Money laundering is a serious charge -- in 2001, U.S. prosecutors obtained almost 900 money-

laundering convictions with an average prison sentence of six years. The rise of global financial

markets makes money laundering easier than ever -- countries with bank-secrecy laws are

directly connected to countries with bank-reporting laws, making it possible to anonymously

deposit "dirty" money in one country and then have it transferred to any other country for use.

II. WHAT IS MONEY LAUNDERING?

Money laundering, at its simplest, is the act of making money that comes from Source A look

like it comes from Source B. In practice, criminals are trying to disguise the origins of money

obtained through illegal activities so it looks like it was obtained from legal sources. Otherwise,

they can't use the money because it would connect them to the criminal activity, and law-

enforcement officials would seize it.

Money laundering is actually more of a process than an act. It often takes several transfers to

disguise illegal sources of money so that it looks like it came from legal sources. The methods by

which money may be laundered are varied and can range in sophistication. Many regulatory and

governmental authorities quote estimates each year for the amount of money laundered, either

worldwide or within their national economy.

In 1996 the International Monetary Fund estimated that two to five percent of the worldwide

global economy involved laundered money. However, the FATF, an intergovernmental body set

up to combat money laundering, admitted that "overall it is absolutely impossible to produce a

reliable estimate of the amount of money laundered and therefore the FATF does not publish any

figures in this regard." Academic commentators have likewise been unable to estimate the

volume of money with any degree of assurance.

Regardless of the difficulty in measurement, the amount of money laundered each year is in the

billions (US dollars) and poses a significant policy concern for governments. As a result,

governments and international bodies have undertaken efforts to deter, prevent and apprehend

money launderers. Financial institutions have likewise undertaken efforts to prevent and detect

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transactions involving dirty money, both as a result of government requirements and to avoid the

reputational risk involved.

The basic money laundering process has three steps:

1. Placement - At this stage, the launderer inserts the dirty money into a legitimate

financial institution. This is often in the form of cash bank deposits. This is the riskiest

stage of the laundering process because large amounts of cash are pretty conspicuous,

and banks are required to report high-value transactions.

2. Layering - Layering involves sending the money through various financial transactions

to change its form and make it difficult to follow. Layering may consist of several bank-

to-bank transfers, wire transfers between different accounts in different names in

different countries, making deposits and withdrawals to continually vary the amount of

money in the accounts, changing the money's currency, and purchasing high-value items

(boats, houses, cars, diamonds) to change the form of the money. This is the most

complex step in any laundering scheme, and it's all about making the original dirty

money as hard to trace as possible.

3. Integration - At the integration stage, the money re-enters the mainstream economy in

legitimate-looking form -- it appears to come from a legal transaction. This may involve

a final bank transfer into the account of a local business in which the launderer is

"investing" in exchange for a cut of the profits, the sale of a yacht bought during the

layering stage or the purchase of a $10 million screwdriver from a company owned by

the launderer. At this point, the criminal can use the money without getting caught. It's

very difficult to catch a launderer during the integration stage if there is no

documentation during the previous stages.

III. HOW IT WORKS

Here are some examples of successful (at least for a time) money laundering schemes:

Black Market Colombian Peso Exchange: This system, which the DEA calls the

"largest drug money-laundering mechanism in the Western Hemisphere" came to light in

the 1990s. A Colombian official sat down with people in the U.S. Treasury Department

to discuss the problem of U.S. goods being illegally imported into Colombia using the

black market. When they considered the issue alongside the drug-money-laundering

problem, U.S. and Columbian officials put two and two together and discovered that the

same mechanism was achieving both ends.

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This complex setup relies on the fact that there are businesspeople in Colombia --

typically importers of international goods -- who need U.S. dollars in order to conduct

business. To avoid the Colombian government's taxes on the money exchange from pesos

to dollars and the tariffs on imported goods, these businessmen can go to black market

"peso brokers" who charge a lower fee to conduct the transaction outside of government

intervention. That's the illegal importing side of the scheme.

The money-laundering side worked like this: A drug trafficker turns over dirty U.S.

dollars to a peso broker in Colombia. The peso broker then uses those drug dollars to

purchase goods in the United States for Colombian importers. When the importers

receive those goods (below government radar) and sell them for pesos in Colombia, they

pay back the peso broker from the proceeds. The peso broker then gives the drug

trafficker the equivalent in pesos (minus a commission) of the original, dirty U.S. dollars

that began the process.

Structuring deposits Also known as smurfing, this method entails breaking up large

amounts of money into smaller, less-suspicious amounts. In the United States, this

smaller amount has to be below $10,000 -- the dollar amount at which U.S. banks have to

report the transaction to the government. The money is then deposited into one or more

bank accounts either by multiple people (smurfs) or by a single person over an extended

period of time.

Overseas banks Money launderers often send money through various "offshore

accounts" in countries that have bank secrecy laws, meaning that for all intents and

purposes, these countries allow anonymous banking. A complex scheme can involve

hundreds of bank transfers to and from offshore banks. According to the International

Monetary Fund, "major offshore centers" include the Bahamas, Bahrain, the Cayman

Islands, Hong Kong, Antilles, Panama and Singapore.

Underground/alternative banking Some countries in Asia have well-established, legal

alternative banking systems that allow for undocumented deposits, withdrawals and

transfers. These are trust-based systems, often with ancient roots, that leave no paper trail

and operate outside of government control. This includes the hawala system in Pakistan

and India and the fie chen system in China.

Shell companies These are fake companies that exist for no other reason than to launder

money. They take in dirty money as "payment" for supposed goods or services but

actually provide no goods or services; they simply create the appearance of legitimate

transactions through fake invoices and balance sheets.

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Investing in legitimate businesses Launderers sometimes place dirty money in

otherwise legitimate businesses to clean it. They may use large businesses like brokerage

firms or casinos that deal in so much money it's easy for the dirty stuff to blend in, or

they may use small, cash-intensive businesses like bars, car washes, strip clubs, check-

cashing stores or even scrap metal businesses. These businesses may be "front

companies" that actually do provide a good or service but whose real purpose is to clean

the launderer's money. This method typically works in one of two ways: The launderer

can combine his dirty money with the company's clean revenues -- in this case, the

company reports higher revenues from its legitimate business than it's really earning; or

the launderer can simply hide his dirty money in the company's legitimate bank accounts

in the hopes that authorities won't compare the bank balance to the company's financial

statements.

IV. BEYOND MONEY LAUNDERING

A. Promotes other Criminal Enterprises

Depending on which international agency you ask, criminals launder anywhere between $500

billion and $1 trillion worldwide every year. The global effect is staggering in social, economic

and security terms.

The most common types of criminals who need to launder money are drug traffickers,

embezzlers, corrupt politicians and public officials, mobsters, terrorists and con artists. Drug

traffickers are in serious need of good laundering systems because they deal almost exclusively

in cash, which causes all sorts of logistics problems. Not only does cash draw the attention of

law-enforcement officials, but it's also really heavy. Cocaine that's worth $1 million on the street

weighs about 44 pounds (20 kg), while a stash of U.S. dollars’ worth $1 million weighs about

256 pounds (116 kg).

B. Organized Crime

There is also a growing realization about the extent that money laundering and its relationship

with organized crime are interlinked. The huge profits that accrue to these criminals from such

areas as drug trafficking, international fraud, advance fee fraud, long firm fraud, arms dealing,

trafficking in human organs and tissue, etc., will be used not only to facilitate ongoing

operations, but to consolidate the wealth, prestige and respectability of those in control of the

criminal business. Drug trafficking remains the largest single generator of illegal proceeds:

Robinson (1994) stated that more money is spent world-wide on illicit drugs than on food.

However, non-drug related crime is increasingly significant.

The characteristics of organized crime are evident in money laundering:

it is a group activity, in that it is carried out often by more than one person;

it is a criminal activity which is long term and continuing;

it is a criminal activity which is carried out irrespective of national boundaries;

it is large scale; and

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it generates proceeds which are often made available for licit use.

C. All Crime in General

On the socio-cultural end of the spectrum, successfully laundering money means that criminal

activity actually does pay off. This success encourages criminals to continue their illicit schemes

because they get to spend the profit with no repercussions. This means more fraud, more

corporate embezzling (which means more workers losing their pensions when the corporation

collapses), more drugs on the streets, more drug-related crime, law-enforcement resources

stretched beyond their means and a general loss of morale on the part of legitimate business

people who don't break the law and don't make nearly the profits that the criminals do.

D. Ability to Corrupt the System

The economic effects are on a broader scale. Developing countries often bear the brunt of

modern money laundering because the governments are still in the process of establishing

regulations for their newly privatized financial sectors. This makes them a prime target. In the

1990s, numerous banks in the developing Baltic states ended up with huge, widely rumored

deposits of dirty money. Bank patrons proceeded to withdraw their own clean money for fear of

losing it if the banks came under investigation and lost their insurance. The banks collapsed as a

result. Other major issues facing the world's economies include errors in economic policy

resulting from artificially inflated financial sectors. Massive influxes of dirty cash into particular

areas of the economy that are desirable to money launderers create false demand, and officials

act on this new demand by adjusting economic policy. When the laundering process reaches a

certain point or if law-enforcement officials start to show interest, all of that money that will

suddenly disappear without any predictable economic cause, and that financial sector falls apart.

E. Unfair Competition

Some problems on a more local scale relate to taxation and small-business competition.

Laundered money is usually untaxed, meaning the rest of us ultimately have to make up the loss

in tax revenue. Also, legitimate small businesses can't compete with money-laundering front

businesses that can afford to sell a product for cheaper because their primary purpose is to clean

money, not turn a profit. They have so much cash coming in that they might even sell a product

or service below cost.

F. Drugs and Terrorists

The majority of global investigations focus on two prime money-laundering industries: Drug

trafficking and terrorist organizations. The effect of successfully cleaning drug money is clear:

More drugs, more crime, more violence. The connection between money laundering and

terrorism may be a bit more complex, but it plays a crucial role in the sustainability of terrorist

organizations. Most people who financially support terrorist organizations do not simply write a

personal check and hand it over to a member of the terrorist group. They send the money in

roundabout ways that allow them to fund terrorism while maintaining anonymity. And on the

other end, terrorists do not use credit cards and checks to purchase the weapons, plane tickets and

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civilian assistance they need to carry out a plot. They launder the money so authorities can't trace

it back to them and foil their planned attack. Interrupting the laundering process can cut off

funding and resources to terrorist groups.

V. Regulation and Enforcement- Agencies

Money laundering is a crucial step in the success of drug trafficking and terrorist activities, not to

mention white collar crime, and there are countless organizations trying to get a handle on the

problem. In the United States, the Department of Justice, the State Department, the Federal

Bureau of Investigation, the Internal Revenue Service and the Drug Enforcement Agency all

have divisions investigating money laundering and the underlying financial structures that make

it work. State and local police also investigate cases that fall under their jurisdiction.

Additionally, there is an international network of enforcement agencies who cooperate

worldwide to fight money laundering. In the U.S. multiple agencies have the duty to help police

this crime, and it is given high priority because it is a process that enables other criminal

activities to continue and thrive. The agencies also serve as watchdogs and disseminators of

statistical information and progress reports.

A. FinCen

The mission statement of The Financial Crimes Enforcement Network (FinCEN) is to

"safeguard the financial system from the abuses of financial crime, including terrorist financing,

money laundering and other illicit activity." FinCEN operates under the Department of

Treasury. FinCEN acts as the designated administrator of the Bank Secrecy Act (BSA). The BSA

was established in 1970 and has become one of the most important tools in the fight against

money laundering. Since then, numerous other laws have enhanced and amended the BSA to

provide law enforcement and regulatory agencies with the most effective tools to combat money

laundering.

In addition to FinCEN there are many other offices and agencies at work on money laundering.

OFAC is an office within Treasury that administers and enforces economic and trade sanctions

based on U.S. foreign policy and national security goals against targeted foreign countries,

terrorism sponsoring organizations, international narcotics traffickers, and those engaged in

activities related to the proliferation of weapons of mass destruction. OFAC acts under

Presidential wartime and national emergency powers, as well as authority granted by specific

legislation, to impose controls on transactions and freeze foreign assets under U.S. jurisdiction.

B. OFAC

The Office of Foreign Assets Control (OFAC) administers and enforces economic sanctions

programs primarily against countries and groups of individuals, such as terrorists and narcotics

traffickers. The sanctions can be either comprehensive or selective, using the blocking of assets

and trade restrictions to accomplish foreign policy and national security goals. All U.S. persons

(which by legal definition includes firms) must abide by these sanctions—this is the meaning of

compliance.

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OFAC publishes a list of Specially Designated Nationals and Blocked Persons ("SDN list")

which includes over 3,500 names of companies and individuals connected with the sanctions

targets. A number of the named individuals and entities are known to move from country to

country and may end up in unexpected locations. U.S. persons are prohibited from dealing with

SDNs wherever they are located and all SDN assets are blocked. It is important to check OFAC's

website on a regular basis to ensure that your SDN list is current.

OFAC’s sanctions programs are separate and distinct from, and in addition to, the AML

requirements imposed on broker-dealers under the BSA.

As a tool in administering sanctions, OFAC publishes lists of sanctioned countries and persons

that are continually being updated. Its list of Specially Designated Nationals and Blocked

Persons (SDNs) lists individuals and entities from all over the world whose property is subject to

blocking and with whom U.S. persons cannot conduct business. OFAC also administers country-

based sanctions that are broader in scope than the “list-based” programs.

OFAC has the authority to impose substantial civil penalties administratively. To guard against

engaging in OFAC prohibited transactions, one best practice that has emerged entails “screening

against the OFAC list.” OFAC has stated that it will take into account the adequacy of a firm’s

OFAC compliance program when it evaluates whether to impose a penalty if an OFAC violation

has occurred. Firms should be aware of other lists, such as the Financial Action Task Force

(“FATF”) list of non-compliant countries (the “NCCT list”). If transactions originate from or are

routed to any FATF-identified countries, it might be an indication of suspicious activity.

C. FATF

The Financial Action Task Force (FATF) is an inter-governmental body whose purpose is the

development and promotion of policies, both at national and international levels, to combat

money laundering and terrorist financing. The Task Force is therefore a "policy-making body"

which works to generate the necessary political will to bring about national legislative and

regulatory reforms in these areas.

FTAF is comprised of over 35 countries, and has a ministerial mandate to establish international

standards for combating money laundering and terrorist financing. Over 180 jurisdictions have

joined the FATF or an FATF‐style regional body, and committed at the ministerial level to

implementing the FATF standards and having their anti‐money laundering

(AML)/counter‐terrorist financing (CFT) systems assessed.

FATF sets international standards to combat money laundering and terrorist financing. It

assesses and monitors compliance with the FATF standards; conducts typologies studies of

money laundering and terrorist financing methods, trends and techniques; and it Responds to

new and emerging threats, such as proliferation financing.

The FATF has internationally endorsed global standards for implementing effective AML/CFT

measures. They increase the transparency of the financial system (making it easier to detect

criminal activity) and give countries the capacity to successfully take action against money

launderers and terrorist financiers.


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D. FINRA

In July 2007, the SEC approved the establishment of the Financial Industry Regulatory Authority

(FINRA). FINRA consolidated the former NASD and the member regulation, enforcement, and

arbitration operations of NYSE Regulation.

FINRA is the largest independent regulator for all securities firms doing business in the United

States. FINRA’s mission is to protect America’s investors by making sure the securities industry

operates fairly and honestly. All told, FINRA oversees nearly 4,495 brokerage firms, about

163,450 branch offices and approximately 635,515 registered securities representatives.

FINRA touches virtually every aspect of the securities business—from registering and educating

industry participants to examining securities firms; writing rules; enforcing those rules and the

federal securities laws; informing and educating the investing public; providing trade reporting

and other industry utilities; and administering the largest dispute resolution forum for investors

and registered firms. We also perform market regulation under contract for the major U.S. stock

markets, including the New York Stock Exchange, NYSE Arca, NYSE Amex, The NASDAQ

Stock Market and the International Securities Exchange.

FINRA has approximately 3,000 employees and operates from Washington, DC, and New York,

NY, with 20 regional offices around the country.

In today's fast-paced and complex global economy, FINRA is a trusted advocate for investors,

dedicated to keeping the markets fair and proactively addressing emerging regulatory issues

before they harm investors or the markets.

FINRA promotes the philosophy that the best form of investor protection begins with education.

They offer a wide range of information and tools—through their website, the media and at public

forums—to help investors protect themselves and better understand the basic principles of saving

and investing.

Their foundation, the FINRA Investor Education Foundation, is the largest foundation in the

United States dedicated to investor education. Since its inception in 2003, the Foundation has

approved more than $63 million in investor education and protection initiatives through a

combination of grants and targeted projects.

E. FBI

The FBI is concerned with matters inside the U.S. boarders. The CIA is charged with the duty to

address matters outside the U.S. Although the FBI has a money laundering division, it has been

overwhelmed by mortgage fraud investigations. However, the FBI reports that in almost every

one of its fraud cases, money laundering has been involved.

The “fast cash” associated with mortgage fraud makes it an appealing vehicle for money

launderers. In addition, mortgage broker channels largely are unregulated, making the real estate

industry very susceptible to money laundering.


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The FBI investigates mortgage fraud in two distinct areas: Fraud for Profit, and Fraud for

Housing. Those who commit mortgage fraud for profit are often industry insiders using their

specialized knowledge or authority to commit or facilitate the fraud.

Although both fraud for housing and fraud for profit can be meshed in any mortgage fraud

scheme, fraud for profit is increasingly linked to other illegal activities, including terrorism, drug

dealing, organized crime and prostitution.

Current investigations and widespread reporting indicate a high percentage of mortgage fraud

involves collusion by industry insiders, such as appraisers, mortgage brokers, attorneys, loan

originators, and other professionals engaged in the industry. Fraud for Housing typically

represents illegal actions conducted solely by the borrower, who is motivated to acquire and

maintain ownership of a house under false pretenses such as misrepresented income and asset

information on a loan application.

In 2005, the Federal Bureau of Investigation called mortgage fraud “one of the fastest growing

white collar crimes in the United States.” The agency estimates annual losses attributed to

mortgage loan fraud at $4 billion to $6 billion. However, because a significant number of cases

go undetected, the true level of mortgage fraud is unknown.

The FBI reports that the number of agents assigned to mortgage-related crimes increased by 50

percent between 2007 and 2008, an increase necessary to address a mortgage fraud caseload that

has doubled in the past three years to more than 1,400 pending cases. The FBI also takes part in

42 mortgage fraud task forces and working groups.

In a June 2008, press release, the FBI stated that between March 1 and June 18, 2008, 406 people

were arrested for mortgage fraud in a Justice Department crackdown on incidents of mortgage

fraud nationwide that stem from the country's housing crisis. Those arrested in the sting, dubbed

“Operation Malicious Mortgage,” included buyers, sellers and others across the wide-ranging

mortgage industry.

Noting that the subprime lending crisis is a contributing factor to mortgage fraud, both directly

and indirectly, law enforcement officials said their increased focus on mortgage cases “aims to

combat problems that have grown out of the risky lending practices prevalent until the mortgage

market collapse started last year.” Reports of mortgage fraud have soared over the past year as

the subprime mortgage market collapsed and the number of defaults and foreclosures rose

steeply.

In 2009, the continuing deterioration of the real estate market and the dramatic rise in mortgage

delinquencies and foreclosures helped fuel the financial crisis and exposed fraudulent practices

that were prevalent throughout the mortgage industry. Weak underwriting standards and unsound

risk management practices, which had allowed mortgage fraud perpetrators to exploit lending

institutions and avoid detection, became evident once the housing market began declining in

2006.

Mortgage fraud schemes employ some type of material misstatement, misrepresentation, or

omission relating to the property or potential borrower which is relied on by an underwriter or


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lender to fund, purchase, or insure a loan. These misstatements, misrepresentations, or omissions

are indicative of mortgage fraud and include the following:

Inflated Appraisals

Fictitious/Stolen Identities

Nominee/Straw Buyers

False Loan Application

Fraudulent Supporting Loan Documentation

Kickbacks

Although there are many different types of schemes, mortgage fraud can be summarized as a

form of bank robbery where the bank is not even aware it has been robbed until months or years

later. Mortgage fraud perpetrators often obtain loans based on falsely representing the value of

the collateral or their qualifications to receive the loan and steal the proceeds without an

intention of repaying the borrowed funds. Lending institutions are subsequently left holding the

inflated collateral and incurring significant losses.

Mortgage fraud is a part of the Financial Institution Fraud (FIF) subprogram within the FBI’s

White Collar Crime Program (WCCP) which was begun in 1978 by William Sessions.

One of the ways the FBI becomes aware of mortgage fraud is through the analysis of Suspicious

Activity Reports (SARs), which are filed by federally-insured financial institutions. Mortgage

fraud SARs have increased from 6,936 in FY 2003 to 67,190 in FY 2009. These SARs provide

valuable intelligence in mortgage fraud trends and can lead to the initiation of mortgage fraud

cases, as well as the enhancement of current FBI investigations.

In response to the increase in mortgage fraud, the FBI has continued to add investigative

resources to combat the mortgage fraud problem. In December 2008, the FBI dedicated

resources to create the National Mortgage Fraud Team (NMFT) at FBI Headquarters in

Washington, D.C. The NMFT has the specific responsibility for all management of the mortgage

fraud program at both the origination and corporate level. The NMFT assists the field offices in

addressing the mortgage fraud problem at all levels.

The current financial crisis, however, has required the FBI to move resources from other WCC

and criminal programs in order to appropriately address the crime problem. Since January 2007,

the FBI has increased its agent and analyst manpower working mortgage fraud investigations.

The NMFT provides tools to identify the most egregious mortgage fraud perpetrators, prioritize

pending investigations, and provide information to evaluate where additional manpower is

needed.

In September 2009, the FBI established the Financial Intelligence Center (FIC) to provide

tactical analysis of intelligence datasets and financial databases. The FIC uses evolving

technology and data exploitation techniques to create targeting packages to identify the most

egregious criminal enterprises and to enhance current criminal investigations. The FIC has

worked jointly with the NMFT to assist the field offices by creating mortgage fraud targeting

packages.


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One of the best tools the FBI has in its arsenal for combating mortgage fraud is its long-standing

partnerships with other federal, state, and local law enforcement. This is not a new tool employed

by the FBI. Collaboration, communication, and information sharing have long been a proven

solution to the nation’s most difficult crimes.

In response to a growing gang problem, for example, the FBI formed Safe Streets Task Forces

across the country. In response to crimes in Indian Country, the FBI developed the Safe Trails

Task Force Program. In response to this new threat, the FBI created Mortgage Fraud Task Forces

(MFTF) and Mortgage Fraud Working Groups (MFWG). As of FY 2009, there are 15 MFTFs

and 62 MFWGs across the country. With representatives of federal, state, and local law

enforcement, these task forces and working groups are strategically placed in locations identified

as high-threat areas for mortgage fraud. Partners are varied but typically include representatives

of the Federal Deposit Insurance Corporation-OIG, the USPIS, the IRS-CID, FinCEN, and the

HUD-OIG, as well as state and local law enforcement officers across the nation.

While the FBI has increased the number of agents around the country who investigate mortgage

fraud cases from 120 Special Agents in FY 2007 to 300 Special Agents in FY 2009, this

multiagency model serves as a force-multiplier, providing an array of resources to adequately

identify the source of the fraud, as well as finding the most effective way to prosecute each case,

particularly in active markets where fraud is widespread.

In short, the FBI remains committed to its responsibility to aggressively investigate mortgage

fraud, as well as engage with the mortgage industry in identifying fraud trends and educating the

public. To maximize our current resources, they are relying on intelligence collection and

analysis to identify emerging trends and egregious offenders. FBI continues to rely heavily on

the strong relationships with both law enforcement and regulatory agency partners to combat

mortgage fraud and to target, disrupt, and dismantle the criminal organizations and individuals

engaging in these fraud schemes.

Regional analysis of SARs containing mortgage fraud violations indicate the Western region of

the United States led the nation with 38 percent of mortgage fraud-related SARs filed during FY

2009. Southeastern, North Central, Northeastern, and South Central regions had 28, 17, 11, and 6

percent, respectively, of mortgage fraud-related SAR filings. FBI pending cases indicate the

Western region also had the majority of mortgage fraud cases, with 29 percent during 2009. The

Southeastern, North Central, Northeastern, and South Central regions had 24, 20, 15, and 12

percent, respectively.


12

F. IRS

According to the IRS website, the term “money laundering” refers to the activities and financial

transactions that are undertaken specifically to hide the true source of the money. In most cases,

the money involved is earned from an illegal enterprise and the goal is to give that money the

appearance of coming from a legitimate source.

One look at the daily news is proof that the crimes dealing with or motivated by money make up

the majority of criminal activity in the nation. Tax evasion, public corruption, health care fraud,

money laundering and drug trafficking are all examples of the types of crimes that revolve

around money. In these cases, a financial investigation often becomes the key to a conviction.

For this reason, IRS is one of the key agencies involved in money laundering investigations.

Money laundering is a very complex crime involving intricate details, often involving numerous

financial transactions and financial outlets throughout the world. Criminal Investigation has the

financial investigators and expertise that is critical to “follow the money trail.” Criminal

Investigation focuses on money laundering where the underlying conduct is a violation of the

income tax laws or violations of the Bank Secrecy Act.

According to the IRS, money laundering is the means by which criminals evade paying taxes on

illegal income by concealing the source and the amount of profit. Money laundering is in effect

tax evasion in progress. When no other crimes could be pinned to Al Capone, the Internal

Revenue Service obtained a conviction for tax evasion. As the astonished Capone left the

courthouse he said, "This is preposterous. You can't tax illegal income!" But the fact is income

from whatever source derived (legal or illegal) is taxable income. Had the money laundering

statutes been on the books in the 1930's, Capone would also have been charged with money

laundering.

However, since October 1986, with the passage of the Money Laundering Control Act, organized

crime members and many others have been charged and convicted of both tax evasion and

money laundering. When a criminal has a large amount of illegal income, they have to do

something with it in order to hide it from the IRS. They attempt to launder it to make it appear as

if it was from a legitimate source, allowing them to spend it or invest it in assets without having

to worry about the IRS and tax consequences.

One of the ways to launder illegal proceeds is to move the money out of the United States and

then bring it back in a clean form, often disguised as loan proceeds. Another method is to

channel or co-mingle the money through various business activities to give the appearance that

the money was derived from a legal source.

Financial investigations are by their nature very document intensive. They involve records, such

as bank account information or real estate files, which point to the movement of money. Any

record that pertains to or shows the sequence of events involving money movement is important.

The major goal in a financial investigation is to identify and document the movement of money


13

during the course of a crime. The link between where the money comes from, who gets it, when

it is received and where it is stored or deposited, can provide proof of criminal activity.

IRS investigations of illegal income cases involving money laundering are critical components of

the nation’s National Money Laundering Strategy. The long hours of tracking and documenting

financial leads allows an investigation to go right to the door of the money launderers and

eventually to the leader of the illegal enterprise. A complete financial analysis and reconstruction

of the illegal activity (i.e. a drug organization or an abusive trust scheme) will document the

financial activities related to unreported income on tax returns and money laundering which is

usually key to securing a conviction.

Money laundering creates an underground, untaxed economy that harms our country’s overall

economic strength. It is a global threat that erodes our financial systems.

G. SEC

The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain

fair, orderly, and efficient markets, and facilitate capital formation. As more and more first-time

investors turn to the markets to help secure their futures, pay for homes, and send children to

college, our investor protection mission is more compelling than ever.

Unlike the banking world, where deposits are guaranteed by the federal government, stocks,

bonds and other securities can lose value. There are no guarantees.

The laws and rules that govern the securities industry in the United States derive from a simple

and straightforward concept: all investors, whether large institutions or private individuals,

should have access to certain basic facts about an investment prior to buying it, and so long as

they hold it. To achieve this, the SEC requires public companies to disclose meaningful financial

and other information to the public. This provides a common pool of knowledge for all investors

to use to judge for themselves whether to buy, sell, or hold a particular security. Only through the

steady flow of timely, comprehensive, and accurate information can people make sound

investment decisions.

The result of this information flow is a far more active, efficient, and transparent capital market

that facilitates the capital formation so important to our nation's economy. To insure that this

objective is always being met, the SEC continually works with all major market participants,

including especially the investors in our securities markets, to listen to their concerns and to learn

from their experience.

The SEC oversees the key participants in the securities world, including securities exchanges,

securities brokers and dealers, investment advisors, and mutual funds. Here the SEC is concerned

primarily with promoting the disclosure of important market-related information, maintaining

fair dealing, and protecting against fraud.

Crucial to the SEC's effectiveness in each of these areas is its enforcement authority. Each year

the SEC brings hundreds of civil enforcement actions against individuals and companies for


14

violation of the securities laws. Typical infractions include insider trading, accounting fraud, and

providing false or misleading information about securities and the companies that issue them.

One of the major sources of information on which the SEC relies to bring enforcement action is

investors themselves — another reason that educated and careful investors are so critical to the

functioning of efficient markets. To help support investor education, the SEC offers the public a

wealth of educational information on its Internet website, which also includes the EDGAR

database of disclosure documents that public companies are required to file with the

Commission.

Though it is the primary overseer and regulator of the U.S. securities markets, the SEC works

closely with many other institutions, including Congress, other federal departments and agencies,

the self-regulatory organizations (e.g. the stock exchanges), state securities regulators, and

various private sector organizations. In particular, the Chairman of the SEC, together with the

Chairman of the Federal Reserve, the Secretary of the Treasury, and the Chairman of the

Commodity Futures Trading Commission, serves as a member of the President's Working Group

on Financial Markets.

H. DEA

Undercover stings are also a big component of the fight. The Drug Enforcement Agency's

Operation Juno, which ended in 1999, is a prime example. The DEA out of Atlanta conducted a

sting operation that involved providing resources to drug traffickers to launder money. The

undercover DEA agents made deals with the traffickers to turn drug money from dollars to pesos

using the Colombian Black Market Peso Exchange. The operation ended with 40 arrests and the

seizure of $10 million in drug proceeds and 3,600 kilograms of cocaine

VI. Laws and Legislation

A. Historical View

Until the enactment of the money laundering provisions of the Money Laundering Control Act of

1986, most money laundering prosecutions were based upon a combination of charges pursuant

to the conspiracy provisions of Title 21, currency transaction reporting ("CTR") violations under

Title 31, and prosecutions under the Travel Act, and Title 18 conspiracy. However, money

laundering accusations using the conspiracy theory prove problematic for the government.

Money laundering in and of itself was not a crime. The mere fact that a person laundered money

derived from illegal drug trafficking did not make the launderer part of the conspiracy to violate

narcotics law. Under law that existed prior to enactment of modem money laundering statutes,

the government was required to show a sufficient link between a defendant's money laundering

and the underlying illegal activity to demonstrate the defendant was a member of the conspiracy.

U.S. v. Dela Espriella, 781 F.2d 1432 (9th Cir. 1986).

Likewise, under the Travel Act, the government was required to show an ongoing continuous

"business enterprise" which the defendant intended to "facilitate by his actions." For example, in

United States v. Lignarolo, 770 F.2d 971 (1Ith Cir. 1985), cert. denied 476 US 1105 (1986), the

http://www.sec.gov/index.htm

http://www.sec.gov/edgar.shtml

http://www.sec.gov/edgar.shtml


15

l1th Circuit Court of Appeals upheld the conviction of the defendant in the situation where he

"willfully distributes proceeds that he knows were derived from an unlawful activity". The

Court's holding was based in part on the language and purpose of the Travel Act which was "to

control the flow of illegal profits" from narcotics activity. However, even in Lignarolo, the Court

made clear that its ruling had limited application. The Court specifically noted that its holding

did not encompass businessmen who provide otherwise lawful services and products to an

unlawful business enterprise. The Court felt that its ruling was limited to individuals who

knowingly distribute and launder proceeds of an unlawful activity as defined in 18 U.S.C. 1952

(b), a result in harmony both with the practicalities of the business community and the legislative

history of the Travel Act. U.S. v. Lignarolo, 770 F.2d at 978 n. 11.

Recognizing the need for better legislation and regulation, Congress proceeded to pass various

legislation to combat money laundering.

B. Bank Secrecy Act (1970)

Established requirements for recordkeeping and reporting by private individuals, banks

and other financial institutions

Designed to help identify the source, volume, and movement of currency and other

monetary instruments transported or transmitted into or out of the United States or

deposited in financial institutions

Required banks to (1) report cash transactions over $10,000 using the Currency

Transaction Report; (2) properly identify persons conducting transactions; and (3)

maintain a paper trail by keeping appropriate records of financial transactions

The BSA is sometimes referred to as an "anti-money laundering" law ("AML") or jointly

as “BSA/AML”. Several anti-money laundering acts, including provisions in title III of

the USA PATRIOT Act, have been enacted up to the present to amend the BSA. (See 31

USC 5311-5330 and 31 CFR Chapter X (formerly 31 CFR Part 103).

The BSA established the basic framework for anti-money laundering obligations imposed

on financial institutions. Among other things, it authorizes the Secretary of the Treasury

(Treasury) to issue regulations requiring financial institutions (including broker-dealers)

to keep records and file reports on financial transactions that may be useful in

investigations and prosecuting money laundering and other financial crimes.

Rule 17a-8 under the Securities Exchange Act of 1934 (Exchange Act) requires broker-

dealers to comply with the reporting, recordkeeping, and record retention requirements

adopted under the BSA.

C. Money Laundering Control Act (1986)

Established money laundering as a federal crime

Prohibited structuring transactions to evade CTR filings

Introduced civil and criminal forfeiture for BSA violations


16

Directed banks to establish and maintain procedures to ensure and monitor compliance

with the reporting and recordkeeping requirements of the BSA

The Money Laundering Control Act of 1986 was adopted by Congress in response to the

enormous problem of money laundering involving proceeds of illegal drug trafficking. The

provisions of the Act are found in Sections 1956 and 1957 of Title 18 of the United States Code.

Since its initial enactment, a series of amendments to the money laundering provisions of

Sections 1956 and 1957 have expanded the application of the law to a very broad range of

financial transactions which have nothing to do with traditional concepts of money laundering.

In adopting the Money Laundering Control Act of 1986, Congress intended that liability under the

Act extend to both those who actually engage in the criminal activity that generates the illegal funds

and to those who merely receive or otherwise handle illegal funds while providing ordinary,

legitimate goods or services.

At the time of its adoption, Congress was fully aware that the Act could and would be used to seek

prosecution of otherwise law abiding citizens who knowingly accepted funds from illegal activity as

payment for ordinary, legitimate goods or services, or who otherwise knowingly handled criminally

derived funds while providing those services. In reporting the Money Laundering Control Act to

Congress in 1986, the Senate Subcommittee on Crime reported to Congress that a person who

engaged in a financial transaction using the proceeds of a designated offense would violate the

provisions of the Money Laundering Act if such person knew that the subject of the transaction were

the proceeds of any crime. The House judiciary Committee on Crime was also well aware that every

person who does business with a drug trafficker, or any other criminal, does so at some substantial

risk if that person knows that they are being paid with the proceeds of a crime and then uses that

money in a financial transaction.

D. Anti-Drug Abuse Act of 1988

Expanded the definition of financial institution to include businesses such as car dealers

and real estate closing personnel and required them to file reports on large currency

transactions

Required the verification of identity of purchasers of monetary instruments over $3,000

E. Annunzio-Wylie Anti-Money Laundering Act (1992)

Strengthened the sanctions for BSA violations

Required Suspicious Activity Reports and eliminated previously used Criminal Referral

Forms

Required verification and recordkeeping for wire transfers

Established the Bank Secrecy Act Advisory Group (BSAAG)

F. Money Laundering Suppression Act (1994)

Required banking agencies to review and enhance training, and develop anti-money

laundering examination procedures


17

Required banking agencies to review and enhance procedures for referring cases to

appropriate law enforcement agencies

Streamlined CTR exemption process

Required each Money Services Business (MSB) to be registered by an owner or

controlling person of the MSB

Required every MSB to maintain a list of businesses authorized to act as agents in

connection with the financial services offered by the MSB

Made operating an unregistered MSB a federal crime

Recommended that states adopt uniform laws applicable to MSBs

G. Money Laundering and Financial Crimes Strategy Act (1998)

Required banking agencies to develop anti-money laundering training for examiners

Required the Department of the Treasury and other agencies to develop a National

Money Laundering Strategy

Created the High Intensity Money Laundering and Related Financial Crime Area

(HIFCA) Task Forces to concentrate law enforcement efforts at the federal, state and

local levels in zones where money laundering is prevalent. HIFCAs may be defined

geographically or they can also be created to address money laundering in an industry

sector, a financial institution, or group of financial institutions.

H. Executive Order 13224 (2001)

President Bush issued Executive Order 13224 effective September 24, 2001. The Order provides

that property of particular persons already in the United States or hereinafter comes into the

possession or control of persons in the United States is blocked. Any transaction or dealing by

United States persons (“USP”), or within the United States in property or interests in property

blocked pursuant to the Order is prohibited, including the making or receiving of any

contribution of funds, goods or services to certain individuals. To avoid penalties, USPs must

block or “freeze” assets of blocked countries and individuals.

Furthermore, USPs are required to report the blocked transactions to the Office of Foreign

Assets Control (“OFAC”) within ten (10) days after such blocking occurs. Persons subject to

having their property blocked include everyone listed in the Annex to the Order (the “Annex”).

The Order also provides for the possibility of including foreign persons who may be named by

the Secretary of State or the Secretary of the Treasury in the future because the persons are

deemed to have committed, or pose a significant risk of committing, acts of terrorism10 against

the United States.

Additionally, persons determined to be owned or controlled by persons listed in the Annex, as

well as persons who support terrorism or assist persons listed in the Annex, are subject to having

their property blocked. Finally, the Order allows for the blocking of assets of persons who

“associate” with persons currently listed or later added to the Annex. The list of known or

suspected terrorists is very long and is continually updated.


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I. Uniting and Strengthening America by Providing Appropriate Tools to Restrict,

Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act)

[Title III of the USA PATRIOT Act is referred to as the International Money Laundering

Abatement and Financial Anti-Terrorism Act of 2001]

Criminalized the financing of terrorism and augmented the existing BSA framework by

strengthening customer identification procedures

Prohibited financial institutions from engaging in business with foreign shell banks

Required financial institutions to have due diligence procedures (and enhanced due

diligence procedures for foreign correspondent and private banking accounts)

Improved information sharing between financial institutions and the U.S. government by

requiring government-institution information sharing and voluntary information sharing

among financial institutions

Expanded the anti-money laundering program requirements to all financial institutions

Increased civil and criminal penalties for money laundering

Provided the Secretary of the Treasury with the authority to impose "special measures"

on jurisdictions, institutions, or transactions that are of "primary money laundering

concern"

Facilitated records access and required banks to respond to regulatory requests for

information within 120 hours

Required federal banking agencies to consider a bank's AML record when reviewing

bank mergers, acquisitions, and other applications for business combinations

The official title of the USA PATRIOT Act is “Uniting and Strengthening America by Providing

Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT Act) Act of

2001.” The USA PATRIOT Act, enacted by Congress in 2001 in response to the September 11,

2001 terrorist attacks, (among other things) amended and strengthened the BSA . It imposed a

number of AML obligations directly on various businesses, including:

AML compliance programs;

customer identification programs;

monitoring, detecting, and filing reports of suspicious activity;

due diligence on foreign correspondent accounts, including prohibitions on transactions

with foreign shell banks;

due diligence on private banking accounts;

mandatory information-sharing in response to requests by federal law enforcement); and

compliance with “special measures” imposed by the Secretary of the Treasury to address

J. Intelligence Reform & Terrorism Prevention Act of 2004

Amended the BSA to require the Secretary of the Treasury to prescribe regulations

requiring certain financial institutions to report cross-border electronic transmittals of

funds, if the Secretary determines that such reporting is "reasonably necessary" to aid in

the fight against money laundering and terrorist financing


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VII. OUR ROLE OR POTENTIAL ROLE

A. Title Companies

The Patriot Act broadly affects several different areas of trade and commerce. Of primary

concern to financial institutions is Title III, the “International Money Laundering Abatement and

Anti-Terrorist Financing Act of 2001” (“Title III”). Title III makes a number of amendments to

the anti-laundering provisions of the Bank Secrecy Act (“BSA”), which is codified in Subchapter

II of Chapter 53 of Title 31, United States Code (“U.S.C.”). The main purpose of Title III is to

prevent and detect money laundering, which is a significant source of funding for terrorism.

The Act purports to meet this goal mainly through the implementation of anti–money laundering

programs, sharing of information, customer identification programs, and reporting of certain

money transactions and suspicious activities. Treasury and FinCEN have been and continue to

be involved in the process of reviewing each category of U.S. financial institutions and have

been and will continue to implement regulations requiring the development of anti–money

laundering programs (“AMLP”) tailored to the specific risks presented by the products and

services offered by each business industry designated as a financial institution.

Section 311 of the Act amends the money and finance provisions of the U.S.C. (31 U.S.C.

§5318A (2002)) and gives Treasury the power and authority to issue rules and regulations that

require financial institutions to take “special measures” if Treasury finds reasonable grounds that

certain transactions are of “primary money laundering concern.” These special measures may

include additional record keeping and reporting of certain financial transactions as well as the

retention of information relating to beneficial ownership of any account. The measures may also

require financial institutions to identify customers with certain payable-through accounts and

correspondent accounts, as well as prohibiting or imposing conditions on opening such accounts.

A financial institution (as defined in 31 U.S.C. 5312) is:

An insured bank;

A commercial bank or trust company;

A private banker;

An agency or branch of a foreign bank in the United States;

A credit union;

A thrift institution;

A broker or dealer registered with the SEC;

A broker or dealer in securities or commodities;

An investment banker or investment company;

A currency exchange;

An issuer, redeemer, or cashier of travelers’ checks, checks, money orders, or similar

instruments;

An operator of a credit card system;

An insurance company;

A dealer in precious metals, stones, or jewels


20

A pawnbroker;

A loan or finance company;

A travel agency;

A licensed sender of money or any other person who engages as a business in the transmission

of funds;

A telegraph company;

A business engaged in vehicle sales, including automobile, airplane, and boat sales;

Persons involved in real estate closings and settlements;

The United States Postal Service;

An agency of the U.S. Government or of a State or local government carrying out a duty or

power of a business described in this paragraph;

A casino, gambling casino, or gaming establishment with an annual gaming revenue of more

than $1,000,000;

Any business which engages in activities similar to those engaged in by the businesses

described above;

and

Any other business designated by the Secretary of the Treasury whose cash transactions have a

high degree of usefulness in criminal, tax, or regulatory matters.

B. Dodging the Bullet

However, shortly after the drafting and passing of the Patriot Act, Treasury addressed the AMLP

requirements for banks, savings associations, registered brokers and dealers in securities, futures

commission merchants, casinos, money services businesses (including currency dealers, check

cashers, issuers of traveler’s checks, money orders, etc.), operators of credit card systems and

mutual funds.

The interim regulations temporarily excluded all other financial institutions from the requirement

that they establish AMLPs until October 24, 2002. However, effective November 6, 2002,

Treasury issued an interim final rule extending the exemption for certain financial institutions

from the requirement of establishing an AMLP indefinitely.

The financial institutions subject to this exemption include:

Certain insurance companies;

investment companies other than mutual funds;

loan and finance companies;

dealers in precious metals, stones, or jewels;

commodity pool operators and commodity trading advisors;

businesses engaged in vehicle sales;

persons involved in real estate closings and settlements;

pawnbrokers;

travel agencies;

telegraph companies;


21

private bankers;

state-chartered, non-depository trust companies;

non-federally insured credit unions;

and private banks.

Treasury indicated that it needed time for further study of these industries and thus compliance

with Section 352 is not required until Treasury issues final and effective regulations.

The temporary exemption from the requirement to establish an AMLP does not relieve exempted

entities from existing requirements that they report transactions in cash or currency that exceed

$10,000, as well as otherwise suspicious transactions. These transactions must be reported to

FinCEN and the IRS using form 8300. No other guidance has been offered by Treasury as to the

composition of internal policies, procedures, controls or training programs.

C. “Involved in Real Estate Closings and Settlements”

But what if the exemption is removed? We have had far too many title companies involved in

mortgage fraud. The BSA still applies to financial institutions, but the scope of that term has

been expanded to include 27 separately identified categories of financial institutions.

It is important to remember that the obligation of persons engaged in real estate transactions to

file a Currency Transaction Report pursuant to the BSA (when cash or cash equivalents in an

amount over $10,000.00 are used as the means of payment), predates the Act.

As noted above, the Act applies to "financial institutions" and includes a broad laundry list of

institutions and individuals within that term. Of particular relevance to the real estate industry,

the definition of a "financial institution" includes "persons involved in real estate closings and

settlements."

The phrase “persons involved in real estate closings and settlements” is bereft of any meaningful

legislative history. Neither the BSA, nor its legislative history define or elaborate on its meaning.

It is thus left to the Treasury Department’s Financial Crimes Enforcement Network ("FinCEN")

to define this phase.

D. Lawyers

1. Fees as Money Laundering

The provisions of Money Laundering Control Act from its inception in 1986 created a dilemma for

attorneys representing individuals who might be involved in illegal activity. A principal concern was

18 U.S.C. §1956(a)(2) and 1956(c) which, if applied to an attorney who accepted a fee from a client

whose money was derived from a specific unlawful activity, could be convicted of money laundering

under Section 1956 upon proof that the attorney (a) knew the money was from an unlawful activity,

and (b) knew that the defendant was using the attorney to conceal (by defending the client from a

criminal prosecution) the unlawful activity.


22

As initially drafted, Section 1956 contained no exemption for bona fide attorney's fees. Ten days

before the President signed the Money Laundering Control Act into law, Congressman Bill

McCollum proposed an exemption for attorneys fearing that exposing defense attorneys to

prosecution for accepting bona fide, but nevertheless tainted legal fees, would chill the attorney-

client relationship, interfere with the attorney-client privilege and deprive defendants of their right to

representation. The House of Representatives eventually added the exemption.

However, the exemption was dropped during conferences between the House and Senate.

Two years later, the Money Laundering Prosecution Improvements Act of 1988 amended Section

1957 to provide that the definition of monetary transaction "does not include any transaction

necessary to preserve a person's right to representation as guaranteed by the Sixth Amendment to the

Constitution".

Arguably, the Sixth Amendment to the Constitution would stand on its own without the necessity of

adding the attorney exemption to Section 1957. However, the exemption provides only limited

protection to attorneys. First, because it is keyed to the Sixth Amendment of the Constitution, it

applies only to criminal matters and does not apply until the client has been indicted. U.S. v.

Gouveia, 467 U.S. 180, 191 (1984). A real estate attorney who deposits tainted funds with

knowledge that the funds are tainted can face prosecution for money laundering under Section 1957.

There is a rumor that the Department of Justice Internal Manual includes limitations on the use of

Section 1957 against attorneys. Guidelines require that the property transferred to the attorney be a

legitimate fee, and not a sham designed to hide property. If this condition is met, the Department of

Justice will prosecute only those attorneys who had actual knowledge that the fee was generated by

crime, even if the lack of actual knowledge is due to the lawyer's willful blindness. Moreover, the

lawyer's actual knowledge cannot come from confidential lawyer-client communications or the

lawyer's own efforts in the course of representing the client.

2. Forfeiture of Attorney Fees.

The forfeiture of assets is authorized by the Comprehensive Forfeiture Act of 1984. The Act

amended 18 U.S.C. §1963 and added 21 V.S.C. §853. Under the Act, the government can claim title

to property obtained in violation of the Racketeering Influenced and Corrupt Organizations Act

(RICO). 18 U.S.C. §1961-1968. The forfeiture laws include provisions designed to stop defendants

from hiding or liquidating their tainted assets. The forfeiture "relates back" to the date the crime was

committed. In other words, title to the assets transferred to the government immediately upon the

commission of the crime.

This retroactive effect of the forfeiture that can cause problems for attorneys. The Supreme Court

has ruled that criminal forfeiture laws apply to attorney's fees and that forfeiture fees is

constitutional. U.S. v. Monsanto, 491 U.S. 600 (1989). If a defendant pays his lawyer with

forfeitable assets, the government can recoup those fees from the lawyer. The only defense

available to the lawyer is a bona fide purchaser defense. 21 U.S.C. §853(c) (1988). The lawyer

must prove at a post trial hearing that at the time he received the fee, he was "reasonably without

cause to believe" that the property was subject to forfeiture.


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3. Professional Standards of Conduct.

No attorney should entertain the prospect of representing a client involved in questionable

activity without first becoming thoroughly familiar with portions of the Texas Disciplinary Rules

of Professional Conduct which will affect the scope of the lawyer's responsibility in representing

his/her client. Rule 1.02(c) of the Texas Rules of Professional Conduct provides as follows:

"A lawyer shall not assist or counsel a client to engage in conduct that the lawyer knows is

criminal or fraudulent. A lawyer may discuss the legal consequences of any proposed course of

conduct with a client and may counsel and represent a client in connection with the making of a

good faith effort to determine the validity, scope, meaning or application of the law.

When a lawyer has confidential information clearly establishing that a client is likely to commit

a criminal or fraudulent act that is likely to result in substantial injury to the financial interests or

property of another, the lawyer shall promptly make reasonable efforts under the circumstances

to dissuade the client from committing the crime or fraud."

The commentary to Rule 1.02 make the following observation:

"A lawyer is required to give an honest opinion about the actual consequences that appear likely

to result from a client's conduct. The fact that a client uses advice in a course of action that is

criminal or fraudulent does not, of itself, make a lawyer a party to the course of action. However,

a lawyer may not knowingly assist a client in criminal or fraudulent conduct. There is a critical

distinction between presenting an analysis of legal aspect of questionable conduct and

recommending the means by which a crime or fraud might be committed with impunity."

If the attorney discovers during the scope of his representation that the client has already

embarked in a criminal or fraudulent scheme, the attorney must not assist the client in

such endeavors and, if necessary, must withdraw from representation of the client if the

attorneys continued involvement will result in violation of the disciplinary rules or law.

[Rule 1.15(a)(1)].

4. Confidentiality and the Attorney-Client Privilege

The Texas Disciplinary Rules of Professional Conduct, Rule 1.05, defines "confidential

information" to include both "privileged information" and "unprivileged client information."

Privileged information is referred to as the information of a client protected by the lawyer-client

privilege of Rule 503 of the Texas Rules of Evidence or of Rule 503 of the Texas Rules of

Criminal Evidence or by the principles of attorney/client privilege governed by Rule 501 of the

Federal Rules of Evidence. "Unprivileged client information" means all information relating to a

client or furnished by the client, other than privileged information, acquired by the lawyer during

the course of or by reason of the representation of the client. Under some circumstances, an

attorney may reveal confidential information, such as when a crime has been committed or is

about to be committed, so long as such revelation is made pursuant to the guidelines provided in

the rules. Although the revelation of confidential information by an attorney, against his client's

wishes, is a serious matter, it often times pales in comparison to the situation where a privileged


24

communication between the attorney and his client is sought to be discovered by a third-party or,

even worse, the U.S. Attorney's Office.

Rule 503 of the Texas Rules of Civil Procedure provides that no attorney/client privilege exists if

the services of the lawyer were sought or obtained to enable or aid someone to commit or plan to

commit what the client knew or reasonably or should have known to be a crime or fraud. Thus,

the attorney may find themselves a subject in proceedings where a grand jury may be seeking to

obtain information from the attorney, including the attorney's notes and the attorney work

product, involving an alleged fraud committed by his client. Because the same rule applies in

criminal proceedings, it is possible that forcing an attorney to involuntary disclose information

may reveal information which is incriminating to the attorney himself in addition to the client.

One of the goals of money laundering statutes was to make worthless the proceeds from

unlawful activity. Real estate professionals or attorneys who knowingly conduct business with

those involved in unlawful activity or are willfully blind to the potential unlawful activities of

their clients face both civil and criminal sanctions. While it is not necessary that real estate

professionals and/or their lawyers conduct background investigations of all their clients, it may

become necessary to conduct such an investigation if suspicious circumstances surrounding the

client warrant further review. Moreover, once it is discovered that proceeds from unlawful

activity are potentially involved in a real estate transaction, neither the real estate professional

nor the attorney should have any further involvement with the transaction.

VIII. Unwitting Money Laundering

Last year the Permanent Subcommittee on Investigations issued a report that sheds light on how

banks like Citigroup, Wachovia and Bank of America unwittingly shifted hundreds of millions of

dollars on behalf of African politicians, their relatives and associates.

A suitcase containing $1 million in shrink-wrapped bills was hand-carried into New York by the

former president of Gabon, for his daughter to buy a Manhattan apartment. There were

purchases of a stretch Hummer H2 armored limousine and a C-130 Hercules military transport

planes for a civil war in Angola. A shell company named Sweet Pink was used to funnel

millions of dollars into the United States from Equatorial Guinea.

These and other deals and money transfers took place in recent years because of inadequate

controls on money laundering at large American banks and unregulated American lawyers, real

estate agents and lobbyists, according to the Senate report.

The banks ended up closing or restricting the accounts and cooperated with the subcommittee,

offering comments on individual transactions.

In all cases, the Senate report says, the banks ignored controls intended to prevent money

laundering and related screens on PEP, meaning politically exposed persons — high-risk clients

from corrupt countries.

http://topics.nytimes.com/top/news/business/companies/citigroup_inc/index.html?inline=nyt-org

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The report recommends strengthening regulations against money laundering at banks and

revoking exemptions for lawyers and other third parties from restrictions on money laundering in

the USA Patriot Act. It recommends that Congress pass laws requiring people who form

corporations to disclose the true owners.

IX. Cases

A. The report detailed how Teodoro Nguema Obiang, the son of Teodoro Obiang Nguema

Mbasogo, the president of Equatorial Guinea, used lawyers, bankers, real estate agents and

escrow agents, all Americans, from 2004 through 2008 to move more than $110 million into the

United States, including $100 million through Wachovia and Citibank.

Mr. Obiang, the subject of a criminal investigation into charges of money laundering, bribery

and extortion, also employed Sidley Austin Brown & Wood, a law firm now known as Sidley

Austin, to help him buy a $38.5 million Gulfstream G-5 jet in 2005, the report says.

The report says two American lawyers, Michael Berger and George Nagler, helped Mr. Obiang

circumvent controls at the banks by setting up accounts for shell companies with names like

Beautiful Vision, Unlimited Horizon and Sweet Pink, named on honor of the rapper Eve, Mr.

Obiang’s girlfriend at the time.

Mr. Obiang, Equatorial Guinea’s minister of agriculture and forestry, used the accounts to pay

his personal expenses, including chefs and butlers for his home in Malibu, Calif., and bills at

Ferrari of Beverly Hills and Dolce & Gabbana, receipts cited in the report show. He also

arranged for Mr. Berger to be invited to the 2007 “Kandy Halloween Bash” at the Playboy

Mansion, the report says.

It says Mr. Obiang hired two American real estate agents to help him buy the $30 million home

in Malibu, with suspect money transferred from Equatorial Guinea.

B. The report also details how in recent years an American lobbyist, Jeffrey Birrell, helped

the former president of Gabon, Omar Bongo, buy six armored vehicles, including the Hummer,

and obtain United States government permission to buy six C-130 military cargo aircraft to

support his government, all suspect transactions. The purchases were routed through accounts set

up at HSBC, Commerce Bank and JPMorgan Chase, the report says.

C. Another case study details how Jennifer Douglas Abubakar, an American and the fourth

wife of the former vice president of Nigeria, helped her husband bring more than $40 million in

suspect money into the United States. It says some of the money was then funneled through

offshore accounts.

http://topics.nytimes.com/top/reference/timestopics/organizations/d/dolce_and_gabbana/index.html?inline=nyt-org

http://topics.nytimes.com/top/news/business/companies/playboy-enterprises-inc/index.html?inline=nyt-org

http://topics.nytimes.com/top/news/business/companies/hsbc_holdings_plc/index.html?inline=nyt-org

http://topics.nytimes.com/top/news/business/companies/morgan_j_p_chase_and_company/index.html?inline=nyt-org


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D. The report also details how Pierre Falcone, a native Algerian and known arms dealer now

imprisoned in France, used nearly 30 bank accounts at Bank of America’s Scottsdale, Ariz.,

branch to funnel millions of dollars in suspect money through the United States over 18 years.

E. In April 2006, the FBI issued a press release announcing that five individuals had been

arrested and summons issued for two additional individuals believed to be part of a criminal

enterprise operating in Utah and elsewhere in the country over the previous several years. The

criminal activity included mortgage loan fraud, wire and mail fraud and money laundering.

The FBI stated that the case was being investigated by the members of the FBI’s Joint Terrorism

Task Force, Internal Revenue Service Criminal Investigation, Immigration and Customs

Enforcement and the Utah Department of Public Safety.

Alaa “Alex” Ramadan and Bassam Omar were charged in a six-count indictment returned on

October 19, 2005, with three counts of receiving money by fraud, one count of conspiracy to

commit money laundering and two counts of money laundering. The indictment alleged that the

two men were involved in a mortgage fraud scheme that occurred in December 2000, and

involved homes in Sandy and Bountiful, Utah. The indictment alleged that the fraud scheme

netted Ramadan and Omar $121,398.55 in funds that they were not entitled to receive. Ramadan

allegedly had a person act as a straw buyer for the two homes. He represented to the title

companies at closing that he had done significant remodeling work on each home. Ramadan

allegedly presented an invoice to each title company indicating what remodeling work

specifically was done on each home. The title companies issued checks at the closing of each

home written to Wasatch Front Construction Services based on the invoices provided by

Ramadan. In fact, according to the indictment, no remodeling was done on the homes. The

indictment alleged that that Wasatch Front Construction Services was a fictitious company that

did no construction work on the homes. The homes later went into default and foreclosure.

They were also charged in a six-count indictment for wire fraud, false statements on a loan

application, mail fraud, money laundering and misuse of a Social Security number.

The straw buyer bought the home for $260,000 and sold it the same day for $386,000, based on

the inflated.

One of the defendants arrested on the mortgage fraud and money laundering charges, is the

brother of Shawqi Omar, who was under investigation for ties to al-Qaida in Iraq. Another

defendant was a cousin to Shawqi Omar. Shawqi Omar, aka Abu Ahmed Al-Amriki, is a

naturalized U.S. citizen who resided in Utah, North Carolina, and other states. At one point,

according to authorities, he was a member of the Minnesota National Guard. Omar ran a

furniture import business associated with Syria.

Shawqi Omar was indicted as a participant in a Jordan terror plot in April 2004, and was

captured in Iraq in October 2004. Authorities say that he is a lieutenant of Abu Musab Al-

Zarqawi, believed to be the most wanted terrorist in the world. His value to Al-Zarqawi,

authorities claim, is as a fundraiser.


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The question that authorities wanted answered at the time of the arrests was whether the illegal

gains from the loan fraud schemes perpetrated by members of these families, were being

funneled to support terrorist activities.

“We do have some indications of where the money went,” Greg Bretzing, Special Agent with the

FBI’s Joint Terrorism Task Force in Utah, said at the time of the arrests. “We know some went

to Jordan overseas and a lot went to personal accounts. What exactly it was spent on or what

happened to it overseas is still under investigation.”

The techniques used by the fraud ring made detection difficult. Members of the criminal

enterprise:

Used family members, some unwittingly, to move money;

Transferred funds among multiple bank accounts;

Sent funds overseas;

Made use of shell companies;

Used more than 50 bank accounts to perpetuate

E. FBI New York Agents participated in a joint investigation with Rockland County, NY,

law enforcement, targeting La Cosa Nostra (LCN) subjects that were running a multimillion-

dollar Internet gambling operation out of Costa Rica. Based on experience garnered in that

investigation, agents formulated a plan to attack the entire internet gambling industry by

targeting all facets to include; online gaming companies, banks, money transfer businesses, and

the owners of same. Significant targets included: Neteller PLC, Partygaming PLC, Sportingbet

PLC, Fireone Group PLC, HSBC, Dresdner Bank, and Canaccord Capital, to name a few.

As a result of investigation to date, the targets listed above, as well as several others, are fully

cooperating with the FBI. Key cooperators have recently been tasked to identify companies,

individuals, assets, and to conduct consensual recordings. Liaison with Legats in Canada,

Europe, South America, and the Bahamas has been necessary to the success of this ongoing

investigation into what has become a virtually worldwide criminal industry. This investigation

thus far has obtained evidence of money laundering, mail fraud, wire fraud, bank fraud,

securities fraud, credit card fraud, and illegal gambling. There has also been clear indication of

an expertise in moving vast sums of money around the world while effectively masking the

associated transactions. Forfeiture to date: $364,265,995.86.


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F. Hassan Nemazee is a multimillionaire Iranian-American investment banker. Nemazee is

one of the top political donors in the United States. Nemazee obtained approximately

$230,000,000 in loans from Bank of America (BoA), HSBC, and other banks. It was determined

that the collateral securing the loans was based on false and misleading information. Nemazee

was arrested as he was attempting to flee to Italy. A meeting was held with Daylight FAs,

retained by BoA to trace the flow of illegal proceeds. Numerous seizure warrants were executed

against various accounts owned/controlled by Nemazee.

Having learned that they were in possession of illegal proceeds, Citibank wired $75,000,000 to

the U.S. Marshals Asset Forfeiture Account for forfeiture. Plea negotiations with Nemazee's

partner are continuing, which could lead to the receipt of another $40 million.

G. On December 10, 2008, Bernard L. Madoff was arrested for perpetrating the largest

Ponzi scheme in history, $64 billion, through the Madoff Investment Advisory (MIA). The fraud

involved thousands of victims and numerous targets.

The Madoff office space contained approximately 3,000 banking boxes of potential evidence;

additionally, a warehouse contained approximately 9,000 more banking boxes of evidence.

Madoff conspired with two computer programmers who created a proprietary software system

which was used to document false trades and issue bogus statements. The system was the

foundation for the Ponzi scheme. The fraudulent documents were so effective the fraud went on

for decades and cleared audits by the SEC as well as major financial institutions.

Various institutions and individual funds invested their clients' funds into the Madoff Ponzi

scheme. These entities are referred to as "feeder funds" because they "fed" the MIA Ponzi fraud.

Without this consistent injection of capital the fraud could not have been maintained for the

length of time that it was. As many as 50 funds fed the MIA. Many of the feeder fund managers

appear to have been excessively compensated. Finally, Madoff used an elaborate flow of funds

from domestic banks to offshore banks to cloak the fraudulent activity in the MIA.

H. Gary Pierce of Edgewater Maryland pleaded guilty to conspiracy to commit wire fraud in

connection with a five year scheme to divert or hold mortgage payoff funds from clients’

closings on 17 Maryland properties. According to his plea agreement, Pierce owns and manages

At Home Settlements, LCC, a real estate title agency with an office in Gambrills, Maryland.

In 2007, Pierce applied for and received a mortgage on a property in Edgewater, Maryland, that

he did not own. Pierce used funds obtained from the lender to perpetuate the scheme and

diverted $50,000 from the funds provided by the mortgage lender to himself. The true owner of

the property had no knowledge that documents were created that purported to show that he had

sold the property to Pierce.

Beginning in 2007, Pierce and his co-conspirator diverted or held mortgage payoff funds from

clients’ closings for a matter of days, weeks and sometimes years. Pierce falsely represented on

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HUD-1 forms sent to the borrower’s lender that the payoff was made, when in fact Pierce

intended to divert the funds. Pierce and his co-conspirator fabricated wire confirmation reports,

which purported to be a bank record of the transfer, to include in loan files. These were created

in advance of audits by the title insurers in order to deceive the title insurers.

Additionally, to forestall discovery by the lenders, Pierce and his co-conspirator contacted the

mortgage lender who should have been paid off and posed as the borrower/homeowner. Pierce’s

co-conspirator would either create an on-line profile for the borrower and stop any mail from

being sent to the borrower, or he would tell the lender that his, the borrower’s, address had

changed and he would re-direct the lender to send all correspondence to a post office box owned

by Pierce. The co-conspirator would then make monthly mortgage payments to the existing

lender. With no delinquency in the account, the scheme went undetected.

Because the existing mortgages were not paid off, the liens against the property were not

removed and clear title could not be passed to the new lender and borrower. The total amount of

diverted or otherwise improperly obtained funds totals $4,971,380.

Pierce faces a maximum sentence of 20 years in prison and a fine of $250,000. U.S. District

Judge Catherine C. Blake scheduled his sentencing for February 10 , 2012, at 10:00 a.m.

I. In the 1980s, Eddie Antar, the owner of Crazy Eddie's Electronics, skimmed millions of

dollars from the company to hide it from the IRS. That was the original plan, anyway, but he and

his co-conspirators eventually decided they could make better use of the money if they sent it

back to the company disguised as revenue. This would inflate the company's reported assets in

preparation for its IPO. In a series of trips to Israel, Antar carried millions of dollars strapped to

his body and in his suitcase. Here's a basic recounting of how the scheme worked:

Placement: Antar made a series of separate deposits to a bank in Israel. On one trip, he made 12

deposits in a single day.

Layering: Before U.S. or Israeli authorities had a chance to notice the suddenly huge balance in

the account, Antar had the Israeli bank wire transfer everything to Panama, where bank secrecy

laws are in effect. From that account, Antar could make anonymous transfers to various offshore

accounts.

Integration: Antar then slowly wired the money from those accounts to the legitimate Crazy

Eddie's Electronics bank account, where the money got mixed in with legitimate dollars and

documented as revenue.

Overall, Crazy Eddie laundered more than $8 million. His scheme boosted the initial offering

stock price so that the company ended up worth $40 million more than it would have been

without the added revenue. Antar sold his stock and left with $30 million in profit. Authorities

found him in Israel in 1992, and Israel extradited him to the United States to stand trial. He

received an eight-year prison sentence.

http://money.howstuffworks.com/personal-finance/personal-income-taxes/irs.htm

http://money.howstuffworks.com/ipo.htm

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X. SUMMARY

Money laundering is one of the ongoing problems facing the international economy, and from

the evidence studied while researching this work, it can be seen that while the fundamentals of

this crime remains largely the same, technology has offered, and will continue to offer a more

sophisticated and circuitous means to convert ill-gotten proceeds into legal tender and assets. The

largely unchecked growth of the Internet presents what has been described as the "Armageddon

scenario of banking on the `Net - criminals could have money transferred without any audit

trail". There is a total absence of regulation of the Internet and it has been recognized that

authorities need to ensure that legislation keeps abreast of technology in order to understand and

pick up on any new techniques that professional money launderers may come up with.

Documents

Money Laundering- Structuring, Reporting2011 Texas Land Title Institute – Money Laundering Money Laundering- Structuring, Reporting IRS/FBI, Mortgage Fraud Richard Melamed 6750 West