Corporate Governance

The Criminal and Regulatory Framework, and Anti-Money Laundering Compliance Programs (Part 1)


Money laundering is the general term used to describe the processes used to conceal the true source, origin, ownership, destination or use of money or property. It "is the criminal practice of processing ill-gotten gains, or 'dirty' money, through a series of transactions; in this way the funds are 'cleaned' so that they appear to be proceeds from legal activities."1 The "dirty" money may have come from virtually any illegal activity, or it may be planned for an illicit purpose, like terrorism, but in every case it has one thing in common: to give money the appearance of having come from a legitimate source or being used for a legitimate purpose.

For the average criminal, money laundering is the process by which his or her criminal proceeds are made to look legitimate. For the average terrorist, money laundering is the process used to fund terrorist activity without revealing the true source, destination or purpose of the money. Money laundering provides the vehicle for criminals and terrorists to operate and expand their criminal enterprises. To do so, they must achieve one essential goal: they must exploit legitimate businesses. This is the only way they can accomplish their common goal of making their money and themselves look legitimate.

Many criminal activities (including, but certainly not limited to, drug dealing) generate enormous profits. Other criminal activities (including, but not limited to terrorist activity) require the secret movement of funds. Whether generated by criminal activity or planned for criminal use, these funds can only be used safely if the criminal or terrorist is able to place funds into the legitimate financial system, efficiently and securely move them in order to cover their source, ownership or purpose, and then use them, all without attracting unwanted attention to the underlying criminal activity or purposes involved. Thus, money laundering is vital to the ultimate success of criminal and terrorist operations.2


The methods and means of laundering money are limited only by the imagination of the money launderer. Money launderers have one essential, common goal: to exploit legitimate financial institutions and businesses in such a way as to make their money and their activities look legitimate. Accordingly, they will do everything in their power to trick and deceive legitimate businesses. Although there are many different methods they may use, however, there are three generally recognized and independent steps that can often occur simultaneously:

PLACEMENT - Most criminal activity generates cash. Large amounts of cash are hard to spend without attracting undesirable attention, are hard to move because of the bulk, and are hard to conceal. The only solution to these problems is to place the cash into the financial system, where it will be safer and much easier to move and conceal. The essential process of getting criminal cash into the financial system is known as the "placement" stage of money laundering.

LAYERING - Once illicit funds have been placed gotten into the financial system, the money launderer needs to conceal them as completely as possible. To accomplish this, the money launderer moves the funds that have been placed in the financial system from business to business (often but not always phony businesses), country to country, and continent to continent. This creates a trail that is extremely difficult and time consuming for law enforcement to follow - which is the entire point of the effort. This process of moving the money through a complicated, extended trail in order to conceal its source, ownership or purpose is known as the "layering" stage of money laundering.

INTEGRATION - Once illicit funds have been hidden through the layering process, the money launderer is ready to use the money. To accomplish this, the money launderer will seek ways to efficiently "resurface" the money so that it looks completely legitimate - such as from the legal sale of products, employment or consulting fees from apparently legitimate businesses, or the return on legal investments. This process of making the illicit funds available so that they look "clean" is known as the "integration" stage of money laundering.3

In the placement stage the most common form for the funds to be in is cash. In the layering and integration stage, it most commonly involves monetary instruments (such as wire transfers) and other forms of property.

In light of these three essential steps, it is essential to understand that money laundering involves more than just cash transactions. Money laundering and terrorist financing can involve every possible form that money and property can take in addition to cash: money orders, checks, cashier's checks, bank drafts, wire transfers, traveler's checks, letters of credit, credit cards, life insurance annuities, real property, and so on. It can also involve products, like precious stones and metals, or jewelry.


There are several key federal statutes that together constitute the U.S. government' efforts to detect and deter money laundering. Some apply only to certain types of businesses. Others apply to all businesses and all persons in the United States and, in some cases, even to persons and businesses located outside the United States.

The key laws are: (1) the Money Laundering Control Act; (2) the Bank Secrecy Act; (3) the federal laws requiring the reporting of large cash transactions; and (4) the federal laws prohibiting transactions with "specially designated" persons, such as narcotics trafficking "kingpins," terrorists and supporters of terrorist activity. There are also special laws regarding "Money Services Businesses" or "MSBs."4

In discussing these laws, it is important to keep in mind the general legal principle of "corporate liability." Under the law of the United States, every business is legally responsible for the acts or omissions of its employees and agents, as long as those employees or agents: (a) were acting within the scope of their employment; and (b) were acting for at least the partial benefit of their employer.

Thus, if the law requires some act to be performed and an employee purposely fails to perform that act because he or she thinks it may help the business, both that employee and the business can be criminally prosecuted for the failure to perform the act. Conversely, if the law prohibits some act and an employee performs that act anyway, then again, both that employee and the business itself can be criminally prosecuted for the associate's actions. Because of this general principle, it is of the utmost importance that every business and its employees at all time refrain from doing what the anti-money laundering laws prohibit, and scrupulously perform all acts that the anti-money laundering laws require.


Anti-Money Laundering - Part 2

Our thanks to this article's author, Greg Baldwin of Holland & Knight.

Holland & Knight is a global law firm with more than 1,150 lawyers in 17 U.S. offices. Other offices around the world are located in Beijing and Mexico City, with representative offices in Caracas and Tel Aviv. Holland & Knight is among the world's 18 largest firms, providing representation in litigation, business, real estate and governmental law. Our interdisciplinary practice groups and industry-based teams ensure clients have access to attorneys throughout the firm, regardless of location.

Greg Baldwin practices in the areas of complex commercial litigation and white collar criminal defense. He specializes in the Foreign Corrupt Practices Act, U.S.A. Patriot Act, the Bank Secrecy Act, the Money Laundering Control Act, and OFAC regulations, as well as anti-money laundering and OFAC compliance program development and implementation. Mr. Baldwin is a Certified Anti-Money Laundering Specialist.

DISCLAIMER: This Corporate Governance article is provided as an informational resource and does not constitute legal advice. The information provided in this article is based on the laws in effect at the time the article was published. Laws related to this article's topics may change over the course of time. Visitors to this website should not rely upon or act upon this information without seeking professional legal counsel.

1 Federal Financial Institutions Examination Council, Bank Secrecy Act Anti-Money Laundering Examination Manual," 2006, p. 7. Black's Law Dictionary, 8th ed., defines the term as "[t]he act of transferring illegally obtained money through legitimate people or accounts so that its original source cannot be traced."
2 "Terrorists generally finance their activities through both unlawful and legitimate sources. Unlawful activities, such as extortion, kidnapping, and narcotics trafficking, have been found to be a major source of funding. Other observed activities include smuggling, fraud, theft, robbery, identity theft, use of conflict diamonds, and improper use of charitable or relief funds. In the last case, donors may have no knowledge that their donations have been diverted to support terrorist causes." Id., p.8. ("Conflict diamonds" originate from areas controlled by factions opposed to legitimate governments and are used to finance military action in opposition to those governments. See id.)
3 See, e.g., Federal Financial Institutions Examination Council, Bank Secrecy Act Anti-Money Laundering Examination Manual," 2006, p. 8.
4 MSBs include: currency dealers or exchangers; check cashers; issuers or sellers of cashier's checks, traveler's checks, money orders, or stored value; and money transmitters. 31 C.F.R. 103.11(uu).


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