Corporate Governance

ANTI-MONEY LAUNDERING:
The Criminal and Regulatory Framework, and Anti-Money Laundering Compliance Programs (Part 2)


This article is a continuation of our most recent corporate governance series. If you missed part 1, you can read it online here: Anti-Money Laundering Part 1

1. The Money Laundering Control Act

The Money Laundering Control Act consists of two criminal statutes, 18 U.S.C. §§ 1956 and 1957. Generally, the Act makes it a federal crime to launder money. Violation of this law can result in up to 20 years imprisonment for an individual and substantial fines for both an individual and a business.

Both sections of the Act apply to all persons and businesses in the United States. Prosecution under the Act can thus include not only the person responsible for the underlying crime that generated the illicit funds laundered, but also any person or business that knowingly assists or attempts to assist in the effort, or that is "willfully blind" to the source of the funds. In addition, certain provisions of the Act provide for extraterritorial jurisdiction, thus make it applicable to persons and businesses outside the United States.

As will be seen below, the Money Laundering Control Act is complicated and involves numerous elements. Stripped to its barest essentials, however, the Act generally provides that any person or business that "knows" that funds or property involved in "a financial transaction" come from "some unlawful activity," and then engages in or attempts to engage in the financial transaction involving those funds or property, or transports, transmits or transfers such funds or property, may have violated the Money Laundering Control Act if the funds or property come from or are intended to further a "specified unlawful activity."

Many of the terms used in the Money Laundering Control Act are specifically defined in the statute, and it is essential to understand those definitions in order to understand the scope of activity that can be considered criminal money laundering.

(a) Key Definitions for Sections 1956 and 1957:

(i) "Some Form of Unlawful Activity": "Some form of unlawful activity" means any activity that constitutes a felony under any federal law, any state law, or any law of a foreign country. A person may be wrong about what the actual illegal activity was, but knowledge of the true criminal source of the funds or property is irrelevant. All a person needs to know is that the funds or property has come from some illegal activity. The law provides that no person or entity may get involved with funds or property they know is "dirty" money; it does not say the person or entity involved needs to know where the "dirt" came from.5

(ii) "Knowledge": As interpreted by the case law, "knowing" the property comes from "some" form of illegal activity means not only actual knowledge that the funds came from some illegal activity, but also "deliberate indifference," or "willful blindness." The term "deliberate indifference" is defined as "the careful preservation of one's ignorance despite awareness of circumstances that would put a reasonable person on notice of a fact essential to a crime."6 "Willful blindness" is the "deliberate avoidance of knowledge of a crime, especially by failing to make a reasonable inquiry about suspected wrongdoing despite being aware that it is highly probable."7

Willful blindness occurs in situations in which one is aware of facts that would cause a reasonable person's suspicions to be aroused, but further inquiry is deliberately omitted because one wishes to remain in ignorance of the true facts.8 It is the intentional "cutting off of one's normal curiosity by an effort of the will."9 A person may not escape criminal liability by pleading ignorance "if he ... strongly suspects he is involved with criminal dealings but deliberately avoids learning more exact information about the nature or extent of those dealings."10

One may not turn a blind eye to the truth, or ignore "red flags" that indicate funds or property are derived from some unlawful activity, simply to avoid learning the truth. Putting one's head ostrich-like in the sand will not provide an excuse later on because one did not see anything. Willful blindness creates an inference of actual knowledge of the factual element in issue. If a jury concludes that a person deliberately ignored the warning signs or "red flags" that funds or property involved in a transaction were derived from some form of illegal activity, the law will permit that jury to infer that the person actually knew this the funds or property were criminally derived.

(iii) "Specified Unlawful Activity": Specified unlawful activities include both violations of approximately 250 federal criminal laws as well as violations of certain foreign laws. The particular federal criminal violations are listed in section 1956(c)(7). Specifically included are all acts listed as predicate acts in the federal RICO statute, 18 U.S.C. § 1961(1). As a result of the breadth of section 1956(c)(7) and the RICO list of predicate acts, virtually any federal criminal offense can be considered as a "specified unlawful activity."

The particular foreign laws that constitute "specified unlawful activity include: (1) violations of foreign drug laws; (2) crimes of violence, such as murder, kidnapping, extortion, and terrorism; (3) fraud by or against a foreign bank; (4) public corruption, such as bribery, misappropriation or embezzlement of public funds; (5) illegal arms dealing; (6) sexual exploitation of children and "trafficking in persons" in general; (6) any act for which the United States would be obligated to extradite for under a treaty with the nation in question.11

(iv) "Financial Transaction": A "financial transaction" is defined to include virtually every type of transaction that can be imagined. Specifically, the term covers: (1) a transaction that affects interstate or foreign commerce involving the movement of funds, monetary instruments or the transfer of title of any real property, vehicle, vessel or aircraft; and (2) a transaction involving the use of a financial institution engaged in, or whose activities affect, interstate commerce.12

(v) "Monetary Instruments": Monetary instruments are defined, for purposes of the Act, as "(i) coin or currency of the United States or any other country, traveler's checks, personal checks, bank checks and money orders, or (ii) investment securities or negotiable instruments, in bearer form or otherwise in such form that title thereto passes upon delivery."13

(vi) "Financial Institution": As used in the Money Laundering Control Act, the term "financial institution" means much more than just banks, although banks (including foreign banks as defined in 12 U.S.C. 3101) are certainly included. The term also includes all businesses listed as "financial institutions" under the Bank Secrecy Act, 31 U.S.C. § 5312(a)(2), thus extending the meaning to include a host of other businesses as well.14

(b) 18 U.S.C. § 1956: Section 1956 (entitled "Laundering of Monetary Instruments") criminalizes three types of activity which can generally be described as "transaction money laundering," transportation money laundering," and "sting operations.".

(i) "Transaction Money Laundering" -- Conducting Certain Types of Financial Transactions: The Act prohibits any person or entity from engaging or attempting to engage in a "financial transaction,"

* "knowing" that the property involved in the transaction represents the proceeds of "some form of unlawful activity," and with
** (A) the intent to promote a "specified unlawful activity" or 26 U.S.C. § 7201 (tax evasion) or 7206 (fraud and false statements on a tax return or related documents), or

** (B) knowing that the transaction is at least partly designed to conceal the true nature, location, source, ownership or control of the proceeds of a "specified unlawful activity"

* if the funds or property are in fact derived from a specified unlawful activity.15

(ii) "Transportation Money Laundering" -- Moving Certain Funds or Monetary Instruments: The Act prohibits any person or entity from transporting, transmitting or transferring, or attempting to do so, any "funds" or "monetary instrument" into, out of or through the United States,

* with the intent to promote a "specified unlawful activity," or

* knowing that the funds or instrument represent the proceeds of some form of unlawful activity, and also

* knowing that the movement is designed at least in part to either

(A) conceal the true nature, location, source, ownership or control of the proceeds of a "specified unlawful activity" or

(B) avoid a federal or state transaction reporting requirement.16

(iii) "Sting Operations": The Act prohibits any person or entity that conducts or attempts to conduct a "financial transaction" involving property "represented to be" the proceeds of a "specified unlawful activity," or property used to conduct or facilitate a "specified unlawful activity" with the intent to:

* promote the "specified unlawful activity," or

* conceal the true nature, location, source, ownership or control of the proceeds of the "specified unlawful activity," or

* avoid a federal or state transaction reporting requirement.17

The phrase "represented to be" means any representation made by a law enforcement officer or another person at the direction or with the approval of a Federal law enforcement officer. Thus, funds in an undercover "sting" operation can be considered to be the proceeds of a "specified unlawful activity" even if they are not derived from such activity, but an undercover agent says they are.

(iv) Penalties:

(a) Criminal: Any person or entity convicted of violating Section 1956 may be sentenced to twenty years in prison and/or a criminal fine of $500,000 or twice the value of the property, whichever is greater.18

(b) Civil: Sections 1956(a)(1), (a)(2) and (3) may also be enforced by civil penalty in the amount of $10,000 or twice the value of the property, whichever is greater.19

(c) Forfeiture: Any real or personal property involved in a transaction or attempted transaction in violation 2of section 1956, or any property traceable to such property, is subject to civil or criminal forfeiture by the United States.20

However, "tracing" the property to the offense is not required under two circumstances. First, if funds subject to forfeiture are deposited at a foreign bank, and that foreign bank has an "interbank account" with a U.S. bank, a branch or agency of a foreign bank in the U.S., or a broker or dealer registered with the SEC. In such cases, funds may be seized directly from the "interbank account" and neither the foreign bank nor the U.S. entity holding the "interbank account" has standing to contest the forfeiture.21

The second instance in which "tracing" is not required is in a civil forfeiture action in which the subject property consists of cash or monetary instruments in bearer form deposited into a financial institution, if the forfeiture action is commenced within one year of the offense that is the basis for the forfeiture.22

(v) Extraterritorial Jurisdiction: Section 1956 applies not only to persons and entities inside the United States, but also, under certain circumstances, to persons and entities located outside the U.S. The Act confers jurisdiction over conduct that occurs in foreign countries and conduct by a foreign person or foreign "financial institution" if

* the conduct is by a U.S. citizen; or

* the conduct is by a non-United States citizen and occurs at least in part in the United States; and

* the transaction or series of related transactions involves funds or monetary instruments of a value exceeding $10,000.

In addition, the federal courts have jurisdiction over foreign persons and entities for the propose of imposing the civil penalties for a violation of §§ 1956(a)(1), (a)(2) or (a)(3) when the foreign person or entity

* commits one of the three offenses involving a financial transaction that occurs in whole or in part in the United States;

* converts to his, her or its own use property that has been forfeited to the United States by court order; or

* the foreign person is a "financial institution" that maintains a bank account at a financial institution in the United States.23

The term "financial institution" is includes any of the several dozen types of businesses defined as such in the Bank Secrecy Act (31 U.S.C. § 5312(a)(2)), or any foreign bank.24 For purposes of enforcing section 1956(a), a U.S. court may issue a restraining order to ensure that any bank account or other property held in the United States by a defendant is available to satisfy a judgment. The courts have the authority to appoint a Federal Receiver to find and collect all of a defendant's assets, wherever located, to satisfy a civil or criminal judgment, or an order of forfeiture. The Federal Receiver is granted substantial powers to accomplish this task.25

(c) 18 U.S.C. § 1957: Section 1957 (entitled "Engaging in Monetary Transactions in Property Derived from Specified Unlawful Activity") makes it illegal for any person or entity to knowingly engage or attempt to engage in a "monetary transaction" in "criminally derived property" of a value over $10,000, if the property is, in fact, derived from a "specified unlawful activity." The definitions applicable to section 1956 apply also to section 1957.

A "monetary transaction" means the deposit, withdrawal, transfer or exchange of funds or monetary instruments by, through or to a "financial institution."26 Since "financial institution" includes the broad array of businesses included under this term in the Bank Secrecy Act, the Act essentially makes it illegal to spend any funds derived from a "specified unlawful activity" without regard for the intent or purpose of the transaction.

Further, the government need not prove that the defendant knew that the offence from which the funds were derived was a "specified unlawful activity." It is enough for the defendant to know only that the funds were "criminally derived." Thus, and "financial institution" which receives funds in a transaction and knows, or is willfully blind" to the fact, that the funds come from criminal activity, can be held to have violated section 1957.

"Criminally derived property" means any property, in whatever form, constituting or derived from proceeds obtained from a criminal offense.27

A "specified unlawful activity" has the same meaning as that used for purposes of 1956.28

Similar to section 1956, this section also confers extraterritorial jurisdiction on the government to prosecute offenses. Under section 1957, an offense occurring outside the United States may be prosecuted if the defendant is a "United States Person." A "United States Person" includes a national of the U.S., any resident alien, any person within the U.S., any entity composed principally of nationals or permanent resident aliens of the U.S., or any corporation organized under the laws of the U.S., any state, the District of Columbia, or any territory or possession of the U.S.29

Violations of section 1957 are punishable by imprisonment for up to ten years. In addition, the forfeiture provisions described above in Section 1.1(a)(iv) also apply to violations of section 1957.

IN PART 3 OF THIS ARTICLE SERIES, WE'LL CONTINUE THIS TOPIC BY DISCUSSING THE BANK SECRECY ACT...

Anti-Money Laundering - Part 3

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. www.hklaw.com

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. Gregory.Baldwin@hklaw.com

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.

5 18 U.S.C. § 1956(c)(1).
6 Black's Law Dictionary, 8th Ed..
7 Id.
8 United States v. Murray, 154 Fed. Appx. 740, 744, 2005 WL 3046549 (11th Cir. 2005).
9 United States v. Leahy, 464 F.3d 773, 796 (7th Cir. 2006).
10] United States v. Craig, 178 F.3d 891, 896 (7th Cir. 1999).
1118 U.S.C. § 1956(c)(7)(B).
12 18 U.S.C. §§ 1956(c)(3) and (4).
13 18 U.S.C. § 1956(c)(5).
14 18 U.S.C. § 1956(c)(6). See Section 3.3(a), p. 9, below, for a list of Bank Secrecy Act "financial institutions."
15 18 U.S.C. § 1956(a)(1).
16 See, e.g., Section 3.3, at pp. 12-14, below. 18 U.S.C. § 1956(a)(2). In addition, for purposes of section (a)(2), a defendant's knowledge can be established if: (i) a law enforcement agent states that the funds or monetary instruments represent the proceeds of "some form of unlawful activity;" and (ii) the defendant's subsequent statements or actions indicate that the defendant believed this to be true.
17 18 U.S.C. § 1956(a)(3).
18 18 U.S.C. § 1956(a).
19 19 18 U.S.C. § 1956(b)(1).
20 18 U.S.C. § 981(a)(1).
21 18 U.S.C. § 981(k). An "interbank account" means any account held by a foreign bank in the United States primarily for the purpose of facilitating customer transactions. See 18 U.S.C. §§ 981(k)(4)(a) and 984(c)(2)(B).
22 18 U.S.C. § 984.
23 18 U.S.C. § 1956(b(2).
24 18 U.S.C. § 1956(c)(6). The "financial institutions" included in the Bank Secrecy Act are listed in Section 3.2(a) at p. 9, below.
25 18 U.S.C. §§ 1956(b)(2) through (4).
26 18 U.S.C. § 1957(f). The term specifically excludes, however, paying an attorney for representation in a criminal matter.
27 18 U.S.C. § 1957(f)(2).
28 18 U.S.C. § 1957(f)(3).
29 18 U.S.C. §§ 1957(d)(2) and 3077(2).

 

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