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Casting a Wide Net: The Expanding Reach of Anti-Money Laundering Laws

By Kristofer Readling

Friday, September 11, 2015

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What do a former Speaker of the House, a professional golfer and the leadership of the world’s largest sporting event have in common? Despite being accused of very different types of illegal activity, each of them—former Speaker Dennis Hastert, professional golfer Phil Mickelson and a number of FIFA officials—have all been linked to violations of the Bank Secrecy Act (BSA). These high profile cases have drawn our attention to the issue of the expanded use of anti-money laundering (AML) laws to prosecute individuals for offenses not traditionally associated with money laundering.

The range of activities leading to BSA prosecutions raises questions about the purpose of the BSA, its expansion and the proper scope of its use, because the core conduct at issue is often unrelated to money laundering. The BSA’s history shows a narrative of Congress expanding the BSA’s application to an ever wider range of activities. This expansion is set to continue as the U.S. Treasury Department now intends to bring managed funds under the jurisdiction of the BSA.

The question now is how far will the expansion go? The task of understanding that starts with understanding how it began.

The Anti-Money Laundering Laws

The Bank Secrecy Act of 1970

The U.S. AML regime dates back to 1970 with the passage of the Banks Records and Foreign Transactions Reporting Act, known as the Bank Secrecy Act.1 Despite its name, bank secrecy was not the law’s priority, which instead was the bank secrecy laws of foreign bank havens, especially Switzerland. These laws prevented law enforcement from gaining access to the account record evidence necessary for conviction. The BSA sought to solve these evidentiary problems by requiring banks to maintain records of financial transactions and report certain cash transactions to the IRS, notably those over $10,000. That amount remains in force today. However, $10,000 in 1970 is equivalent to $60,000 today, so it’s much easier to trigger a report now.

The War on Drugs

The BSA’s focus changed in the 1980s, when the federal government began the “War on Drugs” and sought to use money laundering tools to clamp down on drug trafficking. After a high profile prosecution of a New England bank for noncompliance,2 Congress set out to increase penalties and expand the scope of BSA liability. This expansion resulted in the passage of the Money Laundering Control Act of 1986 (MLCA).

Through the MLCA, Congress sought to enforce AML compliance and cut drug traffickers off from the U.S. financial system by mandating that banks establish compliance programs (known as customer due diligence) and adding BSA compliance to bank examinations. In addition to increased supervision, the MCLA augmented the civil and criminal penalties for AML violations (including the authorized use of civil asset forfeiture). Finally, the MCLA created three new criminal offenses; (1) knowingly helping to launder money, (2) knowingly engaging in a transaction of more than $10,000 involving property acquired through criminal activity and (3) structuring a transaction to avoid BSA reporting. The third offense has become increasingly contentious since Congress made explicit in 1994 that a person need not know the illegality of their transaction to face prosecution and asset forfeiture.

September 11th and the PATRIOT Act

Soon after the terrorist attacks of September 11, 2001, Congress passed the USA PATRIOT Act (Patriot Act), part of which expanded the focus of AML to combating terrorism. The legislation increased fines for BSA violations and introduced enhanced customer due diligence requirements that placed minimum standards on identifying customers. These are often called the “know-your-customer requirements” and they hold banks accountable for knowing what parties are on each end of transactions they facilitate.

At a minimum, the know-your-customer requirements compel banks to implement Customer Identification Programs (CIPs) that include risk-based procedures for verifying the identity of each customer. CIPs include obtaining specific and verifiable information about individuals prior to opening a new account including name, date of birth, address and taxpayer or passport ID number. Once the information is verified, banks must compare it with government lists to see if the customer is a known or suspected terrorist. Knowing the identity of parties involved in international cash flows allows law enforcement to track terrorist support networks and choke-off funding for terrorist operations.

Future of AML Enforcement

In the last 45 years, the BSA regulatory structure went through several phases, starting with organized crime and tax evasion, moving to the war on drugs and finally migrating to global terrorism. Each shift sought to quell new and dangerous threats, and each Congress and president sought to “toughen” the severity of the penalties for violations. For instance, the original BSA called only for a $1,000 fine and one year in prison.3 The Patriot Act amendments on the other hand, call for fines of up to $1 million and up to five years in prison.

Despite increasingly severe penalties, major violations by some financial institutions persist. In 2012, the Senate Homeland Security and Government Affairs Permanent Subcommittee on Investigations examined U.S. vulnerabilities to money laundering and terrorist financing through the case history of one large globally active financial institution.4 The Senate report raised concerns about the activities global financial institutions with subsidiaries in high risk regions clearing dollar transactions for those subsidiaries without proper AML monitoring.

The Senate investigation also targeted the banks’ primary regulator, the Office of the Comptroller of the Currency (OCC), for having failed to adequately enforce the BSA. Historically, the OCC’s primary mission was to monitor the “safety and soundness” of banks by examining the riskiness of banks’ loan portfolios. However, the investigation found that the OCC had not treated AML violations as safety and soundness issues. This highlights the tension between the OCC’s core mission of monitoring the health of banks and the national security mission of restricting illegal access of the U.S. financial system. In its investigative report, the subcommittee’s bipartisan report recommended strengthening AML examinations by treating AML deficiencies as safety and soundness issues, thereby upping the pressure on regulators to enforce AML rules.

The Treasury Department intends to further expand the BSA’s reach by bringing managed funds such as hedge funds and venture capital firms under the AML rules. In a proposed rulemaking, Treasury defined “investment advisors” as those required to register with the Securities and Exchange Commission under the Investment Advisors Act of 1940 and submits them to the same BSA reporting requirements of banks and broker-dealers. If promulgated, the rule would signal that BSA expansion continues and begs the question of “who’s next?”

The history of the BSA demonstrates a pattern of lawmakers expanding its scope and liability to an ever wider class of institutions and activities. However, this history does not present any reasoning to help determine how far this expansion could go. Nor does it provide any logic for determining which actors and activities should be subject to the BSA and which should not. It may be time to take a step back and ask what the right focus should be.

1 Codified at 31 U.S.C. §§ 5311 et seq.

2 See United States v. Bank of New England, 821 F.2d 844, 858 (1st Cir. 1987) (“The government … pointed to the fact that between August 1984 and May 1985 there occurred a flurry of law-enforcement activity surrounding [a suspects]’s transactions with the Bank. The Bank, however, did not make any effort to report [the suspects]’s 1983 and 1984 transactions until May 1985, after it received a federal grand jury subpoena.”).

3 The prison term for violations of the Bank Secrecy Act of 1970 was up to 5 years if the violation was in furtherance of a felony. The USA PATRIOT Act doubled this to 10 years.

4 Senate Permanent Subcommittee on Investigations, U.S. Vulnerabilities to Money Laundering, Drugs, and Terrorist Financing: HSBC Case History (Jul. 16, 2012).