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Follow the money: Reviewing the three steps of money laundering

By: Jennifer Morrison, VP, Senior Risk Manager

In 1987, the crime film/thriller “The Untouchables” was released. It stared Robert DeNiro, Kevin Costner, and, one of my personal favorites, Sean Connery. The movie was a mix of historical and fictional characters, based on historical events and one truth: If you “follow the money,” you can often take down the criminal enterprise.

The movie is based on the real-life group of nine U.S. federal law enforcement agents led by Eliot Ness who, from 1929-1931, worked to end Al Capone’s illegal activities by aggressively enforcing Prohibition laws against Capone and his organization. The movie and the 1959-1963 TV series that preceded it were about the incorruptible law enforcement agents who went to great lengths, at great personal risk, to prosecute federal crimes in days of Prohibition.

Ultimately, it was U.S. Treasury agents who brought down Capone. He had failed to pay income taxes on his bootlegging income. In the years since Prohibition, “follow the money” never fell out of use in the art of criminal investigation.

Illegal proceeds are often in the form of cash, thus why the Currency Transaction Report (or CTR) came into use by financial institutions more than forty years ago, at a time when federal investigators were primarily focused on drug-trafficking proceeds.

Speaking of money laundering, the allegations levied against a one-time presidential campaign chairman and his associate have money laundering back in the news.

The indictment is a bit of a primer on money laundering, and drew the attention of investigators through one of its three steps: layering, which involves steps to legitimize illicit funds.

In review, the three-step of money laundering are placement, layering, and integration. Placement involves moving ill-gotten funds and criminal proceeds into the financial system, often by opening accounts, making deposits, and buying financial instruments.

Layering is the second step in money laundering. The alleged criminal takes steps to legitimize the illicit funds. Layering may involve the purchase of fungible items; in other words, items that can be re-sold. Layering also may involve the use of the financial instruments as collateral, such as in the case of CD-secured loans. Layering can also involve the partial withdrawal of deposited funds for the purchase of assets or as a down payment for real estate. The transactions all appear legal and are often frequent and in varying amounts so as to not attract attention.

The final step of money laundering is integration. Integration involves moving the illicit proceeds into the larger economy. That might involve the sale of the fungible item, such as a luxury auto or real estate. The sale of the fungible item might even be at a loss. After all, the illicit funds were all incremental money to the criminal. Plus, even if that luxury auto is sold at a deep discount to what the criminal paid, what consumer is going to complain about getting that Cadillac Escalade at a discount through a private sale on Craigslist?

Back to the case of the alleged activity: The layering is said to have involved the purchase of expensive rugs and home improvements. In this case, a former U.S. attorney, commenting on the case, noted that the layering involved investing money in goods that could increase in value and that the defendant could have done a better job of hiding his criminal loot. Given the presumption of innocence, and in defense of his spending, one defendant has stated that the funds were not illegal and, therefore, he was not layering. If proven innocent, he might simply be simply guilty of flaunting his wealth too much, drawing attention to his purchases.

As a BSA/AML officer or compliance professional at a credit union attempting to complete a CTR and/or Suspicious Activity Report (SAR), the regulations have always pointed to “follow the money” (jnstead of focusing on the criminal element who is constantly looking for new ways to launder their money).

Corporate One Federal Credit Union is a founding sponsor of the Central Ohio ACAMS Chapter. The next meeting of the Chapter is Wednesday, February 21, 2017, at 4:30 p.m. at BMI Federal Credit Union. Please visit http://www.acams.org/acams-chapters/central-ohio or contact CentralOhioACAMSChapter@gmail.com for more information. The meeting qualifies as training for BSA/AML compliance and one CAMS credit.