Government’s New War on Global Money Laundering Places Greater Demands on Corporations

By Kirby D. Behre and Mark A. Byrne

As a result of the September 11 terrorist attacks and the discovery that the terrorists had access to approximately $500,000 in the United States to carry out their suicide mission, the government has embarked on an unparalleled multi-front attack on money laundering. Anti-money laundering efforts are no longer focused solely upon funds derived from the sale of illegal narcotics and organized crime. Money laundering enforcement is no longer the sole purview of a few bureaucrats working at a relatively unknown entity within the Department of the Treasury. Now, numerous federal agencies – such as the CIA, FBI, State Department, IRS, and Treasury and its components – Customs, the Office of Foreign Asset Control ("OFAC"), and the Financial Crimes Network ("FinCEN") – have put aside historical acrimony and distrust to share information and work side-by-side. In addition, many companies involved in businesses that previously were not subject to money laundering reporting requirements will be covered by new anti-money laundering regulations. This newly assigned governmental priority for eliminating money laundering will result in greater scrutiny of corporations, increased governmental demands for information from corporations, and far less tolerance of corporate indifference to money laundering issues. Furthermore, it is clear that the government will not hesitate to seize funds or to prosecute corporations or individuals for money laundering violations.

According to Dennis Lormel, the Chief of the FBI’s Financial Crimes Section, the federal government has created inter-agency working groups to implement the broad objectives of the USA PATRIOT Act of 2001 ("PATRIOT Act") pertaining to money laundering. The PATRIOT Act, Pub.L. 107-56, 115 Stat. 307 (2001) adds and amends certain financial reporting requirements and banking laws. Title III of the Act makes a number of amendments to the anti-money laundering provisions of the Bank Secrecy Act, 31 U.S.C. §§ 5311-5331. These amendments are intended to make it easier to prevent, detect, and prosecute international money laundering and the financing of terrorism. Although the impetus for passage of the PATRIOT Act was terrorism, subsequent regulations make clear that all money laundering, regardless of whether terrorism is involved, is the focus of this new approach. Lormel states that, while the new federal strategy for money laundering is still evolving, the FBI, CIA, and the Department of the Treasury, including Customs and FinCEN,are meeting weekly to establish a nationwide strategy. Lormel made these comments at the Financial Institution Fraud Seminar co-sponsored by Paul Hastings, KPMG, and the FBI in Los Angeles.

Statistics compiled by the government establish an unprecedented level of investigative activity relating to the tracing of terrorist assets and related money laundering activity. In light of the breadth of these governmental inquiries, it is clear that law-abiding companies are being called upon to supply records and information about customers, clients, and transactions like never before. Since September 11, over 1,000 search warrants have been served, and records relating to over 10,500 persons and accounts have been subpoenaed. More than 2,450 accounts have been reviewed, including more than 90 accounts that related to foreign banks. More than 13,000 domestic and foreign wire transfers have been reviewed.¹

Lormel candidly admits that the federal agencies involved are still attempting to determine how best to approach this issue, and what resources within the government are available to aid in the effort.

According to Lormel, while it is widely recognized that U.S. law and policy regarding money laundering changed dramatically as a result of the passage of the PATRIOT Act, the precise manner in which these changes will be implemented is unclear. A nation-wide policy and plan has not been implemented, so policies could vary in local FBI and prosecutor’s offices. Nevertheless, to date the coordination between agencies has been remarkable – Lormel states that the level of cooperation has "greatly, dramatically increased" since September 11.

This new level of inter-agency cooperation is illustrated by the Foreign Terrorist Asset Tracking Center ("FTAT"). Headed by OFAC, the Center shares and analyzes data provided by participating agencies. Another multi-agency effort is Operation Green Quest. Led by the Customs Service, the group includes the IRS, FBI, OFAC, the Secret Service, the Postal Inspection Service, and the Bureau of Alcohol Tobacco and Firearms. Green Quest uses agents in the participating agencies to investigate terrorist financing.

Lormel reports that foreign governments are also providing support, and are coordinating with the United States in the seizing and freezing of assets. The Financial Action Task Force ("FATF") on money laundering, which existed prior to September 11, consists of financial intelligence units from 31 countries, including the United States. In October 2001, the group established eight recommendations regarding the detection of terrorist funding that require member countries to:

• ratify and implement the United Nations International Convention for the Suppression of the Financing of Terrorism;

• criminalize the financing of terrorism, terrorist acts and terrorist organizations, and make such crimes predicate acts for money laundering offenses;

• freeze and confiscate terrorist assets;

• report suspicious financial transactions linked to terrorism;

• assist other countries’ law enforcement and regulatory authorities in their investigations of terrorist financing;

• impose anti-money laundering requirements on business in addition to banks and financial institutions that are involved in alternative remittance systems;

• strengthen customer identification measures in international and domestic wire transfers; and

• ensure that non-profit organizations cannot be misused to finance terrorism.

The FATF website contains these recommendations and other information, and can be found at http://www1.oecd.org/fatf.

One area that requires additional coordination concerns the lists of suspected terrorists that are maintained by the various agencies. Five lists currently exist – two maintained by Commerce (Denied Persons and Entities; the Denied Persons list can be found at: http://www.bxa.doc.gov/DPL/Default.htm;

the Entity List can be found at: http://www.bxa.doc.gov/Entities/Default.htm);

one by the Treasury Department (Specially Designated Nationals and Blocked Persons, which can be found at: http://www.ustreas.gov/ofac/t11sdn.pdf);

and two by the State Department (Terrorist Organizations and Debarred Parties; the State Department List of Terrorists can be found at:
http://www.state.gov/s/ct/rls/fs/2001/6531.htm;

the List of Debarred Parties can be found at: http://www.pmdtc.org/debar059.htm).

These lists change frequently, making it necessary to continually check them to ensure use of the most up-to-date information.

Lormel stated that the new, coordinated attack on money laundering has resulted in the re-assignment of FBI agents from other areas of white collar crime. He stressed that this redeployment of resources is only temporary, and that the FBI and the government remain committed to its top fraud priorities – healthcare fraud, political corruption, financial institution fraud, and securities fraud. Nevertheless, at least for the short term, this re-allocation of resources may negatively impact the govern-ment’s efforts in these areas.

Recently issued regulations encourage and permit financial institutions to share confidential financial data. Financial institutions may provide such information to other financial institutions if they provide notice to the government before such information is shared. 31 C.F.R. pt. 103, sub-part H (Special Information Sharing Procedures to Deter Money Laundering and Terrorist Activity). A certification must be provided to FinCEN prior to the exchange of information. The certification may be submitted via the Internet at:

http://www.ustreas.gov/fincen and must identify the two entities involved in the exchange of information and certify that the information will not be used for any purpose other than complying with the government’s money laundering detection procedures, and that the security and confidentiality of the information will be maintained. 31 C.F.R. § 103.110.

The certification and resulting authorization to share information is valid for one year. Id., Entities that comply with the requirements of these regulations are provided with a safe harbor from liability from individuals or entities for sharing such information. 31 C.F.R. § 103.110(d).

Financial institutions are also permitted to provide financial information to the government in certain situations under a recently proposed rule. FinCEN is the designated point government agency that receives information from other government agencies concerning suspected money launderers and terrorists and provides that information to financial institutions so that suspect accounts and transactions can be checked. Financial Crimes Enforcement Network; Special Information Sharing Procedures to Deter Money Laundering and Terrorist Activity, 67 Fed. Reg. 9874 (Interim Rule, March 4, 2002) (to be codified at 31 C.F.R. pt. 103). Under the proposed regulation financial institutions are required to search their records regarding the individuals, accounts, or transactions at issue. Id., 67 Fed. Reg. 9879, 9884 (proposed March 4, 2002) (to be codified at 31 C.F.R. § 103.100(d)).

Entities that provide such information are given immunity from suit by the account holder whose information is provided.

Similarly, new regulations permit various federal agencies to share financial and other information with other governmental entities.

Because both money laundering and terrorism are the immediate focus of this new international effort, the impact will be felt by all companies facing money laundering compliance issues. The scores of law enforcement personnel that have been re-assigned to money laundering detection and eradication, and the applicability of new anti-money laundering regulations to companies not previously covered, virtually guarantee that companies that have never before had any contact with the government about such issues will do so in the future.

While it is clear that enforcement standards will be more stringent, and that the line between administrative liability and criminal culpability for non-compliance is forever changed, the long-term implications for corporations are not completely clear. Nevertheless, it is clear that companies involved in acquisitions, sales, mergers and business relationships with companies and individuals located abroad, and companies located in the United States with businesses in other countries, are being held to a higher standard regarding their due diligence before embarking on such a relationship or transaction. The risk of failing to do so is seizure of assets, business records, and perhaps the resulting distress or failure of the effected business entity.

For example, it is now far more likely that a company purchasing another entity – whether located in the United States or abroad – will be called upon by the government to explain the due diligence investigation it engaged in prior to making the purchase to determine whether the entity serves as a conduit for money laundering, whether the principals are involved in illegal activity here or abroad, or whether the proceeds derived from the operation of the company are being used for illicit purposes. If the government is not satisfied with the answers it receives and it has reason to believe the entity or individuals are connected in some way to suspected money laundering, whether related to terrorism or not, it is far more likely that the government may seize the suspected laundered funds and ask questions later.

As a result of this new reality, companies should institute due diligence programs to detect possible money laundering issues. While many larger companies in certain industries already have money laundering compliance plans, the scope and methodology of those plans may be insufficient in today’s environment. Furthermore, companies without any money laundering compliance plan need to consider whether they now require one.

In addition, every company needs to implement a thorough plan for conducting due diligence on deals, business partners, and employees. Such a plan should set forth standards for conducting background checks, audits, and interviews of key personnel. The results of those efforts should be reduced to writing and retained by the company, so that if an issue ever arises it can demonstrate the good faith with which it conducted its review.

Due diligence inquiries should initially focus on the two major areas that have long been recognized as the cornerstone of anti-money laundering programs: "know your customer" (or business partner, investor, or employee) and determining the "source of funds" involved in the transaction. It is essential that the names of entities and individuals involved in a transaction or relationship be compared to those names contained in lists of suspected terrorists and other suspected criminals maintained by the government and discussed above.

However, these two concepts are not an exhaustive list of all that may be required in today’s environment. In fact, regulations recently issued pursuant to the USA PATRIOT Act require that foreign banks not only know their customers, but know their customers’ customers as well.

Conclusion

The environment in which businesses operate has changed forever as a result of September 11, but the precise confines of this new world are still evolving. In order to mitigate exposure in this area, companies must engage in verifiable and reasonable efforts to detect businesses, business partners, and individuals that may be involved in money laundering and other criminal activity. The risks of not doing so are far greater than they were just twelve months ago.