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In short, money generated in large volume by illegal activities must be “laundered”, or made to look legitimate, before it can be freely spent or invested; otherwise, it may be seized by law enforcement agencies and forfeited to the government. Money laundering is a diverse and often complex process. It basically involves three independent steps that often occur simultaneously:
Placement: Physically “placing” bulk cash proceeds in a bank or NBFI.
Layering: Separating the proceeds from criminal activity from their origins through layers of complex financial transactions.
Integration: Providing an apparently legitimate explanation for the illicit proceeds.
For money laundering to be successful, there must be no discernible “paper trail” to connect the three steps of this process. The cornerstone of the U.S. enforcement efforts is the Bank Secrecy Act (BSA). The main goals of this statute are summarized below. When money laundering is accomplished, it indicates that the requirements stipulated by the BSA were successfully evaded, manipulated, or ignored. In the United States, this is most commonly done by infiltrating the banking system or physically smuggling the currency out of the country.
Within the banking system, launderers may structure transactions so that they fall below reportable levels, coerce employees to not file proper reports, or establish legitimate “front” businesses that are used when new accounts are opened. Smuggling currency out of the country, especially to countries with rigid standards of secrecy, makes tracking it difficult for U.S. law enforcement agents. Until recently, the U.S. was nearly alone in the effort to prevent and detect money-laundering activities. Fortunately, a growing number of other countries have begun implementing anti-money laundering laws that make money laundering more difficult. Bank regulators and enforcement agencies around the world are now working to improve communications and share information on this issue. It will take a unified effort to make a dent in the enormous amount of illicit activity that is currently taking place on a global basis, currently conservatively estimated at creating over $280 billion per year in new illegal proceeds.
Electronic funds transfer (EFT) systems are regularly used by criminals to repatriate profits from illegal activities. The problem for government officials and bankers is that it is extremely difficult to discern which transfers are legitimate and which are not. A study conducted by the US Office of Technology Assessment (OTA) estimates that in total around $500 trillion per year is wire transferred through the US via CHIPS, SWIFT and Fedwire. These three payment systems handle some 700,000 transactions in the US each business day.
Most of the senders are other banks or non-bank financial institutions. Very few are individuals. The problem faced by the US government is that a proportion of the wire transfers carry “dirty money'“; i.e., illegal proceeds from the sale of drugs, gambling and terrorist activities. The OTA roughly estimates up to $300 million is laundered each day through the US payments systems, representing between 0.05% and .1% of the EFT volume or one of every two thousand transfers. In recent years the government has introduced various measures, both voluntary and regulatory, to detect illegal transfers. In addition to having to report deposits exceeding $10,000, banks were asked to voluntarily screen wire transfers and report any suspicious funds transfers or patterns of funds transfers. Yet the sheer volume, diversity and high level of automation rendered voluntary screening ineffective.
Legitimate wire transfer activities in the US banking system are diverse and wide-ranging, differing in their type, purpose, frequency, origins, destinations and amounts. Because the ordinary traffic is so heterogeneous, it can be difficult to identify transfers that are 'out of the ordinary'. Further complicating matters, money launderers have gone to great lengths to employ lawyers and accountants who are skilled in cash management. They set up operations whose transactions perfectly mirror legitimate businesses.
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