How to Keep Your Business Safe From Money-Laundering

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The FATF (Financial Action Task Force) defines Money laundering as “the processing of the criminal proceeds to disguise their illegal origin”

Money is laundered by introducing illegal profits into the financial system. After that, they are channeled into purchasing various investment instruments. It is estimated that roughly 2 trillion is laundered through financial systems every year. The integrity of the financial and economic system of a country lies in how it prevents such unscrupulous activities from taking place.

Anti-Money Laundering in the US

The United States Secretary of Treasury established the Financial Crimes Enforcement Network in 1990. Its function is to collect and analyze financial transactions. Any suspicious activity in the US is reported to FinCEN.

The AML policies in the US arise from two legislations – Bank Secrecy Act and the Patriot Act.

The BSA, also called Currency and Foreign Transactions Reporting Act was also created with the main purpose of preventing criminals from using financial institutions to launder money. It establishes rules regarding record keeping and documentation for national banks, federal savings associations, federal branches, and agencies of foreign banks when a transaction exceeds $10,000.

Businesses must file IRS Form 8300 if they receive more than $10,000 in cash from one buyer. This $10,000 can arise from a single transaction or from multiple transactions that occur within a 24-hr period.

FinCEN has the authority to investigate financial institutions for violation of the BSA.

The Patriot Act came into the picture in 2001. Although the Patriot Act’s primary purpose is to pre-empt terrorist acts, other key purposes also include-

  • Strengthening methods to prevent international money laundering and financing of terrorism.
  • Reporting of suspicious money laundering activities

Section 352 of the Patriot Act requires financial institutions to implement the AML Program which includes the development of policies, training of employees, designation of a compliance officer, and testing of the AML Program.

To whom do the AML regulations apply?

  1. Banks
  2. Branches of foreign financial institutions that are operating within the US
  3. Institutions operating outside the US if their financial transactions are through a US financial institution
  4. Foreign subsidiary or branch of US financial institution
  5. Broker-dealers in securities
  6. Mutual funds
  7. Insurance companies
  8. Money Service Businesses
  9. Operators of credit card systems
  10. US person (an individual, a corporation, a partnership, a trust or estate, a joint stock company, an association, a syndicate, joint venture, or other unincorporated organization or group, an Indian Tribe (as that term is defined in the Indian Gaming Regulatory Act), and all entities cognizable as legal personalities)

AML requirements for financial institutions and businesses

AML programs must be created in line with BSA and Patriot Act regulations and keeping in mind the customer profile. Following are a few requirements-

  • Record-keeping- Firms must maintain detailed records and must report suspicious activities and transactions. Records must also be kept for at least 5 years.
  • Systems and controls – Witten policies and guidelines should be formulated and all employees must be trained in them.
  • KYC and due diligence – Firms have to implement Know Your Customer guidelines and the accuracy of the information so gathered must be checked. Firms also need to apply risk assessment to customers
  • Compliance officer – Firms must appoint an individual employee as the Chief AML Compliance officer to oversee the AML regulations. He must have sufficient authority and professional experience to carry out his duties.
  • Audits – Independent audits will make sure that the AML guidelines are in proper effect.

Currency Transaction Report (CTR) – This is a report that needs to be made by a financial institution whenever a customer attempts to make a transaction over $10,000. Verification of the identity and the Social Security Number of the individual attempting the transaction must be done. It may also be filed if there is a reason for suspicion that an individual is making below threshold transactions to not hit the $10,000 mark.

Suspicious Activity Report(SAR) –As above, this is a document that financial institutions must file with FinCEN whenever there is a suspected money laundering activity. FinCEN requires a SAR if financial institutions believe an employee engaged in insider activity, if there is hacking of computers, or if customers operate an unlicensed money service.

It must be filed within 30 days and must be kept for 5 years.

Foreign Bank and Financial Account Report (FBAR) – A person holding more than $10,000 in foreign banks needs to file an FBAR.Click here to know more about FBAR reporting

AML requirements for Non financial businesses

Cash-intensive businesses are often used for laundering money. Apart from those, businesses that allow the conversion of cash to other assets, make international transactions or offer high-value and high-risk products also fall prey to such money laundering activities.

The following businesses face a heightened risk of being used to launder money –

  • Art/antique dealers
  • Car washes
  • Charitable organizations
  • Consumer electronics rentals and dealers
  • Convenience stores
  • Restaurants/Bars
  • Gas stations
  • Importers/exporters
  • Leather goods stores
  • Textile businesses
  • Liquor stores
  • Tobacco wholesalers
  • Notaries
  • Offshore companies

The AML compliance requirements are:

  1. Filing of FBARs
  2. Filing Report of International Transportation of Currency or Monetary instruments (CMIRs) – It needs to be filed by any business which physically transports or causes to be transported currency or other monetary instruments in an aggregate amount exceeding $10,000, whether that transportation is into or out of the US. A CMIR also must be filed by any person/business who/which receives in the US currency or other monetary instrument in an aggregate amount exceeding $10,000 that has come from outside the US and on which no CMIR was filed.

It does not need to be filed if the person is a bank or broker-dealer, and the currency or other monetary instrument is mailed or shipped through the postal service or by a common carrier.

The report includes information like the basic details of the person shipping or receiving, details of the business on whose behalf it was done, and currency or the monetary instrument used.

  1. Filing Form 8300 with the IRS – If a business receives a payment of $10,000 in cash, it is required to file Form 8300. It must be filed for each separate transaction that crosses the $10,000 cash limit. The onus of filing this form lies only on the receiver. All transactions that are considered related must be filed in Form 8300, regardless of how many transactions it is broken into and how long the time period is (<12 months).

Related transactions are those that occur between a payer and receiver within a 24-hour period. They can be considered related if the receiver has enough information to consider them connected transactions. Failure to file related transactions will attract a penalty from the IRS.

The form must be filed within 15 days of receiving such money. Failing to file on time will attract a fine of $100 for each such transaction.

The form requires information like-

  • Basic details of the individual from whom the cash was received like name, address, contact information
  • Details of the person on whose behalf this transaction was conducted
  • Description of the transaction and the mode of payment
  • Details of the business that received the cash like business name, address, nature of business, and signature of the authorized business owner or employee.

Non financial businesses are also required to comply with OFAC (Office of Foreign Assets Control) regulations. A business that has a high volume of international deals, and works with a large customer base that’s changing or sells online goods or services is expected to have its own OFAC compliance program. Your business could face significant monetary fines if it is found engaging in business or other transactions with parties on the SDN List (Specially Designated Nationals and Blocked Person List), even if such activity occurred inadvertently. Performing sanctions screening of the names of persons and other parties with whom business is done against the constantly changing OFAC SDN List can help you stay compliant.

Unlike financial institutions, non financial businesses need not comply with the AML Program (Section 352 of the Patriot Act). However, businesses can opt to implement an AML program voluntarily to alleviate the risk of being abused for money laundering and terror financing. They also need not file CTRs as financial businesses do. Filing SAR is not necessary but FinCEN encourages the voluntary filing of SAR on any suspicious activity.

Consequences of non-compliance with AML requirements

Non-compliance can lead to severe fines and penalties. It may be imposed on each branch of the firm for each day of violation of norms. Fines range from $10,000 per day to $100,000 per day depending on the extent of the violation. Damage is not restricted to fines and penalties; the reputation of the firm and business also takes a hit.

It is highly instrumental for non financial businesses to comply with AML requirements and guidelines as they are being used more and more by terror elements to launder money. It is recommended that the help of a CFO consultancy service be taken to help with the timely filing of Form 8300 and other AML requirements.