Money Laundering and the USA PATRIOT Act

As a general proposition, “money laundering” is the process of disguising money obtained from illegal activities (e.g., arms sales, drug trafficking), so that it appears to have come from legitimate sources. Some authorities describe it as occurring in three stages:

  • The “ill-gotten” gains are converted into money orders, travelers’ checks, or like instruments, or are deposited into an account at a financial institution.
  • The funds may then be transferred into other accounts at the same or other financial institutions.
  • The funds are then often withdrawn and used to purchase legitimate assets (e.g., cars, homes, equipment), or to fund legitimate or criminal activities.

The USA PATRIOT Act

Following 9/11, Congress quickly passed the “Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism” or “USA PATRIOT Act.” The PATRIOT Act was intended to deal with, among other things, financing terrorism with “laundered” money. To this end, Title III of the PATRIOT Act is the “International Money Laundering Abatement and Anti-Terrorist Financing Act” (Act).

Although money laundering was a crime before the Act, earlier measures focused on institutions commonly considered “financial,” such as banks and savings and loans. The Act creates numerous reporting and monitoring duties intended to detect money laundering. It also extends these duties to a laundry list of other businesses, which are now included in the definition of “financial institution,” such as:

  • Stock brokers and dealers, and investment companies
  • Credit card companies
  • Car, boat, and airplanes dealers
  • Insurance, loan or finance, and escrow companies
  • Travel agencies and dealers in precious metals, stones, or jewels
  • Casinos and gaming establishments

Currency exchanges, companies that assist in transfers of funds (e.g., Western Union), telegraph companies, and even the U.S. Post Office

Businesses or agencies that the Treasury Department determines conduct business “similar to, related to, or as a substitute for” the above

Designated businesses whose cash transactions have a high degree of usefulness in crime, tax, or other regulatory matters

Some Provisions of the Act

The Act contains more than fifty separate sections, so a survey of the entire Act is beyond the scope of this article. However, some of the more salient provisions of the Act include:

Financial institutions are required to establish anti-money laundering programs to detect and report money laundering, including development of internal monitoring policies, designation of a “compliance” officer, employee training, and independent oversight (i.e., an outside audit of program).

Financial institutions are further required to adopt measures to verify the identities of new customers in accordance with Treasury regulations.

Federal law is amended to create new penalties for “bulk cash smuggling into or out of the United States.” The undeclared movement of more than $10,000 is punishable by up to five years in prison and forfeiture of “any property, real or personal, involved in the offense, and any property traceable to such property.” This provision overrules a U.S. Supreme Court decision from 1998, which held that the confiscation of more than $350,000 from an individual who was attempting to move it out of the U.S. was unconstitutional. The Court found that the punishment violated the Eighth Amendment’s protection against “excessive fines.”

The maximum criminal and money penalties for money laundering are increased from $100,000 to $1,000,000.

“Suspicious activity” must be reported. For example, receipt of more than $10,000 in “coins or currency,” by any person engaged in a trade of business, in one transaction (or two or more related ones) constitutes suspicious activity. The Act also limits the financial institution’s liability for filing a suspicious activity report or for disclosing possible violations to the government.

Permission is granted for greater, voluntary cooperation between financial institutions, their regulatory authorities, and law enforcement. By encouraging cooperation, the hope is these entities will be able to share information related to suspected terrorism and money laundering. Before sharing information, however, a financial institution must provide notice to the Financial Crimes Enforcement Network of the Treasury Department and certify, among other things, that it has established and will maintain adequate procedures to safeguard the security and confidentiality of the information.

The Treasury Department and other agencies provide regulations on implementation.