Plugging the Gaps in the U.S. Anti-Money Laundering System
How These Reforms Affect Banks and Other Financial Institutions — an interview with Courtney J. Linn of Department of Justice - U.S. Attorney
Elizabeth Donald | University of California, Davis, School of Law
Dina M. Randazzo

Posted Sunday, January 1, 2006
6 U.C. Davis Bus. L.J. 10 (2005)

Courtney J. Linn is an Assistant U.S. Attorney in the Eastern District of California, where he primarily handles asset forfeiture and money laundering cases. He is a frequent lecturer at the National Advocacy Center on asset forfeiture and money laundering, a member of the U.S. Department of Justice's asset forfeiture working group, and the author of recent articles on terrorist financing and international asset forfeiture. Prior to becoming an Assistant U.S. Attorney, Mr. Linn clerked for a United States District Judge in Sacramento, and worked as an associate attorney at Orrick Herrington & Sutcliffe. Mr. Linn received his A.B. in History with distinction and departmental honors from the University California, Davis, and graduated Order of the Coif from the School of Law, University of California, Davis.

Background

In recent years, individuals with illicit intentions have exposed severe gaps in the U.S. anti-money laundering system. The proceeds of crime often pass through these gaps in place at traditional banks and money service businesses (MSBs) via money transmitters and check cashers. Since the attacks of September 11th, there are further concerns that terrorist networks will exploit these gaps to secrete funds used to finance activities both in the U.S. and abroad.

Courtney J. Linn advocates plugging these gaps by enacting anti-money laundering reforms that include stricter regulations for check cashing businesses, renewed efforts to police the relationship between traditional banks and MSBs, and requirements for traditional banks to verify and record the identity of persons conducting any cash deposit transaction (not just those over $10,000). Mr. Linn also emphasizes the need for U.S. law enforcement agencies to take a systematic approach of reviewing suspicious activity reports (SARs) filed by financial institutions.

Although these reforms would be beneficial in the abstract, questions remain over the implementation of the reforms and their practical effects on businesses and banks.

Q: What is the current anti-money laundering scheme in the U.S.?

A: In 1970, Congress enacted the Bank Secrecy Act.[1] This Act imposed upon traditional (brick and mortar) banks, the obligation to file Currency Transaction Reports (CTR) with the Department of Treasury for cash deposits over $10,000. The purpose of the law was to help the government identify large currency deposits in light of concerns that they might be related to criminal activity or tax evasion. Beginning in the 90s, Congress enacted anti-money laundering laws that made it a separate crime to engage in financial transactions involving proceeds of crime with the intent to conceal and disguise the source or ownership of this ill-obtained money. That separate conduct, the conduct of depositing the money with the specific intent to conceal the source of the money, Congress criminalized and termed "money laundering."

What people began to do to avoid triggering a CTR was to structure cash deposits in amounts lower than $10,000, for example, they would deposit $9,000 in currency on Monday, and $9,000 on Tuesday, and thereby avoid the need for the bank to file a CTR. Congress responded by criminalizing this conduct, known as "structuring." These activities - structuring and activities like it - are the kinds of activities banks began to report to the government in "suspicious activity reports" (or SARs).

Q: What problems do you see within the scheme?

A: The government is a victim of its own success in enforcing the anti-money laundering laws that Congress enacted. The enforcement of those laws had the effect of squeezing on a balloon, but only on one part of the balloon. Those laws have done a reasonably good job of protecting the integrity of traditional financial institutions from money laundering, and ensuring that the government has the information it needs to track and identify illegal flows of money. But in response to the government squeezing on that part of the balloon, people involved in criminal activity, including terrorist financing, are resorting to other means outside of traditional banks, to move money wherever it is needed in the world. Some of those means include money service businesses (MSB), hawalas,[2] and alternative remittance systems such as the Black Market Peso Exchange.[3] These transactions occur outside traditional banks and pose the biggest challenges we face in enforcing the laws in the current anti-money laundering system.

Q: In a recent article in the Journal of Money Laundering Control, you wrote on terrorist financing and mentioned multiple reforms to address the problems of illegal bank transactions. One such reform mentioned was the necessity of verifying and recording the identity of a person presenting cash deposits under $10,000, especially if the person making the deposit isn't the account holder. How will banks be able to check that the identity information is actually valid?

A: My proposal asks banks to verify the identity of the depositor and record that information on a deposit item like a deposit slip. This does not mean that the bank will necessarily report that information to the government unless that transaction is otherwise suspicious enough to justify the filing of a SAR. In making this proposal, I only ask that the banks use the same degree of scrutiny it would apply to any transaction involving a withdrawal of funds. In other words, I am asking banks to look at some sort of proof of identification issued by a government agency.

Q: You also advocate that banks determine whether their customers are MSBs and refuse the business of illegal MSBs. Why do you think banks should be regulating MSBs - shouldn't regulation of this sort be done by a business regulatory agency?

A: Congress has been trying to get at the problem of illegal MSBs[4] since 1992. The first legislative push Congress enacted was 18 U.S.C. § 5327. That statute imposed on banks the exact requirements that I am advocating. It requires that the banks identify their depositor or their account holder and determine if that person is an MSB. In 1996, before the Secretary of Treasury could promulgate the regulations that would have given effect to § 5327, Congress repealed the law because they believed they had already taken direct aim at MSBs. Congress enacted a law that required the Secretary of Treasury to regulate MSBs directly, but those laws have not been effective. I think Senator Shelby (R-AL), in remarks he made in the Senate just about a year ago, noted that there are approximately 15,000 licensed and registered MSBs in the U.S., and 600,000 that are not licensed or registered. So only a small, small fraction, are registered despite the fact that we have this law requiring registration. Asking the MSBs to step forward and register and license just has not been successful.

My proposal goes a little further than the initial statute. I would add the requirement that the bank identify whether its customer is an MSB and ascertain if it is licensed under applicable state law and registered with the Financial Crimes Enforcement Network (FinCEN).[5] If the MSB is not licensed under state law or is not registered with FinCEN, then under my proposal the bank must terminate the banking relationship with the MSB. For the bank to continue the relationship in that situation is, in my view, nothing less than aiding and abetting a felony. It is a crime to engage in money transmitting, for example, without being registered with FinCEN. So I'm asking the banks to do a little bit of due diligence on the front end to determine if the MSB is lawfully licensed and registered.

Q: You also advocate additional regulations for check cashing businesses. This will add additional responsibilities to these businesses, but how will these responsibilities further the goal of patching holes in the money laundering system? How will the requirements to file SARs be enforced? There is already an overwhelming number of SARs being filed. How can FinCEN deal with the increased number of reports?

A: Under existing law (since December of 2001), MSBs have been subject to the same kind of reporting requirements as traditional banks, namely the obligation to file CTRs, and, in the case of suspicious financial transactions, the obligation to file SARs. For reasons that aren't clear to me, check cashers were exempted from the latter requirement. Check cashers don't face that same kind of pressure as a legitimate bank to identify the depositor. So what we see is that a lot of criminal activity involving welfare benefit fraud, identity theft and so forth, being negotiated through MSBs (such as check cashers), precisely to avoid the kinds of regulatory scrutiny that traditional banks might put on that transaction.

FinCEN may quarrel with what I'm about to say, but I don't think the burden of an increased number of SARs will fall too heavily on FinCEN. FinCEN is already set up to handle and process all these SARs and CTRs that have been filed. So the added volume will affect them incrementally. The problem is going to be for those in the law enforcement community, in the FBI, the DEA, the IRS Criminal Investigation Division, the Secret Service, and other federal and state law enforcement agencies.

To understand this problem you have to look at how the government has been using the suspicious activity reports. Until very recently, we've been using them in a very reactive way. For example, in the course of an investigation, the DEA may acquire a target (i.e., someone they believe is engaged in drug trafficking or criminal activity). Then, at that stage in the investigation, having acquired the target, a DEA special agent may look at that person's CTR filings and SAR fillings to get a sense of the target's financial activity.

Historically, that's how federal law enforcement agencies have used SARs. But as you point out, we're drowning in them. I think 1.2 or 1.3 million of them were filed last year, just by traditional banks. So, I recommend a more proactive approach that involves a systematic review of SARs. Under my recommended approach, law enforcement agencies would use SARs not to acquire more information about an existing target, but to acquire a criminal target in the first place.

It involves using a multiple-agency approach to reviewing SARs. Historically, the FBI might look at an SAR by itself. The DEA might look at the same SAR, but the two never necessarily conferred. My proposal would involve those agencies sitting down at a table together to review a week or a month's worth of suspicious activity reports for a particular geographic area and other more particular kinds of transactions.[6] Then, both agencies could move forward in coordinating an investigative approach. Instead of having the FBI and the DEA conduct redundant investigations of the same SAR, have them sit down at a table and decide, "Ok, you're going to take this SAR, you run with it, you investigate it."

Q: The proposed regulations would impose a new burden on many institutions, like banks and MSBs. How would these regulations affect the institutions as a whole, financially, as well as individual officers who are working at those institutions, like bank tellers? Will they need training?

A: Lets separate out which regulations in particular and which group of people are affected by them. The regulation that pertains to banks - verifying and recording the identity of depositors for currency transactions under $10,000 - does not impose a significant burden on a bank because the bank is already collecting this information in the case of withdrawals. So they already know how to do that. I'm just asking them to do that in the case of cash deposits as well.

Regulations that pertain to check cashers is a different matter. I think money service businesses, and in particular the banks, also feel overburdened by the regulatory requirements that already exist. Check cashers that are small operations - mom and pop grocery stores - will feel the regulations the most. It may be just part of their business to cash checks, either welfare benefit checks or private checks, third party checks, etc. For these kinds of check cashers, the burden is significant, and no doubt, it is one of the reasons why the regulations give check cashers more of a break than the other MSBs. But even so, under the existing regulations, check cashers are required to maintain anti-money laundering compliance programs not too dissimilar to the ones big banks maintain. Check cashers may not have to designate Bank Secrecy Act Compliance Officers, as traditional banks do, but they have to have an anti-money laundering compliance program. However, the added burden of requiring check cashers to file suspicious activity reports, which is one of my proposals, is going to be a significant burden. Nevertheless, I think it's one that this financial community needs to bear if we're going to get a grip on money laundering, particularly money laundering that's occurring through money service businesses.

Q: Do you think members of that community, check cashers in particular, have the training or ability to follow through on these regulations? Who bears the burden of giving them the training to understand how these regulations work?

A: I think the burden will be a shared one. If regulations like the ones I'm proposing were implemented, FinCEN would have to expand its role in providing MSBs with the kind of information they need to complete these forms. FinCEN is already doing that. If you go to www.fincen.gov, you will find all kinds of information available to banks and MSBs, about how to complete a SAR, when they're required, how to complete a CTR, the requirements of maintaining an anti-money laundering compliance program and so forth. This information is publicly available. Having said that, the process of training people with regard to SARs is not an easy one. Good banks are very diligent with this, and they provide bank tellers with annual or semi-annual training on just the kinds of things that we're talking about. But it's expensive. I think there is a great risk that check cashing agencies won't have the proper training in filing SARs. For that reason there is a greater need for FinCEN to provide information for there to be greater regulatory oversight and guidance. But as I indicated, we've already crossed that threshold. After 9/11 we imposed these burdens on MSBs such as money transmitters, currency exchange houses, issuers and redeemers of money orders. These businesses are already grappling with this problem, and their experience and FinCEN's experience in trying to train and help and assist those people in these requirements would translate into efforts to try to help those check cashers as well.

Q: Although the burdens might not be as heavy as it would initially seem, there will still be some burdens on financial institutions. To justify these burdens, what benefits in the post-9/11 world would these reforms bring?

A: A healthy financial system depends on transparency in financial transactions. As we've succeeded in pushing money laundering out of traditional banks, we've seen that some of that activity is being pushed into MSBs, and right now we don't have that kind of transparency in the money service business. Congress has given the U.S. the tools, in the form of 18 U.S.C. § 1960, to prosecute people who engage in illegal MSBs, but as I noted earlier, compliance with licensing and registration requirements is very spotty. Under the existing scheme, it's very easy to use check cashers and MSBs to place money into bank accounts that don't belong to you, and to move it anywhere in the world that you want to move it to (even to finance terrorism). All of this is under the radar of U.S. anti-money laundering policies. But it's not just 9/11; it's a confluence of several things that are all happening at one time. First, there is the globalization of banking. It's now possible to bank on the internet; it's now possible to have a bank account in Latvia and a debit card here in Sacramento and the two may not necessarily meet. Second, it is increasingly the case that criminal activity is occurring in one country, and the proceeds of that activity are being moved to another. The money is moving at the speed of light. As fast as someone can strike a computer key at a bank, the money is moving from the United States to Geneva, Geneva to Kiev, Kiev to Hong Kong. I want to encourage globalization. I want money to move as fast as it can. As a prosecutor, all I want is the paper trail to follow when we identify criminal activity. Who made the deposit, and on whose behalf? Who conducted the financial transaction that caused it to move from the United States to Geneva, and so forth? I just want to have a paper trail that will allow U.S. to investigate the people who are involved in criminal activity.

The views expressed by the interviewee do not necessarily reflect the views of the US Department of Justice, or its agencies.



[1] 31 U.S.C. § 5311-30; 12 U.S.C. § 1951 et. seq.

[2] "Hawalas are unregulated international financing networks. Hawalas are not limited to specific geographic regions, and are found throughout the world. The word hawala means "in trust" in Hindi. The money-transfer system is used primarily by individuals to transfer cash, locally or overseas, to people who do not have access to a bank. Hawalas are commonly used by immigrants in Canada. Transfers are usually from one blood relative to another. They leave no paper trail and offer anonymity to both the originator and the recipient." See, e.g., money-transfer systems, hawala style, available at http://www.cbc.ca/news/background/banking/hawala.html.

[3] The Black Peso Market Exchange refers to the complex system of money laundering used by individuals, in many cases drug dealers, to exchange large sums of dollars into pesos without triggering U.S. anti-money laundering laws. The practice usually entailed multiple individuals depositing sums less than $10,000 in numerous U.S. banks.

[4] Illegal money service businesses are defined in 18 U.S.C. § 1960. It is an MSB that is not licensed under the state law when applicable, not registered with the Financial Crimes Enforcement Network (FinCEN), or is knowingly engaging in transactions involving criminal proceeds or money promoting crime.

[5] "The mission of the Financial Crimes Enforcement Network is to safeguard the financial system from the abuses of financial crime, including terrorist financing, money laundering, and other illicit activity. We achieve this mission by: Administering the Bank Secrecy Act; Supporting law enforcement, intelligence, and regulatory agencies through sharing and analysis of financial intelligence; Building global cooperation with our counterpart financial intelligence units; Networking people, ideas, and information." See About FinCEN / Mission available at http://www.fincen.gov/af_mission.html.

[6] SARs are coded depending on the kind of transaction involved, whether it relates to money laundering, or possible terrorist financing

Courtney J. Linn is an Assistant U.S. Attorney for the Eastern District of California.