Combating Money laundering (ML) Part 1

The word ‘combat’ has its origin in the Latin language where com meaning “together with” and battere meaning “to fight”. As the title suggests, in this article we will discuss the different US and International regulatory bodies fighting together against this(ML) heinous crime. As responsible citizens of our respective nations, it is our duty to be aware of this crime and also be a part of this fight against ML.

In 1970, the U.S. was one of the first nations to enact Anti-Money Laundering (AML) legislation to combat this crime. As the nature of ML has evolved over the past few decades, so has the legislation that aims to fight it. We will read about a few of these legislations in brief.

US Legislation

Bank Secrecy Act (BSA): Starting in 1970, the US passed a series of laws referred to as the Bank Secrecy Act. These laws and the implemented regulations, provide a broad overview of what banks and other financial institutions must do to combat ML and Terrorist Financing (TF).

USA Patriot Act: As a result of the 9/11 attacks, the USA passed one of the most significant AML/CFT (Combating Financing of Terrorism) laws since BSA itself. Its main objective was to deter and punish terrorist activities in the US and around the world. It also aimed to enhance law enforcement, investigatory tools, and for other purposes. USA PATRIOT is a backronym that stands for Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism.

Section 311: This section is a provision that enables the US to designate a jurisdiction, bank, account, or transaction as a “primary money laundering concern”. Once the designation is made, there are various special measures that can be imposed which range from requiring the reporting of certain information to prohibiting activity with the entity or jurisdiction.

Section 312: Part I is dedicated to a Foreign correspondent banking account. This section requires US banks To undertake due diligence reviews before agreeing to open a correspondent account for a foreign bank. As a result of the review, if it is determined That there is an enhanced risk, the US bank must undertake additional due diligence steps like enhanced Scrutiny of transactions, obtaining information about foreign banks AML programs, Determining ownership of the foreign bank, and determining whether the account is being used by other foreign banks.

Part II With regard to private banking accounts for non-US persons. This section requires US banks to determine the beneficial owners of the account, determine whether any of the owners is PEP ( politically Exposed Person ), Determine the purpose of the account, and monitoring of the account. If the account owner is a PEP, Then the institution is obligated to conduct enhanced scrutiny in order to determine if the sources of funds for the account are derived from corruption.

Section 313: This section prohibits US banks from dealing with shell banks.

Section 314: a) This section requires banks in the US to respond to requests From the US government pertaining to the existence of accounts or transactions for specifically named individuals. b) This part of the act permits US banks, on a voluntary basis, to share AML related information concerning accounts and transactions. This sharing process, however, requires registration by both institutions with FinCEN.

Section 319: It permits the US government to save money laundering-related funds in a US-based correspondent account that is maintained by a foreign bank. Meaning, if illegal or laundered funds are deposited into a foreign bank in a foreign country, the US can reach those funds by seizing A comparable amount of money in the US-based correspondent account that the foreign bank maintains. It also permits US banking agencies to require a US bank to produce information about its AML program or an account at the bank including opening documentation within five days. It permits the US government to subpoena information related to a foreign bank that maintains a correspondent account in the US even if the information is located overseas. The penalty for noncompliance is that the US correspondent account will be closed.

Section 326: This section is extremely important as it outlines minimum requirements offer bank which it must adhere to while opening a new account for a customer. The institution is obligated to obtain information like the name of the account holder, date of birth (if the account holder is an individual), Address, and federally issued identification number. The institution is obligated to use documentary and non-documentary means to verify the collected information.

US Banking Supervisory Agencies

OCC: The Office of the Comptroller of Currency (regulates national banks).

FDIC: The Federal Deposit Insurance Corporation (regulates some states bank).

FRS: The Federal Reserve System (regulates state banks not regulated by FDIC).

These agencies work together with FinCEN to write AML/CFT Regulations and to ensure banks that they supervise AML/CFT laws and regulations.

FinCEN: Financial Crimes Enforcement Network is a part of the US Treasury Department, primarily responsible for BSA and AML/CFT regulations.

OFAC: The Office of Foreign Assets Control, a bureau of the US Treasury Department is responsible for administering and enforcing economic and trade sanctions based on US foreign policy and national security goals. It is working closely with the department of justice and banking agencies and imposing extremely large fines for violations of these rules.

FATF (Financial Action Task Force): It was created in 1989 and its headquarters are located in Paris. It is comprised of member jurisdiction and regional organizations representing most major financial centers in all parts of the world. Its primary work is to establish international standards for fighting money laundering and terrorist financing. FATF with the assistance of the IMF (International Monetary Fund) and the World Bank conducts periodic reviews of member countries to determine their adherence to the FATF.

European Legislation

European Union Directives: European Union is an economic and political union of member states that are primarily located in Europe. EU operates through a system of supranational independent institutions and intergovernmental negotiated decisions by the member states. There are five different Directives issued by the European Union. Unlike FATF, EU Directives had the force of law. These directives will be discussed in a different article in detail.

Council of Europe: This international organization promotes cooperation between all countries of Europe in the areas of legal standards, human rights, democratic development, rule of law, and cultural cooperation. Unlike the EU, It cannot pass binding laws.

United Nations: Inter-governmental organization established to promote international cooperation. It is not a world government and does not make laws. UN has issued a number of documents pertaining to the fight against money laundering and terrorist financing, two of which are known as the Vienna Convention and Palermo Convention.

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