Requirements for Preventing Money Laundering Affect Many Businesses
A variety of businesses, such as jewelers, travel agents, real estate brokers, and car dealers, have certain legal requirements under the Bank Secrecy Act of 1970 (BSA). The BSA also includes specific requirements mat can affect certain high-risk taxpayers and their tax preparers.
In order to limit risk exposure, even for firms whose business is limited solely to notfor-profit entities, it's crucial to have knowledge of BSA requirements. Not-for-profit entities have new BSA requirements focused on terrorist financing. No longer are BSA provisions important only to larger CPA firms mat audit banks and investment brokers. Even the smallest sole proprietor is likely to have clients affected by the BSA and subject to its Suspicious Activity Report (SAR) requirements.
CPAs should be concerned not just about protecting their clients, but also about protecting themselves. CPAs in both public and private practice need to be cognizant of the risks of indirectly supporting terrorism. Additionally, there's the risk of unwittingly being in violation of national and international law, thereby jeopardizing licensure. A variety of legislation in the past decades, including the Patriot Act as well as the BSA, changed the legal landscape for accountants. Anyone involved in audits, tax preparation, or financial reporting needs to become familiar with SAR and other reporting requirements, as well as the basics of money laundering practices. The carrot dangling from mis stick is the opportunity to develop specialized expertise and expand engagement services.
What Is Money Laundering?
When most people hear the phrase "money laundering," they think of drug dealers. The U.S. Drug Enforcement Administration estimates that Americans spend $65 billion per year on illegal drugs, of which only $1 billion is seized by all federal agencies combined. That leaves $64 billion to finance additional activities by drug trafficking organizations. A portion of those proceeds are used to pay suppliers and to support the infrastructure of these organizations, but a substantial amount remains available for other uses, including acquiring personal wealth, expanding into other illicit activities such as prostitution and human trafficking, and financing terrorist activities around the world.
This $65 billion is a drop in the bucket when money laundering is considered on a global scale. The intergovernmental Financial Action Task Force (FATF) estimates mat up to $1.46 trillion is laundered annually worldwide - more man the gross domestic product of the United Kingdom. The World Bank cautions that money laundering and terrorist financing are global crimes. It is difficult to determine whether any particular act is related to terrorism or to organized crime, simply because the two are often interrelated. Perpetrators internationalize their operations to make it hard to follow the money by adding layers of complexity, exploiting constraints of communication across national borders, and avoiding jurisdictions with strong regulation and law enforcement.
Historically, the objective of money laundering was to conceal the existence, illegal source, or ownership of proceeds derived from criminal activity - to make the illegal proceeds look legal. Terrorist financing has expanded the objective of money laundering to include activities intended to disguise the source of funds that will be used to carry out terrorist acts, even if the source does not involve illegal activities. Osama bin Laden began as a rich financier and gained power by building a financial network characterized by multiple layers that allow al Qaeda to raise funds from businesses worldwide operating under a cloak of legitimacy, as well as utilizing a foundation of intermediaries, banks, and other financial institutions. Over time, al Qaeda moved its funds through a global network of businesses and charities, the Islamic banking system, and other parts of the global financial system to distribute money to cells in the field. The Council on Foreign Relations notes that the extensive and complex al Qaeda financial operations allow the organization to remain a threat and al Qaeda financial tactics have been adopted by other jihadists.
Steps in Money Laundering
Money-laundering schemes are becoming increasingly complex. When big money is involved, there is plenty available to pay for big talent The masterminds behind these schemes hire brilliant and creative lawyers, accountants, and other experts to cover their tracks. The John Jay & ARTIS Transnational Terrorism Database (JJATT) indicates that between 10% and 15% of identified individuals involved with radical Islamic terrorist organizations fill financerelated roles. Improved technology has also complicated the money-laundering environment by facilitating fast, convoluted transaction trails. Nevertheless, every moneylaundering scheme has three basic steps: placement layering, and integration.
Placement. In order to disguise the source of the cash, it needs to be brought into the financial system without attracting attention. A common technique, known as "smurfing," is to divide the cash into small sums that fly under the radar of BSA reporting requirements. Even nonaccountants are generally familiar with the $10,000 cash transaction SAR requirement Though SAR requirements include the reporting of suspicious patterns of deposits or withdrawals, many believe it is easily circumvented by simply transacting in smaller amounts. Banks are no longer the exclusive clearinghouse for these "placed" funds. Many industries are now covered by BSA reporting requirements, including travel agencies, casinos, dealers in precious metals, jewelers, pawnbrokers, and securities brokers/dealers.
Rather than dealing in small sums, placement may involve moving money offshore. Eddie Antar, infamous for his role in the Crazy Eddie fraud, tells the tale of uncomfortable trips from New York to Tel Aviv with tens of thousands of dollars strapped to his body. As the prices of highend colored gemstones have risen in recent decades, they have also become a hot item for money laundering. Gemstones are very valuable, highly portable, and seldom leave an audit trail. Stored value cards (gift cards) are another portable way to move money out of the country. Cards purchased for cash below the reporting requirement limits are virtually untraceable and can easily be carried or mailed elsewhere.
The FATF notes that increasingly, legitimate nonprofit organizations are being exploited to raise and move funds, particularly by terrorist organizations. Alfonso Portillo, the president of Guatemala from 2000 to 2004, was indicted in January 2010 for conspiracy to launder millions of dollars he embezzled from the government of Guatemala. A large portion of this money was diverted through the Bibliotecas Para La Paz (Libraries for Peace) program designed to purchase books for school libraries. While these funds were allegedly used to enhance Portillo's personal wealth, nonprofits are considered vulnerable to similar abuse by terrorists because they are often cash-intensive, have a global presence, and are usually subject to tittle oversight. In the United States, organizations that sound benign-including Benevolence International Foundation, Global Relief Foundation, and Holy Land Foundation - are alleged to have financial ties to terrorist acts in the United States, Europe, or the Middle East and are subject to U.S. counterterrorism sanctions.
Layering. Layering is the process of distancing the financial resources from the sources of the money. Currency is a fungible good, and electronic numbers are even less identifiable. By moving money through a convoluted series of transactions - particularly if one or more occurs in a noncooperative jurisdiction (i.e., a bank secrecy haven) such as Turkmenistan, São Tomé and Principe, Uzbekistan, or the Cook Islands-it is easy to obfuscate the audit trail. Fictitiously named or numbered accounts also disguise the true source of the transactions.
Integration is the return of the laundered money back to the originator of the scheme so it may be spent as "legitimate" funds. If criminals want to spend any money laundered to disguise its illicit origin, they need to integrate it back into the local economy. Similarly, terrorist organizations need to integrate their funds, licit or illicit to spend them locally on embedded individuals or cells. There are video recordings of Mohamed Atta, the hijacker who piloted the first plane to strike the World Trade Center, withdrawing money from an ATM machine in Portland, Maine, on September 10, 2001, and a similar ATM withdrawal in Zurich in July 2001. His lifestyle and training during the years prior to the September 11 attack were financed via the al Qaeda network.
Criminals and terrorists may gradually transfer money back to the United States and mix it with legitimate sales or purchase expensive items elsewhere and resell them in the United States to show a legitimate source of income. A variety of spending, investing, and lending techniques may be used to make the money usable. Even colleges, universities, and trade schools may be the recipient of laundered funds, because the source of the $40,000 or $50,000 paid for a year of private education would seldom be questioned.
Impact on Clients
The BSA (as amended) established recordkeeping and reporting requirements for financial institutions, which now include 14 major industries (see Exhibit 1). Even the smallest CPA firms may have clients who are jewelers, travel agents, real estate agents, or boat dealers, and, thus, are covered by the BSA. The BSA requires these financial institutions to design and implement anti-money laundering (AML) compliance programs, including the filing of SARs. The laws, rules, and regulations are complex, but penalties for noncompliance can be severe. There are civil and criminal fines, asset forfeiture provisions, and prison sentences of up to 20 years. The compliance requirements are continuous, rather than one-time. Not only do CPAs have a responsibility to educate clients on BSA requirements or to refer them to a qualified attorney or other expert - they also need to protect themselves.
Do you have a client who runs a golf course? In 2008, the CEO of Diamond Golf Company in San Diego, Peter Carlo Mertens, and his wife, Bettina Thakore, were arrested on federal charges of laundering $500,000 in illegal proceeds from the cultivation and manufacture of marijuana. Mertens and Thakore were not involved in the drug operations, but used the legitimate golf company to launder the money. Their accountants, Wayne Fernandes and William Hamman, were also arrested. All four defendants pleaded guilty and await sentencing.
Perhaps you have a client in the jewelry business. In April 2010, federal officials announced the forfeiture of more than $40 million worm of gold, silver, and jewels in an asset seizure operation related to a cocaine trafficking organization in New York engaged in an illicit black-market peso exchange. Yardena Hebroni and Eliahu Mizrahi pleaded guilty to using a wholesale jewelry business to facilitate the money laundering, and were each sentenced to more than two years in prison and the loss of all their personal and business assets.
Also in April 2010, a New York businessman known as Michael Mixon, whose real identity is Abdul Tawala Ibn Ali Alishtari, was sentenced to more than 10 years in prison for trying to funnel money to a terrorist training camp in Afghanistan for the purchase of equipment such as night vision goggles. The funds were raised through a fraudulent loan investment program Alishtari also pleaded guilty to stealing millions of dollars from victims through this bogus investment scheme.
Money laundering through residential and commercial real estate is of increasing concern and is often associated with mortgage loan fraud. The Financial Crimes Enforcement Network (FinCEN) reported a trebling of suspicious activity in residential real estate since 2004, and notes that about 6% of the alleged money laundering involved contractors and construction firms. FinCEN is quick to point out, however, that over 75% of the suspicious activity involved individuals unaffiliated with the real estate industry. In the case of the money launderer, the mortgage loan fraud takes the form of using illicit or "straw" buyers to fraudulently secure the loan. Once the real estate purchase is financed, the launderer will make regular and timely payments, thereby integrating the questionable cash into the legal economy. Because these loans are performing well, they are less likely to draw attention than other loans. It takes diligent attention for someone to note patterns of deposits or money orders or other structured payment schemes, particularly if several individuals are working in collusion. Anyone dealing with mortgage lenders, real estate appraisers, or real estate agents should be aware of the BSA reporting requirements.
Impact on CPA Engagements
The European Union Gatekeeper Initiative requires individuals such as lawyers, accountants, real estate agents, notaries, and investment advisors to report suspicions of money laundering. The United Kingdom has adopted the Third Money Laundering Directive, imposing reporting requirements on accountants and other persons who advise on capital structure. In the United States, SARs are required of most of the industries noted in Exhibit 1. Although the accounting profession is not specifically addressed, employees of these financial institutions and anyone else involved with the financial recordkeeping for such institutions may be bound by SAR requirements. A prudent CPA will take a conservative posture on questionable transactions.
As noted earlier, the 14 industries held to the highest reporting standards are required to have AML compliance programs. Internal auditors conduct a majority of the required independent tests of these AML programs, but accounting firms are also frequently involved. Regulators have found a lack of BSA/AML subject matter expertise in persons conducting fliese tests. Additionally, regulators' findings reflect insufficient scope and examination procedure in the independent tests. In 2008, the FATF published "Guidance for Risk-based Approach for Accountants," and it is imperative that accountants familiarize themselves with issues such as this.
Impact on Tax Practices
There are a number of tax-related issues with regard to money laundering. Regulations on Foreign Bank Account Reporting (FBAR) require Form TD F 90.22- 1 to be filed by a U.S. person to report either a financial interest in, or signature or other authority over, one or more financial accounts located in a foreign country. There are related questions on Forms 1040 and 1120, and FinCEN delegated enforcement authority to the IRS in 2003. Other IRS forms directly related to the enforcement of money laundering laws include
* Form 547 1 , Information Return of US . Persons with Respect to Certain Foreign Corporations. There are four categories of U.S. persons who are shareholders, officers, or directors of a foreign corporation or international business company who may be required to file this form Acquisition, disposition, or ownership of an interest in a foreign corporation must be addressed.
* Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Contains information regarding financial and nonfinancial transactions of foreign corporations. Form 8858, Information Return of U.S. Persons with Respect to Foreign Disregarded Entities. Must be filed by several categories of U.S. persons who own a foreign disregarded entity directly, or, in certain cases, indirectly or constructively.
* Form 8865, Return of U.S. Persons with Respect to Certain Foreign Partnerships. Requires information about acquisition or disposition of a 10% interest in a foreign partnership, or transfer to a foreign partnership of $100,000 even if less than a 10% partner.
* Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation. Reports transfer of property to a foreign corporation pursuant to a nontaxable transaction.
What About Form 8300?
The IRS requires Form 8300, Report of Cash Payments over $10,000 Received in a Trade or Business, to be filed by any persons who receive more than $10,000 in cash, including a number of monetary instruments such as cashier's checks and money orders, while conducting their trade or business, whether in a single transaction or a series of related transactions. These reporting requirements include transactions for the sale or rental of goods or real or personal property, as well as the sale of services. You may want to consider the following questions: Does my firm have any such transactions? Do we meet the filing requirements? If you aren't protecting yourself, who will?
Opportunities for CPAs
Murilo Portugal, deputy managing director of the International Monetary Fund (IMF), noted, "Robust anti-money laundering and combating the financing of terrorism regimes are an important pillar of the international regulatory supervisory system and part and parcel of the current efforts to strengthen the global financial framework." The current political and economic climate present an opportunity for CPAs to establish themselves as trusted providers of BSA and AML services. CPAs possess broad financial industry knowledge, detailed financial transaction expertise, analytic and forensic skills, seasoned business acumen, and an informed professional perspective. They are already trusted providers of AML compliance services.
In addition to CPA licensure, consideration should be given to complementary certifications. Certified Anti-Money Laundering Specialists (CAMS) promote international standards for the detection and prevention of money laundering and terrorist financing, and are dedicated to the detection and prevention of such activities around the world, including the development and implementation of AML policies and procedures. The Certified Fraud Examiner (CFE) credential is indicative of training and expertise in fraud prevention, detection, and deterrence; CFEs help protect the global economy by implementing processes to prevent fraud from occurring, as well as uncovering fraud and white-collar crimes. Certified Forensic Accountants (CrFA), for which CPA licensure is a minimum requirement, may be involved in both investigative accounting and litigation support.
By educating ourselves and our clients, and building strategic relationships with policy makers, regulators, and the judicial system, CPAs can establish a variety of engagement opportunities. With the many ongoing changes in regulations and requirements, BSA/AML advisory services are critical to clients, including small and medium-sized businesses. Independent testing of AML programs is a natural extension of a CPA' s auditing skills. And, when needed, litigation support services present another opportunity to protect clients and the public interest.
Of even greater import is the impact CPAs can have on reducing crime, combating terrorism, and supporting the healthy growth of developing nations. Louis Freeh, former director of the FBI, testified before Congress that the destruction intended in the 1993 attack on the World Trade Center was thwarted because of a shortage of funds. Criminals and terrorists need money to operate, and terrorists need funds to purchase weapons, equipment, supplies, and services. By strengthening our role in AML activities, CPAs may have a dramatic impact on the future.
Industries with Current Bank Secrecy Act Requirements
* Registered securities broker/dealers
* Investment bankers
* Futures commission merchants and introducing brokers in commodities
* Mutual funds and other investment companies
* Casinos and card clubs
* Money services businesses
* Operators of credit card systems
* Dealers in precious metals, stones, or jewels
* Loan or finance companies
* Travel agencies
* Businesses engaged in vehicle sales (cars, airplanes, and boats)
* Persons involved in real estate closings and settlements
* Other business whose cash transactions are deemed to have a high degree of usefulness in criminal, tax, or regulatory matters
Not only do CPAs have a responsibility to educate clients on BSA requirements or to refer them to a qualified attorney or other expert- they also need to protect themselves.
Cynthia L Krom, CPA, CFE, is an assistant professor of accounting at Marist College, Poughkeepsie, N.Y., and a member of the NYSSCPA 's Anti-Money Laundering and Counter Terrorist Financing Committee. Peter Romaniuk, PhD, is an assistant professor at John Jay College of Criminal Justice, the City University of New York (CUNY), New York, NY.…