Is the Administration Shifting Priorities from Terrorism Financing to Money Laundering?

By Victor Comras

Last week the Bush Administration issued its new strategy for combating money laundering. Crafted by the Department of the Treasury, along with Justice, State, Homeland Security, the Federal Reserve, Comptroller of the Currency, and the Federal Deposit Insurance Corporation, it sets forth a new Administration focus on money laundering as a direct threat to our national and economic security. Previous AML strategies had co-mingled, and encompassed, combating both money laundering and terrorism financing. But, this strategy tackles money laundering independently. As it contains no call for additional resources, it may portend a shift in resources from terrorism financing investigations to new AML priorities. This could have a negative impact on the Administration’s ability to effectively address new and emerging terrorism financing schemes and mechanisms.

The new AML strategy places increased emphasis on the international aspects of money laundering. It is now clear that foreign banks are being used regularly to introduce illegally obtained proceeds into US banks and other depository institutions. This includes using “correspondent,” “payable through,” and “nested” accounts to conceal the customer’s true identity. Once such funds get into a depository institution, they can be easily moved or disguised through commingling with legitimate funds. This scenario often begins with cash being smuggled out of the US in bulk, often via our Southwest border. Once outside the United States, the funds are routed back into the US banking system via the foreign banks. Other mechanisms, such as the Black Market Peso Exchange and the use of illicit funds to finance ostensibly legitimate exports, are also increasingly being used to launder drug and other crime related funds.

To be effective, the new strategy must engender greater international interest and support for US AML enforcement activities. Other countries need to be convinced to adopt similar or complementary regulatory mechanism to make it just as difficult to introduce illicitly obtained funds in one country as in another. And there must also be increased application and enforcement of the international sanctions against banks and other financial institutions that fail to comply with these regulatory standards.

The new AML strategy includes a number of measures that can be used to encourage,
or to coerce, greater international cooperation on combating money laundering. This includes enhanced due diligence requirements, the use of Suspicious Activity Reports (SARs) and other protective procedures outlined in Section 311 of the Patriot Act when it comes to transactions involving banking institutions in weak regulatory, or suspect areas. It also includes increased use of asset seizures in appropriate cases.

Section 312 of the Patriot Act already imposes specific due diligence requirements with regard to correspondent accounts maintained in US banks by foreign banks for the benefit of non US persons. The Treasury Department has been directed to identify specific problem areas and to issue “Geographic Targeting Orders” (GTOs) which would enable regulators to identify and attack geographically specific money laundering activity. FinCen has also been charged with developing new mechanisms to improve information sharing between US and foreign banks, and to provide actionable intelligence, alerts, and advisories to US banks when it comes to questionable accounts or banking activities. In addition, OFAC is to work on measures to assure improved oversight of transactions moving through the automated clearing house community. Such transactions are to contain adequate information to identify the name and location of the actual originators and recipients.

Trade based money laundering schemes remain among the most complex money laundering methods to identify and deal with. These schemes often include use of the Black Market Peso Exchange (BMPE), manipulating trade documents, and using criminal proceeds to buy gems or precious metals. Trade-based schemes are also used by informal value transfer systems to settle accounts. The approach here is to expand the establishment and use of Trade Transparency Units (TTUs) that work in tandem with cooperating units in foreign countries to review the bona-fides of such trade transactions. ICE will also expand its use of covert infiltration tactics, particularly with respect to Drug trafficking, to combat such illicit activities, Treasury and ICE also plan to expand their investigative activities with respect to the operation of Free Trade Zones (FTZ) that are increasingly being abused for trade based money laundering.

While welcoming the new AML strategy and the benchmarks and priorities it lays out to combat money laundering, one must sound a word of caution when it comes to the possibility of drawing down resources now devoted to terrorism financing. Many of the tactics used to detect, trace, follow, and/or prevent terrorism financing are distinct from the measures proposed for dealing with money laundering risks. And, there has been no let-up in international terrorism. Terrorist groups remain very active in soliciting and raising funds for their activities. These groups are constantly searching for new opportunities for funds, and would quickly take advantage of any perceived new regulatory laxity or gap in controls. So, we need to insure that there are adequate resources available to US regulatory, investigative and enforcement agencies to do what is necessary to combat both money laundering and terrorism financing.

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