Money Service Business Cases Show Difficulty of Stopping Funds Flows

By Andrew Cochran

For years, U.S. and state financial regulators and law enforcement have recognized the unique difficulties in trying to prevent money laundering and terrorist financing through money service businesses (a.k.a. MSBs or "hawalas"). Guidance implementing Patriot Act mandates for Bank Secrecy Act compliance was not issued until April 2005, over two years after passage of the Act. The next year, in January 2006, the U.S. Treasury Department released the first "U.S. Money Laundering Threat Assessment." According to the report, "FBI field offices consistently identified MSBs (money service businesses) as the third-most utilized money laundering method that they encounter, after formal banking systems and cash businesses, and particularly pointed to money remitters as a threat...Despite repeated outreach efforts to the sector, only a small fraction of the total MSBs - around 23,000 - have registered with the federal government... With respect to destinations, most federal law enforcement agencies identified Mexico as the primary destination for suspicious funds sent through MSBs." Trying to ease the compliance process, the Financial Crimes Enforcement Network (FinCEN) set up a separate website to enable MSB's to access the forms and regulations. Outreach materials are available in seven languages from that website.

Still, the difficulties remain. As of December 2007, just over 38,300 MSBs were registered, still "a small fraction" of the total. This month, two new enforcement cases indicate the continuing difficulties. Sigue Corp., a California-based MSB wiring cash to Mexico and other countries, faces a record fine of up to $25 million for failure to maintain an adequate anti-money laundering compliance program. A California man pleaded guilty to sending almost $5 million through an illegal MSB to Syria through intermediary countries including Lebanon, the United Arab Emirates, China, France, Switzerland, Germany, and South Korea. He ran the MSB for over five years, maintaining funds at five local banks in San Francisco, and wiring the money to over 50 recipients in 22 countries, who then sent the funds through to Syria. All that activity was done under the nose of highly trained, dedicated personnel at those banks. At least he was finally caught and prosecuted.

After the September 11 attacks led to the Patriot Act's expansion of Bank Secrecy Act mandates, we thought we had a better handle on terrorist financing through various methods. But the two MSB cases, plus other cases on the continued use of non-traditional methods such as the smuggling of cigarettes, baby formula, and even used cars, show us how difficult it still is to break the informal networks through which terrorist funds often flow.

TrackBack