AML Red Flags
Financial institutions have to take steps to prevent their customers from laundering money. Anti-money laundering laws penalize those that do not take appropriate steps, and define what measures financial institutions are expected to take to keep it from happening. One of those laws is the Bank Secrecy Act, or BSA. Key provisions in the BSA require financial institutions to retain financial records and to disclose them to law enforcement agencies if the records show “suspicious activity.”
But what amounts to “suspicious activity” that triggers the legal obligation of disclosure?
The corporate compliance and anti-money laundering defense lawyers at Oberheiden P.C. have represented numerous financial institutions in the past. During that time, our lawyers have isolated dozens of courses of conduct that should raise red flags at your institution and trigger further scrutiny. Taking these steps can insulate your bank, credit union, or other covered entity from the significant legal liability that can come with allowing money laundering to happen on your watch.
1. Red Flags Based on Cash Transactions
While innocent people use cash for the convenience of the transaction, it is also a common choice for bad actors because cash is difficult to trace. Some red flags for cash transactions include:
- Deposits or withdrawals that seem designed to come in below reporting thresholds
- Cash gets deposited into an account and then transferred into an overseas account
- An extremely high amount of an account’s transactions are in cash
These are all red flags. It does not necessarily mean that money is being laundered; just that further investigation is worthwhile.
It is important to remember that it is not your job, as the financial institution, to put together a case of money laundering. Your job is to note strange activity, conduct an investigation to see if there is clearly a legitimate business going on, and, if there is not, to report the conduct as suspicious activity for law enforcement to investigate more fully.
2. Red Flags Based on Credit Transactions
Just because an account is using credit or a card to conduct financial transactions does not mean that the transactions are not laundering money. Some red flags to note are:
- Multiple credit transactions coming into an account and then the aggregate amount getting transferred out of it, especially if it goes overseas
- Transactions are being conducted with international accounts, particularly ones in countries that are high-risk or that are known to be tax havens
- Third-party service providers are involved
- Large payments are made against a loan obligation from an unknown source of funds
3. Red Flags from Inconsistent Financial Activities
Inconsistent activity can raise red flags of money laundering as well. Activity can be inconsistent in two ways:
- The financial activity does not match the customer’s intended use of the account, or
- It changes drastically from prior use.
Examples of the first type of inconsistent behavior include:
- Far more assets passing through the account than anticipated from the customer’s line of business or predicted use
- Transactions that do not seem to align with what the customer said their business was
Examples of the second type of behavior include:
- A sudden and significant increase in the number of transactions made or in the amount of money involved
- Significant deposits that do not comply with prior patters of transactions, or that do not appear to be connected to the customer’s line of business
4. Red Flags from Customer Behavior
The customer’s behavior can also raise red flags about their potential intent to launder money. Some common examples are:
- Asking lots of questions about your financial institution’s reporting requirements in the account opening process
- A reluctance to provide information when opening an account
- Providing suspicious information about their business that could not be verified
- Attempts to persuade, or potentially even to bribe, an employee to not make a required report
Of course, many of these suspicious quirks are things that will only be caught if your employees are trained to look for them when walking a potential customer through the account creation process.
5. Red Flags from Your Own Employee’s Conduct
Laundering money is not always done from the outside of a financial institution. Some of the most lucrative and brazen schemes are done from the inside. Some red flags that one or more of your employees is laundering money or helping a customer to launder money are:
- Frequent violations of company policy
- Showing more attention to certain customers than to others
- Lifting a hold that had been imposed on an account for suspicious activity, or advocating for it to be lifted without strong support for the decision
- Living a lifestyle that is beyond their salary and that is not due to another known source of funding, like a spouse’s income
The Reporting Obligations of Financial Institutions
Red flags are just that: Red flags. They are a sign that suspicious activity could be afoot, but not strong proof of it. Financial institutions that notice one or more of these red flags should conduct a further inquiry to see if there is a legitimate and legal explanation. This inquiry process should follow the institution’s policy for this situation.
If the outcome of the internal investigation is that the activity is suspicious and needs to be reported, financial institutions should submit a BSA Suspicious Activity Report (BSAR) to the Financial Crimes Enforcement Network (FinCEN) bureau at the Department of the Treasury within 30 days of the activity being discovered. BSAR submissions are done through FinCEN’s BSAR E-Filing System.
Financial institutions are shielded from civil liability to the person being reported.
Penalties for Allowing Money Laundering
Financial institutions that fail to uphold their legal obligations to prevent money laundering can face civil and even criminal sanctions for their failure, especially if there is a pattern or practice of shirking their duties. These penalties vary widely, and are largely based on the severity of the failure and the level of intent to not comply with the legal requirements.
Many violations are covered by 31 C.F.R. § 1010.821, which imposes penalties of as little as $1,253 for negligent and generic violations of the Bank Secrecy Act, all the way up to over $1.5 million for not doing due diligence on shell companies.
Four Frequently Asked Questions About Anti-Money Laundering Laws and Oberheiden P.C.
What Federal Laws Cover Money Laundering?
Much of federal anti-money laundering law stems from the Bank Secrecy Act (BSA), also known as the Currency and Foreign Transactions Reporting Act of 1970. The BSA gave lots of authority to the executive branch to promulgate regulations to better enforce anti-money laundering laws, and those regulations have expanded the reach of the BSA into unforeseen fields.
However, the BSA is not the only federal law that covers money laundering. Others include the:
- Anti-Drug Abuse Act
- Money Laundering Control Act
- Corporate Transparency Act
- Intelligence Reform and Terrorism Prevention Act
- PATRIOT Act
- Money Laundering and Financial Crimes Strategy Act
- Money Laundering Suppression Act
- Annunzio-Wylie Anti-Money Laundering Act
As their names imply, many of these laws focus on laundering money for the benefit of terrorists. Violating these laws come with extremely steep penalties.
Which Financial Institutions Have Reporting Obligations Under Anti-Money Laundering Laws?
Many of these anti-money laundering laws require “financial institutions” to disclose information to law enforcement when it indicates potentially illegal activity. The phrase “financial institution” is often defined very broadly. For example, the Bank Secrecy Act, in 31 U.S.C. § 5312(a)(2), lists 26 types of entities that fall within the definition of a “financial institution,” including:
- Banks insured by the Federal Deposit Insurance Corporation (FDIC)
- Commercial banks or trust companies
- Credit unions
- Branches of foreign banks that operate within the United States
- Insurance companies
- Loan companies
- Broker-dealers that are regulated by the Securities and Exchange Commission (SEC)
- Travel agencies
Wouldn’t an Investigation Violate My Customers’ Fourth Amendment Rights?
No, private entities, like businesses, banks, credit unions, and other non-governmental financial institutions, cannot violate a person’s Fourth Amendment rights because those rights only protect against government intrusions.
Additionally, the Supreme Court of the United States, in the 1974 case California Bankers Association v. Shultz, expressly stated that the Bank Secrecy Act’s requirements that financial institutions keep records of financial transactions and to disclose them to law enforcement when they revealed suspicious activity did not violate the Fourth Amendment because they did not amount to a “search” or a “seizure.”
Why Doesn’t Oberheiden P.C. Call Itself the Best Anti-Money Laundering Defense and Compliance Law Firm?
Because we like to let our experience and our track record of success speak for themselves.
Our attorneys are all senior-level lawyers with a high level of experience in corporate compliance, white collar crime defense, and business litigation. They have all represented numerous financial institutions in anti-money laundering defense and compliance.
That experience and tenacity both inside and outside of the courtroom has led to numerous success stories. In many cases, we have been called upon to ensure that a financial institution was adequately complying with the numerous anti-money laundering laws in the United States and prevent allegations of wrongdoing from ever being levied. In others, those allegations were in an advanced stage but, with our legal representation, we were able to drastically mitigate the liability that our client faced.
Contact the Anti-Money Laundering and Compliance Lawyers at Oberheiden P.C.
Avoiding these harsh penalties requires strict compliance with the reporting regulations in the diverse set of U.S. anti-money laundering laws. Doing that requires an understanding of the types of conduct that arise to “suspicious activity.”
The anti-money laundering and corporate lawyers at Oberheiden P.C. can help you come into compliance with federal financial and white collar crime laws in ways that insulate your financial institution from legal liability while not overly burdening its efficiency. Contact them online or call their law office at (888) 680-1745 to get started.