Money laundering refers to a financial transaction scheme that aims to conceal the identity, source, and destination of illicitly-obtained money. Given the many ways money laundering can be achieved, the regulation of money laundering by the federal government includes a complex web of regulations trying to target money laundering directly and indirectly through criminal punishment and reporting requirements. Money Laundering also is regulated by the Financial Action Task Force (FATF) on the international level and through state level legislation such as the Florida Control of Money Laundering and Terrorist Financing in Financial Institutions Act.
Money Laundering Generally
The money laundering process can be broken down into three stages.
- First, the illegal activity that garners the money places it in the launderer’s hands.
- Second, the launderer passes the money through a complex scheme of transactions to obscure who initially received the money from the criminal enterprise.
- Third, the scheme returns the money to the launderer in an obscure and indirect way.
Tax evasion and false accounting practices constitute common types of money laundering. Often, criminals achieve these objectives through the use of shell companies, holding companies, and offshore accounts. A shell company is an incorporated company that possesses no significant assets and does not perform any significant operations. To launder money, the shell company purports to perform some service that would reasonably require its customers to often pay with cash. Cash transactions increase the anonymity of customers and therefore decrease the government’s ability to trace the initial recipient of the dirty money. Money launderers commonly select beauty salons and plumbing services as shell companies. The launderer then deposits the money with the shell company, which deposits it into its accounts. The company then creates fake invoices and receipts to account for the cash. Such transactions create the appearance of propriety and clean money. The shell company can then make withdrawals and either return the money to the initial criminal or pass the money on to further shell companies before returning it to further cloud who first deposited the money.
Criminals often use offshore accounts to hide money because they offer greater privacy, less regulation, and reduced taxation. Because the U.S. government has no authority to require foreign banks to report the interest earned by U.S. citizens with foreign bank accounts, the criminal can keep the account abroad, fail to report the account’s existence, and receive the interest without paying personal income taxes on it in the U.S.
U.S. Federal Statutory Scheme
To combat this criminal activity, Congress has passed numerous acts over the years to criminalize money laundering directly. The Money Laundering Control Act of 1986 is the primary act that created an offense for money laundering. Under 18 U.S.C. § 1956, 1957, it is a federal crime to knowingly use or attempt to conduct a financial transaction that involves illicit funds whether in the financing, transportation, or reporting of the transaction. The Act also makes it a crime to partake in a financial transaction that would knowingly aid in or involve property derived from specified unlawful activity under § 1956(c)(7) such as types of fraud or the sale of controlled substances. The Act is extremely broad and tries to encompass the many ways in which money can be aiding illegal activities.
Since the Money Laundering Control Act, Congress has expanded the scope of money laundering and created related offenses to cover problems the original acts did not reach. Congress added § 1960 in 1992 that made it illegal to have an unlicensed money transmitting business which attempted to reduce the illegal money flowing to offshore accounts. In 2001, Congress passed the USA Patriot Act that created 31 U.S. § 5332 which expanded the outlawed transfer of large quantities of concealed currencies.
In a pair of 2008 decisions, the U.S. Supreme Court clarified the scope of money laundering under federal statutes. Cuellar v. United States, 553 U.S. 550 (2008), determined that to prove money laundering, prosecutors must show that concealment of money must be for the purpose of concealing ownership, source, or control rather than for some other purpose. In United States v. Santos, 553 U.S. 507 (2008), the Court held that the word “proceeds” in the federal laundering statute referred only to criminal profits and excluded criminal receipts. Thus, the Court reversed a pair of convictions based on money laundering involving the payout of winnings in an illegal gambling ring.
The Anti-Money Laundering Act of 2020 (AMLA) most recently made some fundamental changes to the regulation of money laundering. Inside the AMLA is the Corporate Transparency Act that requires the beneficial owners of specific entities to be reported to the Financial Crimes Enforcement Network (FinCEN). The AMLA modernizes the Bank Secrecy Act and expands it to include preventing harm to the financial system from illicit financial transactions. The AMLA also adds a key provision giving the Attorney General and the Secretary of the Treasury the ability to subpoena information from foreign banks if they have a correspondent account in the U.S.
[Last updated in October of 2023 by the Wex Definitions Team]
