Money laundering. It’s the stuff mob movies are made of. Here’s how it works: An individual or group engages in a money-making illegal activity and hides what they’re doing by operating a supposedly clean business. This way, the illicitly-obtained money flows through the otherwise legitimate operation, making the business seem clean.
Any individual or organization can launder money—particularly terrorist groups through market manipulation—and that’s why there are anti-money laundering laws, regulations, and protocols in place in the United States. In this article, we review the federal government’s anti-money laundering laws and exactly why they might matter to you.
What Is Anti-Money Laundering (AML)?
Anti-money laundering refers to the United States laws and protocols that prevent individuals or groups from making illegally-gained money—typically more than $10,000—appear legal. Money laundering takes place when individuals or groups funnel illicit funds through “the stream of legitimate commerce and finance,” according to the Government Accountability Office (GAO). The money that is illegally gained is often referred to as “dirty money.” Illegal trade, drug trafficking, and human trafficking are common sources of dirty money.
Criminals and other nefarious actors use means other than seemingly legitimate businesses to launder money, too. These methods include using foreign bank accounts, making a series of small deposits rather than one large one, and stashing the money in investment accounts.
Money laundering isn’t a small problem. The United Nations Office on Drugs and Crime estimates that criminals launder between $800 billion and $2 trillion annually; that’s equal to 2% to 5% of global GDP.
How Anti-Money Laundering (AML) Works
Known as anti-money laundering (AML), the federal government’s rules for combating money laundering consist of a series of acts dating back to the Bank Secrecy Act (BSA) of 1970.
The Bank Secrecy Act set up the initial systems and precedent that private individuals, banks, and other financial institutions are now required to follow in an effort to better monitor and guard against money laundering. The act requires banks to report financial transactions greater than $10,000 to the government, and keep track of suspicious activity that might indicate money laundering.
Since its inception, the BSA has become one of the most essential tools in combating money laundering.
Several pieces of legislation followed the BSA, strengthening anti-money laundering laws. Here’s a sampling of the important acts, along with the key considerations from each:
- Money Laundering Control Act of 1986: Made money laundering a federal crime. It also made it easier to enforce the BSA, requiring banks to comply with specific bookkeeping and reporting practices.
- Anti-Drug Abuse Act of 1988: Classified businesses such as car dealerships and certain real estate personnel as financial institutions, ultimately holding them to strict reporting standards on large transactions.
- Money Laundering and Financial Crimes Strategy Act of 1998: Created two specific task forces as part of a developed National Money Laundering Strategy. This helped focus and bolster law enforcement efforts in geographic areas, industries, and groupings of industries and financial institutions where money laundering tends to take place.
- Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001: Enacted as part of the Patriot Act, it focused on establishing and strengthening protocols in areas such as customer identification, surveillance, and information sharing as a way to identify money laundering as an indicator of potential terrorist activity.
Types of Money Laundering
In addition to traditional types of money laundering, such as using a shell company or seemingly legitimate business to disguise illegal funds, money launderers employ other strategies, including more modern tactics. The U.S. State Department identifies three key methods through which criminals, including terrorists, launder money:
- Trade-based money laundering (TBML): Criminals will often use informal systems of trade, such as hawala, to launder money. The U.S. Treasury explains that hawala moves money from party to party outside of the traditional banking system, and it originated from South Asia prior to the establishment of Western banking. With hawala, if you want to send money overseas, you will use an intermediary who will usually charge less than a bank to facilitate the transaction. The Treasury Department uses an example of a Pakistani taxi driver in the U.S. using another Pakistani taxi driver as an intermediary to move money to a family member in Pakistan.
- Mobile payment technology: According to the Department of State, cash transactions between parties via mobile payment apps can take place with the oversight of formal financial institutions. This helps illicit transactions fly under the radar. These apps have exploded in popularity across the globe, including regions such as Africa and the Middle East, creating a torrent of activity that might serve to hide fraud.
- Virtual currencies: Countries around the world, including the U.S., continue to better monitor the movement of virtual currencies, such as Bitcoin. In effect, nations believe it’s important to treat virtual-currency transactions the same way as traditional monetary transactions in terms of monitoring, reporting requirements, and other procedural oversight.
What It Means for Individual Investors
As an investor, you’re unlikely to be significantly impacted by anti-money laundering laws, as long as everything you’re doing sits above board.
Know your customer or know your client (KYC) rules—established in 2014—require firms to collect data from consumers at the account creation step in order to verify the client’s identity. These rules also require firms to collect information from customers that will help the firm provide better recommendations for financial products and services. You will generally run into these identity verifying and information gathering protocols when you open a new bank or investment account.
At the same time, you will come up against anti-money laundering laws when you initiate an account at a bank or investment institution. Most agreements you sign upon opening an account contain a section where you agree to abide by and allow banks to follow anti-money laundering laws. For example, if you conduct a transaction greater than $10,000, the institution will report it to the federal government as a means of prevention.
- Money laundering is a big problem. The UN estimates that between 2% and 5% of global GDP, or between $800 billion and $2 trillion, is laundered every year.
- Money laundering most often refers to disguising funds obtained via illegal activity by funneling the money through a legitimate business.
- Other forms of money laundering exist, such as hiding the money in investment accounts, or structuring deposits, withdrawals, and transfers in a way that attempts to hide the illegal activity.
- Banks, investment companies, and other financial institutions must comply with federal laws, regulations, and guidelines on the monitoring and reporting of financial transactions. This allows these entities to sniff out illegal activity amid what’s legitimate.