The USA PATRIOT Act Renewed: Reassessing Money Laundering Risk in Finance Transactions

What should a leasing or financing business or other affected parties do? Federal authorities have repeatedly stressed that an AML/CFT program should be risk-based. Measures adopted should be proportionate to the risk that a particular type of activity could be used for money laundering. Many members of the equipment leasing industry, such as banks, already have AML/CFT programs in connection with their other lines of business, and may be quite experienced in this type of risk assessment. For others, it will require a new way of thinking. Identifying the money laundering risks in a business, product, or service is one of the most important steps in creating a good anti-money laundering compliance program.

How might a particular service or transaction be used to facilitate the movement or concealment of the proceeds of illegal activity?

Re-evaluate money laundering risks. Law enforcement officials focus increasingly on private (non-bank) operated ATMs as a tool of money laundering. Many businesses lease ATMs, but there is great variation in the extent that the leasing companies assess the risk that their equipment might be used for money laundering. Similarly, the purchase and resale of goods is often used to hide the trail of illegal money. In the 'black market peso exchange' illicit drug funds are used to purchase goods in the United States that are then exported to countries in South America and sold. The proceeds are then paid to the drug trafficking cartels. Businesses that sell large lots of used equipment, even business jets, are particularly vulnerable to being ensnared in this illegal trade. Large-scale money launderers are creative; a business must be equally creative when evaluating its money laundering risk.

Begin devising plans. Once the areas of risk are identified and assessed, a business can devise an effective AML/CFT program. The key elements of such a program are well established. They consist of knowing whom you are doing business with, knowing what to look for, developing appropriate policies and controls, training, and reporting suspicious activity.

Know your customer. Knowing with whom you are doing business is sometimes called 'know your customer,' but it is more than that. Sometimes a business may unwittingly be the 'customer' of a money launderer who may be looking for a 'deal' to hide illicit funds through an otherwise seemingly legitimate transaction. Understanding whom you are dealing with just makes good business sense. The CyberNet scam of a few years ago proved how vulnerable some equipment leasing companies were to fraud when they paid invoices for equipment from fictitious vendors. Knowing that a business partner is who he says he is and is legitimately engaged in business adds protection against both fraud and money
laundering.

Learn the trouble signs. Knowing what to look for is also critical. The most common red flags of money laundering consist of deals that do not make sound business sense or that may be inconsistent with what would be expected of someone legitimately engaged in the type of business they say they are conducting. After all, a money launderer's main business is laundering money, and he or she may well consider a money-losing business transaction as just part of the cost of doing business. William B. Wood, the U.S. Ambassador to Columbia, recently suggested that, 'As a general rule of thumb, drug traffickers are prepared to spend 20% of the value of their earnings in order to launder them.' Just as with fraud, the biggest money laundering schemes usually depend on the eagerness of someone to 'close the deal' without looking too closely at where the funds are coming from.

Develop policies and controls. The next elements of an AML/CFT program, appropriate policies, controls, and training, should be obvious, but the lack of such things, or the failure to update or follow them, is probably the single greatest failing uncovered in AML/CFT audits of banks. The only way to have an effective program is to have clear, strong policies and inculcate them into the corporate culture through ongoing training.

Report suspicious activity. The final element of an AML/CFT program, reporting suspicious transactions, may be the most important in terms of mitigating liability. Reporting suspicions should not await development of the rest of the program or the issuance of FinCEN regulations mandating it. In the current enforcement climate, companies cannot turn a blind eye. Although there may be no general requirement to report activity that is unusual and might suggest illicit money laundering or terrorist financing activity, a business would be foolish to proceed with such a transaction absent careful examination. When a customer is overly secretive, the source and pedigree of the funding uncertain, or the legitimacy of the underlying business questionable, it may be time to walk away or report the suspicions. Prosecutors have become increasingly willing to go after companies they view as having been willfully blind facilitators of money laundering activity.

Require customer compliance. Insist that customers of financial institutions demonstrate awareness of potential requirements under the Act and willingness to provide information showing that they, too, satisfy current and future regulatory requirements under AML/CFT rules or, even better, have adopted an AML/CFT program, especially when their business may also constitute a financial institution under the Act.

Conclusion

The movement of illicit money is big business. The International Monetary Fund has estimated that as much as $600 billion is laundered annually. The black market peso exchange alone is believed to be used to move more than $5 billion out of the United States each year. Money launderers are constantly searching for new routes and new schemes to place and move these funds. Any business involved in finance or leasing would be naive to believe it might not be a target for money laundering. In this era of heightened enforcement, such naivet' makes a poor defense.

Preparing for new money laundering regulations before the government issues them could minimize the potential disruption of business operations, avert slow-downs in business production or volume, and allow time for an orderly implementation of money laundering programs and training. For leasing and finance companies, and other 'financial institutions,' it is essential to reassess their ability and readiness to comply with new regulations under the Act.

Regardless of when or whether the regulations come out, every 'financial institution' should remain vigilant against becoming a conduit for money laundering schemes. It is no longer simply good risk management; it is a critical practice for business survival.

Stephen J. McHale ([email protected]) is a partner at Patton Boggs LLP in the Washington, DC, office, where he is co-chair of the Homeland Security Practice Group and a member of the Anti-Money Laundering Compliance and Aviation Teams. Before joining Patton Boggs in 2004, he had a 24-year career in the federal government, including assignments as the first Deputy Administrator of the Transportation Security Admini-stration and chief enforcement counsel for the Treasury Department, where he helped draft the original anti-terrorist financing provisions of the Patriot Act. David G. Mayer ([email protected]) is a partner in the firm's Dallas office, where he practices with the Business Group with emphasis in domestic and international asset-based financing/leasing, corporate finance, and project development and finance. His areas of focus include: energy, infrastructure, technology, and aviation.

Part Two of a Two-Part Series

Part One of this series discussed how the federal government is stepping up its aggressive enforcement of anti-money laundering/combating the financing of terrorism ('AML/CFT'). This second installment addresses action steps for leasing and financing businesses affected by the AML/CFT program.

Action Steps for Leasing Companies and Other Financial Institutions

What should a leasing or financing business or other affected parties do? Federal authorities have repeatedly stressed that an AML/CFT program should be risk-based. Measures adopted should be proportionate to the risk that a particular type of activity could be used for money laundering. Many members of the equipment leasing industry, such as banks, already have AML/CFT programs in connection with their other lines of business, and may be quite experienced in this type of risk assessment. For others, it will require a new way of thinking. Identifying the money laundering risks in a business, product, or service is one of the most important steps in creating a good anti-money laundering compliance program.

How might a particular service or transaction be used to facilitate the movement or concealment of the proceeds of illegal activity?

Re-evaluate money laundering risks. Law enforcement officials focus increasingly on private (non-bank) operated ATMs as a tool of money laundering. Many businesses lease ATMs, but there is great variation in the extent that the leasing companies assess the risk that their equipment might be used for money laundering. Similarly, the purchase and resale of goods is often used to hide the trail of illegal money. In the 'black market peso exchange' illicit drug funds are used to purchase goods in the United States that are then exported to countries in South America and sold. The proceeds are then paid to the drug trafficking cartels. Businesses that sell large lots of used equipment, even business jets, are particularly vulnerable to being ensnared in this illegal trade. Large-scale money launderers are creative; a business must be equally creative when evaluating its money laundering risk.

Begin devising plans. Once the areas of risk are identified and assessed, a business can devise an effective AML/CFT program. The key elements of such a program are well established. They consist of knowing whom you are doing business with, knowing what to look for, developing appropriate policies and controls, training, and reporting suspicious activity.

Know your customer. Knowing with whom you are doing business is sometimes called 'know your customer,' but it is more than that. Sometimes a business may unwittingly be the 'customer' of a money launderer who may be looking for a 'deal' to hide illicit funds through an otherwise seemingly legitimate transaction. Understanding whom you are dealing with just makes good business sense. The CyberNet scam of a few years ago proved how vulnerable some equipment leasing companies were to fraud when they paid invoices for equipment from fictitious vendors. Knowing that a business partner is who he says he is and is legitimately engaged in business adds protection against both fraud and money
laundering.

Learn the trouble signs. Knowing what to look for is also critical. The most common red flags of money laundering consist of deals that do not make sound business sense or that may be inconsistent with what would be expected of someone legitimately engaged in the type of business they say they are conducting. After all, a money launderer's main business is laundering money, and he or she may well consider a money-losing business transaction as just part of the cost of doing business. William B. Wood, the U.S. Ambassador to Columbia, recently suggested that, 'As a general rule of thumb, drug traffickers are prepared to spend 20% of the value of their earnings in order to launder them.' Just as with fraud, the biggest money laundering schemes usually depend on the eagerness of someone to 'close the deal' without looking too closely at where the funds are coming from.

Develop policies and controls. The next elements of an AML/CFT program, appropriate policies, controls, and training, should be obvious, but the lack of such things, or the failure to update or follow them, is probably the single greatest failing uncovered in AML/CFT audits of banks. The only way to have an effective program is to have clear, strong policies and inculcate them into the corporate culture through ongoing training.

Report suspicious activity. The final element of an AML/CFT program, reporting suspicious transactions, may be the most important in terms of mitigating liability. Reporting suspicions should not await development of the rest of the program or the issuance of FinCEN regulations mandating it. In the current enforcement climate, companies cannot turn a blind eye. Although there may be no general requirement to report activity that is unusual and might suggest illicit money laundering or terrorist financing activity, a business would be foolish to proceed with such a transaction absent careful examination. When a customer is overly secretive, the source and pedigree of the funding uncertain, or the legitimacy of the underlying business questionable, it may be time to walk away or report the suspicions. Prosecutors have become increasingly willing to go after companies they view as having been willfully blind facilitators of money laundering activity.

Require customer compliance. Insist that customers of financial institutions demonstrate awareness of potential requirements under the Act and willingness to provide information showing that they, too, satisfy current and future regulatory requirements under AML/CFT rules or, even better, have adopted an AML/CFT program, especially when their business may also constitute a financial institution under the Act.

Conclusion

The movement of illicit money is big business. The International Monetary Fund has estimated that as much as $600 billion is laundered annually. The black market peso exchange alone is believed to be used to move more than $5 billion out of the United States each year. Money launderers are constantly searching for new routes and new schemes to place and move these funds. Any business involved in finance or leasing would be naive to believe it might not be a target for money laundering. In this era of heightened enforcement, such naivet' makes a poor defense.

Preparing for new money laundering regulations before the government issues them could minimize the potential disruption of business operations, avert slow-downs in business production or volume, and allow time for an orderly implementation of money laundering programs and training. For leasing and finance companies, and other 'financial institutions,' it is essential to reassess their ability and readiness to comply with new regulations under the Act.

Regardless of when or whether the regulations come out, every 'financial institution' should remain vigilant against becoming a conduit for money laundering schemes. It is no longer simply good risk management; it is a critical practice for business survival.

Stephen J. McHale ([email protected]) is a partner at Patton Boggs LLP in the Washington, DC, office, where he is co-chair of the Homeland Security Practice Group and a member of the Anti-Money Laundering Compliance and Aviation Teams. Before joining Patton Boggs in 2004, he had a 24-year career in the federal government, including assignments as the first Deputy Administrator of the Transportation Security Admini-stration and chief enforcement counsel for the Treasury Department, where he helped draft the original anti-terrorist financing provisions of the Patriot Act. David G. Mayer ([email protected]) is a partner in the firm's Dallas office, where he practices with the Business Group with emphasis in domestic and international asset-based financing/leasing, corporate finance, and project development and finance. His areas of focus include: energy, infrastructure, technology, and aviation.