Third-Party Money Launderers<br><i><font size="-1">The FBI Takes a Second Look</i></font>

This past June, a federal jury convicted Cleveland attorney Matthew King of money laundering after he accepted $20,000 from an informant posing as a cocaine dealer. He deposited the funds into a client trust account and, the following month, returned a $2,000 check to the putative drug dealer. King also advised the informant on how to evade law enforcement by creating an S corporation that, under the informant's control, took the illicit cash and claimed to use it for business expenses, including cars and real estate. He even arranged for shareholder certificates and board-meeting minutes to make the company appear legitimate. Finally, King advised the informant to limit individual deposits to around $4,000, and to collaborate with a particular accountant (whom he characterized as “loosely moral”), to avoid attracting attention from the authorities. United States v. King, No. 1:15CR381 (N.D. Ohio 2016), Government's Trial Brief.

This case throws into relief the havoc that an unscrupulous lawyer can wreak. Because attorneys routinely form and manage corporations and trusts, they are in an ideal position to disguise funds. They can establish shell companies (which exist only on paper and often lack any record of ownership or control), can tap black market professional networks for nominee owners and directors (whose job is simply to appear legitimate), and can point clients to smaller banks or banking systems (with weaker anti-money laundering (AML) controls). They also offer the benefits of claims of attorney-client confidentiality as well as the trust associated with the legal profession.

Of course, King is the rare exception rather than the rule. But the fact remains that services provided by lawyers can be ripe for misuse and, in the current enforcement environment, will undoubtedly be subject to heightened scrutiny. Indeed, The Financial Action Task Force's (FATF) latest review of the United States strongly recommends subjecting lawyers to customer due diligence and suspicious-activity-reporting filing requirements similar to those already required in Britain, Hong Kong and many other jurisdictions. See, FATF, Anti-Money Laundering, infra.

Accountants

In 2014, a federal court convicted Matthew Ware, an Atlanta-area accountant and civic leader, for his role in money laundering. He accepted bags of cash — as much $60,000 at a time — from a barbecue restaurant that served as a front for cocaine traffickers. Ware then lent the money to his clients, who repaid the restaurant's owners. Although he claimed to have no knowledge of this criminal activity, the accountant ignored several money-laundering red flags and failed to report cash payments of $10,000 or more. See, U.S. Department of Justice (DOJ), Press Release (Dec. 24, 2013).

Ware's case is a cautionary tale: Accountants are particularly vulnerable to being used, at times unknowingly, as conduits for money laundering. Common typologies include requests by clients to wire money to and from bank accounts, deposit cash on their behalf in amounts just below the reporting requirement, or issue checks to them or their vendors in return for cash. To avoid attention from the DOJ, accountants would do well to familiarize themselves with money-laundering red flags and steer well clear of questionable activity.

Financial Advisers

Like accountants, investment professionals can easily find themselves complicit in third-party money laundering. Financial advisers, after all, frequently provide services that can be used to conceal the origin of money, such as purchasing securities and other investment assets on their clients' behalf. Even hedge funds, which can offer secrecy, involve large sums and the use of offshore accounts, making them increasingly attractive vehicles for hiding ill-gotten gains.

Notably, Eric St-Cyr and Joshua Vandyk, investment advisers for a firm in the Cayman Islands, were recently convicted, as part of a government sting, in the U.S. District Court in the Eastern District of Virginia for a money-laundering conspiracy. The pair helped undercover agents conceal and disguise money they believed to be the proceeds of bank fraud by instructing them to create offshore foundations used to invest the funds, which the defendants would, upon request, liquidate, repatriating the funds. U.S. Department of Justice, Press Release, (Sept. 5, 2014).

Investment advisers like St-Cyr and Vandyk are particularly well placed to misuse their position within the financial system to launder money because, under current law, such advisers provide many financial services without having to comply with AML requirements under the Bank Secrecy Act (BSA).

This may soon change. The U.S. Financial Crimes Enforcement Network (FinCEN) recently proposed expanding the BSA's definition of financial institutions to include investment advisers, which would require them to implement AML programs and file SARs for suspicious activities involving at least $5,000. See 80 Fed. Reg. 52680-52701 (Sept. 1, 2015). Assuming that the new administration does not reverse course, the proposed rule reflects the growing scrutiny of investment advisers as potential third-party facilitators of financial crime.

Real Estate Professionals

Recent exposés by both The New York Times and Transparency International have spotlighted the role of high-value real estate in money laundering. Cash real-estate transactions are booming in Manhattan, Miami and elsewhere, and it is no secret that they are frequently funded with ill-gotten gains. Purchasers use shell companies registered in the names of accountants, lawyers and relatives, along with trusts and other opaque structures, to conceal true owners of property. When the clandestine owners sell the property, it becomes difficult, even impossible, to connect the funds to the beneficial owners or to criminal activity.

In 2016, FinCEN responded by issuing geographic targeting orders (GTOs) for six major cities, requiring title insurance companies to identify the natural persons behind shell companies used to pay cash in high-end real estate transactions. See, “Fin-CEN Expands Reach of Real Estate 'Geographic Targeting Orders' Beyond Manhattan and Miami.” Although real estate professionals are not subject to the BSA or the GTOs, FinCEN's action puts new pressure on them to pay attention to ways in which money launderers and other wrongdoers can potentially exploit their services. Those working in the industry would be well advised to follow the advice of the National Association of Realtors, which encourages its members to familiarize themselves with money-laundering red flags. See, “Anti-Money Laundering Guidelines for Real Estate Professionals.” Specifically, realtors are urged to consider the source of funds in real estate transactions, and whether funds originate from jurisdictions with weak AML controls or a history of terrorist financing. They are also warned to be wary of transactions in which the title will be held by a corporation that obscures the buyer's identity, or if the buyer is a high-ranking foreign official or has connections to one, among other warning signs.

The Way Forward

With the steady stream of global scandals and leaks, from 1Malaysia Development Berhad (1MDB) and the Panama Papers to FIFA (Fédération Internationale de Football Association) and Lava Jato, there is less tolerance than ever for those who profit from the movement of illicit funds — including for those third-party professionals who serve as their conduits. And with the FBI targeting money-laundering facilitators — a trend certain only to grow — non-financial businesses and professions would be prudent to respond proactively. This means taking a page from the compliance programs of historically regulated financial institutions, such as adopting risk-based approaches for handling clients and their activities.

Third-party professionals, in particular, should consider developing processes for identifying customers and collecting due diligence, understanding what kinds of client conduct are inherently high risk from a financial crime compliance perspective, and monitoring unusual or suspicious transactions. And this entails more than just adopting written policies and procedures. Individuals and organizations should strive to foster a culture of compliance; although an admittedly nebulous concept, this speaks to whether an organization's senior leaders are engaged in financial crime compliance, resources are available for compliance, information is shared both internally and externally, and — perhaps most vitally — business demands do not overshadow ethical and legal obligations. See, Daniel R. Alonso, “Loud and Clear: FinCEN Demands a Culture of Compliance,” Business Crimes Bulletin, Oct. 2014.

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Justin du Rivage is a Consultant at the global consulting firm Exiger, where he focuses on anti-money laundering matters. He is based in London.

Each year, the U.S. government secures more than 1,200 money-laundering convictions. Now, the Federal Bureau of Investigation (FBI), at least, is setting its sights with renewed vigor on those who help criminal organizations and terrorists conceal billions in illicit funds. Last October, the FBI announced that it would prioritize money-laundering investigations of “third-party facilitators,” such as attorneys, accountants, investment managers, trust companies and real estate professionals. See, “Combating the Growing Money Laundering Threat,” (Oct. 24, 2016). This comes amidst growing international pressure for countries to close regulatory gaps in anti-money laundering (AML) and counter-terrorist financing rules. The Financial Action Task Force (FATF), for example, recently urged the United States to improve its regulation of designated non-financial businesses and professions, as well as of shell companies. FATF, Anti-Money Laundering and Counter-Terrorist Financing Measures, United States (Dec. 1, 2016).

FATF's and the FBI's initiative should serve as a warning sign: The authorities have diminishing patience for professionals and other third-party facilitators who act as conduits for money laundering and financial crime, more generally. Recent prosecutions in this area illustrate some of the common typologies by which such organizations and individuals can use their positions and services to conceal and launder illicit funds.

Lawyers

This past June, a federal jury convicted Cleveland attorney Matthew King of money laundering after he accepted $20,000 from an informant posing as a cocaine dealer. He deposited the funds into a client trust account and, the following month, returned a $2,000 check to the putative drug dealer. King also advised the informant on how to evade law enforcement by creating an S corporation that, under the informant's control, took the illicit cash and claimed to use it for business expenses, including cars and real estate. He even arranged for shareholder certificates and board-meeting minutes to make the company appear legitimate. Finally, King advised the informant to limit individual deposits to around $4,000, and to collaborate with a particular accountant (whom he characterized as “loosely moral”), to avoid attracting attention from the authorities. United States v. King, No. 1:15CR381 (N.D. Ohio 2016), Government's Trial Brief.

This case throws into relief the havoc that an unscrupulous lawyer can wreak. Because attorneys routinely form and manage corporations and trusts, they are in an ideal position to disguise funds. They can establish shell companies (which exist only on paper and often lack any record of ownership or control), can tap black market professional networks for nominee owners and directors (whose job is simply to appear legitimate), and can point clients to smaller banks or banking systems (with weaker anti-money laundering (AML) controls). They also offer the benefits of claims of attorney-client confidentiality as well as the trust associated with the legal profession.

Of course, King is the rare exception rather than the rule. But the fact remains that services provided by lawyers can be ripe for misuse and, in the current enforcement environment, will undoubtedly be subject to heightened scrutiny. Indeed, The Financial Action Task Force's (FATF) latest review of the United States strongly recommends subjecting lawyers to customer due diligence and suspicious-activity-reporting filing requirements similar to those already required in Britain, Hong Kong and many other jurisdictions. See, FATF, Anti-Money Laundering, infra.

Accountants

In 2014, a federal court convicted Matthew Ware, an Atlanta-area accountant and civic leader, for his role in money laundering. He accepted bags of cash — as much $60,000 at a time — from a barbecue restaurant that served as a front for cocaine traffickers. Ware then lent the money to his clients, who repaid the restaurant's owners. Although he claimed to have no knowledge of this criminal activity, the accountant ignored several money-laundering red flags and failed to report cash payments of $10,000 or more. See, U.S. Department of Justice (DOJ), Press Release (Dec. 24, 2013).

Ware's case is a cautionary tale: Accountants are particularly vulnerable to being used, at times unknowingly, as conduits for money laundering. Common typologies include requests by clients to wire money to and from bank accounts, deposit cash on their behalf in amounts just below the reporting requirement, or issue checks to them or their vendors in return for cash. To avoid attention from the DOJ, accountants would do well to familiarize themselves with money-laundering red flags and steer well clear of questionable activity.

Financial Advisers

Like accountants, investment professionals can easily find themselves complicit in third-party money laundering. Financial advisers, after all, frequently provide services that can be used to conceal the origin of money, such as purchasing securities and other investment assets on their clients' behalf. Even hedge funds, which can offer secrecy, involve large sums and the use of offshore accounts, making them increasingly attractive vehicles for hiding ill-gotten gains.

Notably, Eric St-Cyr and Joshua Vandyk, investment advisers for a firm in the Cayman Islands, were recently convicted, as part of a government sting, in the U.S. District Court in the Eastern District of Virginia for a money-laundering conspiracy. The pair helped undercover agents conceal and disguise money they believed to be the proceeds of bank fraud by instructing them to create offshore foundations used to invest the funds, which the defendants would, upon request, liquidate, repatriating the funds. U.S. Department of Justice, Press Release, (Sept. 5, 2014).

Investment advisers like St-Cyr and Vandyk are particularly well placed to misuse their position within the financial system to launder money because, under current law, such advisers provide many financial services without having to comply with AML requirements under the Bank Secrecy Act (BSA).

This may soon change. The U.S. Financial Crimes Enforcement Network (FinCEN) recently proposed expanding the BSA's definition of financial institutions to include investment advisers, which would require them to implement AML programs and file SARs for suspicious activities involving at least $5,000. See 80 Fed. Reg. 52680-52701 (Sept. 1, 2015). Assuming that the new administration does not reverse course, the proposed rule reflects the growing scrutiny of investment advisers as potential third-party facilitators of financial crime.

Real Estate Professionals

Recent exposés by both The New York Times and Transparency International have spotlighted the role of high-value real estate in money laundering. Cash real-estate transactions are booming in Manhattan, Miami and elsewhere, and it is no secret that they are frequently funded with ill-gotten gains. Purchasers use shell companies registered in the names of accountants, lawyers and relatives, along with trusts and other opaque structures, to conceal true owners of property. When the clandestine owners sell the property, it becomes difficult, even impossible, to connect the funds to the beneficial owners or to criminal activity.

In 2016, FinCEN responded by issuing geographic targeting orders (GTOs) for six major cities, requiring title insurance companies to identify the natural persons behind shell companies used to pay cash in high-end real estate transactions. See, “Fin-CEN Expands Reach of Real Estate 'Geographic Targeting Orders' Beyond Manhattan and Miami.” Although real estate professionals are not subject to the BSA or the GTOs, FinCEN's action puts new pressure on them to pay attention to ways in which money launderers and other wrongdoers can potentially exploit their services. Those working in the industry would be well advised to follow the advice of the National Association of Realtors, which encourages its members to familiarize themselves with money-laundering red flags. See, “Anti-Money Laundering Guidelines for Real Estate Professionals.” Specifically, realtors are urged to consider the source of funds in real estate transactions, and whether funds originate from jurisdictions with weak AML controls or a history of terrorist financing. They are also warned to be wary of transactions in which the title will be held by a corporation that obscures the buyer's identity, or if the buyer is a high-ranking foreign official or has connections to one, among other warning signs.

The Way Forward

With the steady stream of global scandals and leaks, from 1Malaysia Development Berhad (1MDB) and the Panama Papers to FIFA (Fédération Internationale de Football Association) and Lava Jato, there is less tolerance than ever for those who profit from the movement of illicit funds — including for those third-party professionals who serve as their conduits. And with the FBI targeting money-laundering facilitators — a trend certain only to grow — non-financial businesses and professions would be prudent to respond proactively. This means taking a page from the compliance programs of historically regulated financial institutions, such as adopting risk-based approaches for handling clients and their activities.

Third-party professionals, in particular, should consider developing processes for identifying customers and collecting due diligence, understanding what kinds of client conduct are inherently high risk from a financial crime compliance perspective, and monitoring unusual or suspicious transactions. And this entails more than just adopting written policies and procedures. Individuals and organizations should strive to foster a culture of compliance; although an admittedly nebulous concept, this speaks to whether an organization's senior leaders are engaged in financial crime compliance, resources are available for compliance, information is shared both internally and externally, and — perhaps most vitally — business demands do not overshadow ethical and legal obligations. See, Daniel R. Alonso, “Loud and Clear: FinCEN Demands a Culture of Compliance,” Business Crimes Bulletin, Oct. 2014.

*****
Justin du Rivage is a Consultant at the global consulting firm Exiger, where he focuses on anti-money laundering matters. He is based in London.