Sasha Frid Addresses Electronic Money Laundering Issues

Sasha Frid Addresses Electronic Money Laundering Issues

Alert: Double-Check MSB Licensure Status — Unregulated Entities Can Catch You In The Regulatory Crossfire

The fluidity of Internet-based payment tools makes it hard to track online funds transactions, which means criminals can launder money more easily — sometimes even anonymously. While most banks have mastered the AML routine in the nearly seven years since the PATRIOT Act, the same doesn’t always hold true for other financial services businesses. And if your institution has a relationship with entities involved in money-laundering, you risk getting dragged through the mud too. Read on for lessons learned from a recent money services business (MSB) regulatory action and tips on how to protect yourself from exposure.

Fringe Payment Transactor Muddies Up Online Money Movements

News flash: E-Gold Ltd. (E-Gold), an Internetbased digital currency business, and its three principal directors and owners, pleaded guilty to criminal charges relating to money laundering and operating an illegal money transmitting business, according to a July 21 Department of Justice press release. (For more details on the E-Gold drama see “Watch Out: Blatant AML Failures And Indifference To Criminal Activities Equals Jail Time” on page 60.) “With companies like E-Gold out there, the temptation is there for criminals to use those tools in an unlawful manner — whereas before they had to go to the bank with a briefcase of cash,” comments Rich Walton, attorney in the Los Angeles, CA-based law firm of Buchalter Nemer and an adjunct professor at the University of Southern California School of Law, where he teaches federal crimes. The challenge for financial services businesses is to take the appropriate steps to deter such criminal behavior; and while we can’t stop all of it, we must clamp down on obvious avenues for money laundering, as in the E-Gold case, Walton continues.

Climate: Regulators too are demonstrating that they are poised to crack down on electronic financial crime. Only a little more than a year elapsed between the E-Gold indictment and the guilty plea — in the white-collar crime world, this is a very short time frame, Walton points out. Both regulators and legislators are in agreement that the industry must more heavily regulate electronic transactions — not only for money laundering reasons, but also for losses associated with state sales tax revenue, Walton explains. “There is a growing realization for the need of more oversight of the online world,” he says. (Aside: Even the Financial Action Task Force (FATF) recognizes this emerging risk area in its July 10 report “Money Laundering & Terrorist Financing Vulnerabilities of Commercial Websites & Internet Payment Systems,” available at

Danger: If you are aware of the potential for criminals to abuse a money service tool and do nothing about it — or, worse, participate in helping cover money laundering tracks — you could get slapped with a criminal money laundering conspiracy charge. “If you allow or ignore substantial suspicious transactions, you can be liable,” which opens you up to both federal scrutiny and civil litigation, says Sasha Frid, attorney in the Los Angeles-based law firm of Miller Barondess, LLP. “It doesn’t take much nexus to get lumped into a conspiracy charge,” agrees Walton. However, demonstrating that you stalled or hindered this type of activity goes a long way when defending yourself with federal investigators.

Containment Strategy: Filter Through ACH Transactions And Quiz MSB Associates On Activities

While E-Gold was really “on the fringe” so to speak, online payment systems do present interesting risks for BSA/AML monitoring, notes Randy Carey, consultant with Regulatory Compliance and Internal Audit Services in Galveston, Texas.

Example: Since money to and from these online payment systems flows through bank accounts via Automated Clearing House (ACH) transactions, make sure you have processes to monitor and filter these transactions to identify potential suspicious activity, Carey advises. If you detect unusual transaction patterns, such as a lot of money going offshore, implement your enhanced due diligence process to try to verify the transactions’ legitimacy. You also may want to confirm that the processor is conducting Office of Foreign Assets Control (OFAC) checks before clearing transactions, adds John MacKessy, president of Prism Risk Advisors Inc. and AML Compliance Alert consulting editor.

Also, limiting the volume and velocity of the online payment transactions that pass through your accounts — or restricting certain payment systems — may not be a bad idea, adds Walton. Remember, some of the organizations processing those payments are high-risk entities who aren’t collecting CIP data, he says.

Do this: Be alert to MSB red flags; start by posing pertinent questions to these types of businesses before associating with them, counsels Walton. Give them a questionnaire to fill out under penalty of perjury. To determine the level of risk, he continues, ask questions such as:

How many offshore transactions do you conduct each month?

What is the average size of transactions you handle?

Do you possess the required licensure?

In addition, make sure to follow up to verify that the information the business gave you is correct. Be especially cautious when dealing with businesses that act in the capacity of third-party accommodaters, which means that they hold onto deposits while transactions process, Walton says. Since third-party accommodaters are not subject to close regulatory scrutiny, they have been known to fail in their duties and conduct prohibited activities with the funds that they are holding, he says.

Tip: Lastly, consider implementing key risk indicators for fraud, such as the volume or percentage of returned ACH transactions, offers MacKessy. The industry average for this is about four percent, so consider it a red flag when returned transactions exceed this threshold.

Prediction: The E-Gold case isn’t likely to cause a major regulatory stir in the marketplace — not without a widespread government push to step up requirements, Frid comments. However, these entities may start to step up self-regulation as they take note of this and other MSB enforcement actions, instead of waiting for a government crackdown, he concludes.