The telltale signs of money laundering.

THE TELLTALE SIGNS OF MONEY LAUNDERING 

Companies are at risk if they can't spot a launderer's methods.

Because of today's more aggressive federal investigations, businesses that are not aware of the government's strict and far-reaching money laundering laws could find themselves facing criminal charges. Companies must be aware of the methods launderers use and of their responsibilities to report suspicious activities.

Launderers use cash transactions--which generally leave no paper trail--to avoid documentation or detection of criminal dealings. Although illegal themselves, the money laundering schemes usually are only a symptom of other crimes. Narcotics trafficking, tax evasion, smuggling, gambling and embezzlement often generate large sums of cash that must be hidden from law enforcement authorities, particularly the Internal Revenue Service. The IRS and Justice Department have targeted money laundering violations as a high-priority investigative area because of the crimes associated with them.

THE BANK SECRECY ACT 

Title 31 of the United States Code, commonly referred to as the Bank Secrecy Act, aims to make it easier for the government to trace and attribute cash transactions. The act applies to all "financial institutions" and the courts have established a broad definition of the term. It encompasses banks, savings and loans, brokerage firms, insurance companies, credit unions and check-cashing services, as well as fast food restaurants, grocery stores and any other entity dealing in or conducting business in cash. Law and accounting firms that accept cash payments from clients also may be considered "financial institutions."

THE CTR REQUIREMENT

Under section 5313 of Title 31, financial institutions must prepare and submit to the IRS a currency transaction report (CTR), form 4789, within 15 days of any cash transaction of more than $10,000 made by an individual or depositor in a single day. To illustrate how the law is applied, a local convenience store is subject to the CTR reporting requirement if someone obtains money orders at the store in exchange for $10,001 in cash.

CTRs must contain the date, the individual's full name, address and Social Security number, as well as the name of his or her company and of the institution or store where the transaction occurred. The IRS uses this information to look for transaction patterns. It also compares names on the forms to targets of IRS or other federal investigations. When a connection is made, the information is sent to the local IRS district office or other federal agency--such as the Drug Enforcement Administration (DEA)--for either a follow-up audit examination or an evaluation and possible investigation by a special agent of the IRS Criminal Investigation Division or the DEA.

Title 31 applies only to cash transactions. Those involving money orders, cashier's checks, regular checks or wire transfers are exempt because they leave a paper trail that can be documented and traced. However, CTRs must be submitted when these financial instruments are purchased with cash.

RICO 

Financial institutions or cash businesses can be charged with criminal racketeering under the Racketeer Influenced and Corrupt Organizations Act if they fail to file CTRs more than once in relation to any one scheme or any individual or group involved in a crime. The government can recover any money generated by RICO violations and, in extreme cases, can seize a business's assets or close it down.

BUSINESSES AT RISK

Money laundering cases usually involve two parties: the individual or business violator and the financial institution. The government generally prosecutes the financial institution or cash business involved because of the resulting publicity and deterrent value. Though the government would like to make cases against drug pushers, gangsters and corrupt politicians engaged in money laundering, these individuals often are asked to testify against the entity that, unwittingly or not, assisted them in the money laundering transactions. This places at grave risk financial institutions or cash businesses that do not submit proper CTR forms.

The IRS also has ongoing national projects aimed at attorneys and accountants involved in large cash transactions. These projects are intended to bring civil cases and criminal charges against attorneys and accountants who do not file accurate and timely CTRs.

THE WARNING SIGNS

More than 95% of all money launderers identified by the federal government in the last few years have used at least one of roughly a dozen methods. Here are some of the warning signs businesses should be aware of:

* Repeated transactions in amounts just under $10,000. This is called "structuring accounts" and is a criminal violation. Financial institutions and cash businesses can be held criminally liable for not reporting these repeat transactions, particularly for amounts between $8,000 and $9,999. The government argues, and the courts have held, that repeat transactions of this size should alert an entity to a possible attempt to avoid the CTR reporting requirements. Criminal liability exists even though each transaction amount is under $10,000. Thus, a cash business that does not report several $8,000 cash money-order purchases by one person not only would be criminally liable but also could face civil negligence fines of $1,000 per violation.

* Repeated transactions or deposits by different people on the same day, or within a short period of time, in one account. This also applies to deposits made at different branches of an institution. The institution must file a CTR.

* Internal transfers between accounts followed by large outlays. For example, Smith's five accomplices deposit around $7,000 cash into each of five different accounts. The money from all of these deposits is then moved by check or wire transfer into an account at another bank and then transferred again to an account at yet another financial institution. When Smith empties this final account, he has avoided any connection to the original cash deposits and obtained roughly $35,000 for which no CTRs have been filed. Launderers sometimes use preorder accounts for this scheme. Such an account carries automatic instructions to make a transfer when the balance reaches a certain level.

* Movement of cash to "suspect" locations. These include Panama, the Cayman Islands, the Netherlands Antilles, Hong Kong, Luxembourg and Switzerland, and Central American and Caribbean offshore banks. Many legitimate businesses operate in these areas and are not necessarily involved in money laundering. However, the IRS and U.S. Customs will probably monitor and possibly investigate repeated movements of cash to any of them.

* A series of transfers in or out of a lawyer's or accountant's trust fund accounts, stockbroker's holding accounts or any other escrow or trust accounts. A client often will ask his or her attorney or accountant to receive or hold cash on the client's behalf. The account holder must submit a CTR for large cash deposits or withdrawals.

* Bogus or questionable names used on accounts. The federal government has made cases based on bank or brokerage accounts registered to names such as Juan Valdez, Mickey Mantle, Roy Rogers, Marilyn Monroe, Abraham Lincoln, James Bond and Mae West. A recent indictment in Florida involved a bank account under the name of Roger Rabbit. To protect themselves from liability, businesses should demand identification containing a photograph or Social Security number for depositors with suspicious names.

* Account names often associated with fronts or disguises. These names include "Import/Export Limited," "Investment Company," "Trading Company" or those that end in S.A., Ltd. or GmbH. These names or initials alone are not suspect, but they raise red flags at the IRS when the companies also deal in cash and are located or do business in suspect areas and countries. Such companies can expect to receive government scrutiny.

* Unusually large deposits made by a small company. Even deposits by a financially healthy company with a large cash business could come under IRS scrutiny if they are significantly larger than deposits made by comparable local businesses.

* Unusual or unexplained spikes in exempted business accounts. Cash businesses can ask their banks for exemptions from the CTR requirements; the exemptions are made based on reviews of companies' cash deposit histories. A company that averages $8,000, $9,000 and $10,000 cash deposits a day over a three-week period, for example, might be exempted for up to $10,000 cash per day. However, if the company begins to make a cash deposit of $20,000 every Thursday, and $30,000 on Tuesdays and $25,000 on Fridays, these unusual spikes should prompt the bank to submit a CTR.

* Social Security numbers that appear to be false. Social Security numbers reflect where a person was born and reared. The Social Security number of someone born and reared in Illinois, for example, would begin with three digits ranging from 318 to 361. Anyone making a cash transaction who lists an Illinois Social Security number but indicates elsewhere that he or she was from Texas should raise suspicion. The Social Security number may be false or incorrect.

STIFF PENALTIES

Many financial institutions and cash businesses in Florida and California, as well as New York, Boston, Chicago and other major metropolitan areas, have been indicted for Title 31 violations. Here are some of the penalties they face:

* For financial institutions, 5 years' imprisonment for the officer responsible and/or a $250,000 fine for each violation.

* For corporations other than sole proprietorships and partnerships, 5 years' imprisonment and/or $500,000 in fines. Two or more violations or one in connection with another criminal violation can bring up to 10 years' imprisonment and $500,000 in fines.

* For businesses involved in criminal RICO violations, up to 20 years' imprisonment and possible forfeiture of the business to the government.

Launderers employ a variety of methods, but their activities always involve moving large amounts of cash and they use transactions at cash businesses to cover their trails. A business must be aware of the warning signs, implement detection procedures and comply with its responsibilities under federal law. Its innocence or ignorance of the law is not an adequate defense in money laundering cases--companies must actively monitor and report suspicious activities when cash transactions are involved.

ANDREW B. DOPPELT, JD, CPP, is chief executive officer of National Investigative Services Corp. (NISCOR), Hinsdale, Illinois. A former special agent in the Internal Revenue Service's Criminal Investigation Division, he is a frequent speaker at American Institute of CPAs workshops on the detection of fraud and white-collar crimes.