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Many methods can detect money-laundering activity

Denver Business Journal

On the Money
From the February 9, 2007 print edition

Have you found a dollar bill left in an old pants pocket? Or received change at the fast-food restaurant that drips with more grease than the sandwich? Simply place the bills and coins in a net zippered bag and soak them in the sink with a little dishwasher soap and bleach.

Now you have clean money — freshly laundered. Is that “money laundering?” No.

The term “money laundering” refers to activities and financial transactions carried out specifically to hide the illegal source of income, thereby evading income tax as well as discovery of illegal activities. In most cases, the goal is to give money the appearance of coming from a legitimate source.

Money laundering is extremely complex, involving convoluted transactions, often with numerous financial transactions and financial outlets, and often utilizing currency.

Currency is a “bearer instrument.” That is, whoever has them, owns them. The IRS’s Criminal Investigation (CI) Division has financial investigators and expertise in following the money trail. Tracking dirty money is immeasurably more difficult if it involves currency.

CI special agents combine accounting and law enforcement skills. They focus on money laundering, where the underlying conduct is a violation of the income tax laws or of the Bank Secrecy Act. Money laundering is, in effect, tax evasion in progress.

The CI Division was established in 1919 and began its first investigation of an opium trafficker in Hawaii in the early 1920s, bringing the only charge available at the time: tax evasion.          There was no paper trail at the financial institution other than bank account records — if the money was deposited. There was no requirement for banks to report the large amounts of currency transactions.

It wasn’t until 1970 that the Currency Transaction Report (CTR) came into existence with the passage of the Bank Secrecy Act (BSA). The Money Laundering Control Act was enacted in October 1986, followed in 1996 by the Suspicious Activity Report (SAR), with variations for special industries.

In order to detect possible money laundering, tax evasion or other illegal activities, the following reports are used. Even if the transaction is legitimate, such as withdrawal of cash for the purchase of a car, it will be reported. Dollar thresholds appear for each report.

  • Suspicious Activity Report (SAR) — Filed for transactions or attempted transactions involving at least $5,000 that the financial institution knows, suspects, or has reason to suspect the money was derived from illegal activities.
  • Suspicious Activity Report Casino — Filed for transactions or attempted transactions if they’re conducted or attempted by, at or through a casino, and involves or aggregates at least $5,000 in funds or other assets, and the casino/card club knows, suspects, or has reason to suspect that the transactions or pattern of transactions involves funds derived from illegal activities.
  • Registration of Money Services Business (RMSB) — Each Money Services Business (MSB), except for agents of another MSB, must register with the IRS. An MSB typically is an issuer of money orders, traveler’s checks, a money transmitter, check casher, or currency dealer.
  • Suspicious Activity Report by MSB (SARM) — Filed for transactions or attempted transactions if conducted, attempted by, at, or through an MSB, involving or aggregating funds or other assets of at least $2,000.
  • The SARM is also filed if the MSB knows, suspects, or has reason to suspect that the transactions or pattern of transactions involves funds derived from illegal activities.
  • The SAR report also applies to broker-dealers of securities when transactions involve funds or other assets of at least $5,000, and when transactions are designed, whether through structuring or other means, to evade tax filing requirements.
  • Currency Transaction Report (CTR) and (CTRC) for Casinos — Filed by financial institutions or casinos that engage in a currency transaction in excess of $10,000.
  • Report of Foreign Bank and Financial Accounts (FBAR) — Filed by individuals to report a financial interest in or signatory authority over one or more accounts in foreign countries, if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year.
  • IRS Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business — Filed by persons engaged in a trade or business who, in the course of that trade or business, receive more than $10,000 in cash in one transaction or two or more related transactions within a 12-month period.

In addition to all the above, suspicious individuals or companies that aren’t complying with the tax laws may be reported to the IRS by completing Form 3949-A. It’s online, and should be printed and mailed to:

Internal Revenue Service

Fresno, CA 93888.

Although you’re not required to identify yourself, it’s helpful to do so. Your identity can be kept confidential. You also may be entitled to a reward.

© C. Stephen Guyer for American City Business Journals Inc. All rights reserved.