Tag Archives: money laundering

The Sheriff in Town!

When I first went to university, I was unsure what I wanted to major in. I had been considering chemistry, because I fancied that I might be the person to come up with a cure for AIDS. At the idealistic age of 18, I was so sure that I could use the colorful magic of gas chromatography to come up with a solution that many experienced scientists with doctoral degrees had been unable to discover. I signed up for a chemistry class and, I decided to take an elective in economics. I was hooked after my first class and ended up majoring in economics. I was fascinated by various theories and the push and pull between fiscal and monetary policies. I did come away from my class knowing one thing – I wanted to work for the Federal Reserve System, home of US monetary policy. To me, to be part of an organization that was focused on what to do in order to best positively influence the economy of the entire nation was awesome! Federal Reserve Banks issue the money that we use; how cool is that? I remember going to a campus career fair and spending most of my time there chatting with a representative from the Fed. Following that conversation, getting a job at the Fed was my dream. One big obstacle stood in my way; at the time, I was not a US citizen. I was devastated but I still dreamt that one day I would either be a citizen or the Fed would change its policies, whichever came first. At the time, as an economist in training, my dream was to be an analyst.

As time has gone by (I am a citizen now) and I have gone on to add becoming a CPA and then getting Certified in Financial Forensics to my skill set, my interest in the Fed and what it does has grown. After graduating, with my degree in economics and mathematics, I went on to work at a bank, where I was an analyst. I was very excited about the opportunity to apply the theory I had learnt in college. I had not bargained on how people are not very good at following the rules, be they the rules of logic or the rule of law. I mean, how many times have you said, “Who would do that,” or “Why did they act that way? It doesn’t make sense”? Yep, we humans use our free will in the nuttiest ways. Just last week, I read a crazy story about a Georgia woman filing a tax return for a $94 million dollar refund. Every aspect of the story is insane, from her 100 dependents to thinking that she could pick up her refund check at a local Kroger grocery store, and yet she is neither the first or last person to attempt this kind of thing. So, after the monetary policy folks have come up with their ideas about how best to influence the economy, there need to be the people who make sure that people are not breaking the rules and people who create control systems and audit them to minimize the risk of people breaking the rules. This is where forensic accountants come into play at the Fed.

Forensic Accountants, both those Certified in Financial Forensics and those who are Certified Fraud Examiners, can be found in the audit and enforcement areas of the Federal Reserve System. The saying is that love makes the world go around, but we are all aware that money is a big motivator for who many people behave. I have written about the fraud triangle and how people in positions of trust and authority will break the law in pursuit of illicit gain. With this in mind, it is vital to assess and improve control systems to make sure that, starting at the top financial institution, there is little opportunity for those who feel the pressure to commit financial crime. If the top bank cannot keep money safe, what hope is there for the rest of them? The Fed has bank examiners whose goal is to ensure that banks comply with laws such as those governing anti-money laundering and doing business with nations and people that the US government has imposed sanctions upon. The Fed plays an important role as an independent third party that will objectively assess operations at the banks that they supervise to make sure that they are not, for example, helping criminal rings hide their ill-gotten gains.

There are twelve banks in the Federal Reserve System and each bill of paper money that you have incorporates, in its serial number, the letter assigned to bank that issued that bill. Pull out a banknote, be it a dollar or a $100 bill, it will have the letter of the particular Federal Reserve Bank that issued it, be it Boston, San Francisco or any of the ones in between. In the case of the dollar bill, the name of the issuing bank is also noted on the bill. It goes almost without saying that the institution that issues the money that we use should have top notch controls. Each Federal Reserve Bank, therefore, has audit departments that are constantly reviewing it and making sure that the banks are complying with the rules. The auditors also work to improve systems. Every day, people are spending a lot of time and energy trying to figure out how to game the system and so those at the Fed should spend at least as much time and energy working to keep the banks safe and compliant.

Though my focus has changed, my excitement when it comes to the Fed is unabated. Not only are they working on monetary policy, they are also working to make sure that the rules are not being broken and that the opportunity to defraud, steal or abet crime is diminished. Take a look at the money in your wallet and think about what goes into making it worth what it is worth.

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So Fresh And So… Not Clean

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Last week, online currency exchange, Liberty Reserve, was shut down, several individuals were arrested and an indictment was filed by the United States Justice Department in New York. filed and indictment accusing six individuals of, among several other things, money laundering. Media outlets all over keep throwing out that term but how exactly does money laundering happen?

In the United States, money that is earned, whether by legal or illegal means, is subject to taxation. Al Capone went to jail, not for the many (as I gather from watching Boardwalk Empire) people he killed and his unlawful business ventures but for tax evasion. When the government sees you spending money and you do not give them a reasonable reason for your having that money, they will work hard to find out just where your money is coming from. However, if they find out that this money comes from illegal sources, they can arrest and prosecute you for your unlawful activities. This is where money laundering comes in. People who make money via illegal methods, find ways to make their money look clean, as though it came from lawful sources. How does this happen?

  1. The first step in money laundering is referred to as placement. At this stage, money is put into the financial system. This can be risky as US banks are required to report large cash deposits, and wires and checks contain the payer’s information and are, therefore, quite traceable. This is where Liberty Reserve was very handy. First of all, the only honest information Liberty Reserve required from an account holder was an email address. Although they requested a name and birth date, none of that information was verified. This gave the account holders anonymity. Also, Liberty Reserve did not accept money directly from users. Instead, users took their money to approved exchangers who then issued LR currency, Liberty Reserve’s currency. These exchangers were located in countries with little or no oversight over their financial systems, such as Malaysia and Vietnam, so questions were not asked about where the money came from. This LR currency was then deposited into the users’ Liberty Reserve accounts with no clear path to where the money originally came from.
  2. The second step in money laundering is layering. During this phase, money is moved around, through many different sources, in an attempt to make the money difficult to trace. Under ordinary circumstances this involves moving funds from one bank account to another, generally in different countries and in varying amounts, buying expensive items and then selling them and changing money from one currency to another. The goal is to make the money’s path as complicated and difficult to trace as possible. Liberty Reserve made this relatively simple. Money going into a Liberty Reserve account holder’s account was already pretty anonymous and difficult to trace. Funds could then be moved, as LR currency, between various anonymous Liberty Reserve accounts. The sources of the funds became near, if not totally, impossible to trace, without having to go through the complications of multiple bank transfers through different countries and bank accounts.
  3. The final step in money laundering is integration. Here, the money re-enters the economy, disguised as coming from a legitimate source. The funds are transferred into a business that is probably a front for the illegal business but now that its origin has been disguised, it appears to be coming from a legal source. In the case of Liberty Reserve, the LR currency was transferred to money exchangers who converted the LR currency back to US dollars and then moved that money to wherever it was the Liberty Reserve account holder requested.

It is pretty clear just how handy Liberty Reserve was to those involved in illegal business and wanting to launder money so that it looked clean. By removing identification and making money transactions anonymous, placement and layering of dirty money a far less complicated endeavor than it tends to be. It is not surprising that Liberty Reserve had over a million users, 200,000 of which were in the United States, and that over $6 billion went through its system.

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