How to Spot Money Launderers

A newlywed couple makes an appointment to discuss opening an account with you. At the meeting, they place orders for about $40,000 in large-cap stocks and deposit an envelope full of cashiers checks and money orders. In response to your mandatory source of funds inquiry, they say the checks were gifts from their recent wedding. One week later, they request physical delivery of the certificates and

A newlywed couple makes an appointment to discuss opening an account with you. At the meeting, they place orders for about $40,000 in large-cap stocks and deposit an envelope full of cashiers checks and money orders. In response to your mandatory source of funds inquiry, they say the checks were gifts from their recent wedding. One week later, they request physical delivery of the certificates and close the account.

Such a scenario is hardly an everyday occurrence for advisors, but it raises several important practical and ethical questions, including, “Have I just participated in a money-laundering scheme?” and “Is my professional life in jeopardy?”

What follows is a primer on money laundering rules that can help you address these issues before they become potential career killers.

Illegally gotten gains have long been the target of Federal regulations. Highlights range from the $10,000 threshold-reporting requirement of the Bank Secrecy Act of 1970 to the Suspicious Activity Reports (SAR) of the 1986 Money Laundering Act. More recently, The USA Patriot Act of 2001 puts banks and, via NASD Rule 3011, all broker/dealers on the front lines of this financial battle.

The Patriot Act requires broker/dealers to establish and maintain anti-money laundering education and monitoring procedures. With penalties that quickly run up to $500,000 — plus double the amount laundered — it makes sense to learn the provisions of the act.

The Patriot Act aims to fight money laundering by removing subjectivity from certain ethical decisions. Special punishment awaits those found to be “willfully blind.” However, because the requirements are statutory, even a good-faith lapse can become an actionable offense.

The Patriot Act's SAR provisions, which took effect January 1, target transactions of $5,000 or more which involve funds derived from illegal activity. Telltale signs of this include the disguising of a transaction's source or an obvious departure from normal business. Some other red flags include:

  • Non Resident Aliens (NRAs) and “High Risk” Countries. Accounts with connections to either of these call for extra documentation, including copies of client passports.

  • Businesses incorporated in a country other than the United States and not traded on a major exchange. The legal status of the business should be established by reviewing, and copying, corporate documents. The principals of the firm should be identified and copies of passports should be obtained for principals who are NRAs.

  • Personal Investment Companies (PIC) and Offshore Trusts. PICs are legal entities incorporated in offshore jurisdictions, usually for tax benefits. Extra care should be taken to establish and document the identities of all beneficiaries and principals prior to establishing a relationship.

  • Financial intermediaries. When dealing with a client's financial manager or bookkeeper, make sure to positively identify the actual client before opening an account.

Fully vetting clients at the time an account is opened is not enough to protect financial advisors from Patriot Act penalties. Full compliance with the act also entails keeping an eye peeled for suspicious activities, including:

  • An unusual lack of concern regarding risks, commissions or other transaction costs.

  • Offers to pay higher than normal charges for secrecy.

  • A high volume of cash-intensive transactions.

  • Requests to settle transactions through means outside a recognized clearing system.

  • Transactions inconsistent with the customer's known legitimate business or past history.

  • A customer making payments using multiple monetary instruments — especially if instruments are sequentially numbered or if their value falls just beneath the $10,000 reporting threshold.

Lastly, be aware that clients engaged in certain cash-intensive businesses pose higher than usual risks. These include car/boat/airplane dealers, gem/precious metal dealers, auctioneers, gaming institutions and civilian expatriates.

While AML standards might seem complex, they can be simplified thus: “When in doubt, learn more about.” Don't let a scam artist jeopardize your future.

Writer's BIO:
David J. Gordon
is a senior vice president/investment officer in Wachovia Securities' Deerfield, Ill. office. A former practicing attorney and faculty ethics instructor at Wharton, he now manages a team of fee-based investment advisors. [email protected]

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