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Money Laundering

Overview

What is Money Laundering? The term “money laundering” refers to the activities and financial transactions that are undertaken specifically to hide the true source of the income. In most cases, the money involved is earned from an illegal enterprise and the goal is to give that money the appearance of coming from a legitimate source. 

Why is IRS Involved in Money Laundering Investigations?

One look at the daily news is proof that the crimes dealing with or motivated by money make up the majority of criminal activity in the nation. Tax evasion, public corruption, health care fraud, money laundering and drug trafficking are all examples of the types of crimes that revolve around money. In these cases, a financial investigation often becomes the key to a conviction. For this reason, IRS is one of the key agencies involved in money laundering investigations.

Money laundering is a very complex crime involving intricate details, often involving numerous financial transactions and financial outlets throughout the world. Criminal Investigation has the financial investigators and expertise that is critical to “follow the money trail.”

Criminal Investigation focuses on money laundering where the underlying conduct is a violation of the income tax laws. According to the IRS, money laundering is the means by which criminals evade paying taxes on illegal income by concealing the source and the amount of profit. Money laundering is in effect tax evasion in progress.

When no other crimes could be pinned to Al Capone, the Internal Revenue Service obtained a conviction for tax evasion. As the astonished Capone left the courthouse he said, "This is preposterous. You can't tax illegal income!" But the fact is income from whatever source derived (legal or illegal) is taxable income. 

Had the money laundering statutes been on the books in the 1930's, Capone would also have been charged with money laundering. However, since October 1986, with the passage of the Money Laundering Control Act, organized crime members and many others have been charged and convicted of both tax evasion and money laundering.

When a criminal has a large amount of illegal income, they have to do something with it in order to hide it from the IRS. They attempt to launder it to make it appear as if it was from a legitimate source, allowing them to spend it or invest it in assets without having to worry about the IRS and tax consequences.

One of the ways to launder illegal proceeds is to move the money out of the United States and then bring it back in a clean form, often disguised as loan proceeds. Another method is to channel or co-mingle the money through various business activities to give the appearance that the money was derived from a legal source. 

Why a Financial Investigation?

Financial investigations are by their nature very document intensive. They involve records, such as bank account information or real estate files, which point to the movement of money. Any record that pertains to or shows the sequence of events involving money movement is important. The major goal in a financial investigation is to identify and document the movement of money during the course of a crime. The link between where the money comes from, who gets it, when it is received and where it is stored or deposited, can provide proof of criminal activity.

IRS investigations of illegal income cases involving money laundering are critical components of the nations National Money Laundering Strategy. The long hours of tracking and documenting financial leads allows an investigation to go right to the door of the money launderers and eventually to the leader of the illegal enterprise. A complete financial analysis and reconstruction of the illegal activity (i.e. a drug organization or an abusive trust scheme) will document the financial activities related to unreported income on tax returns and money laundering which is usually key to securing a conviction.

Money laundering creates an underground, untaxed economy that harms our country’s overall economic strength. It is a global threat that erodes our financial systems. 

History

Criminal Investigation was established in 1919 and commenced its first narcotics investigation of an opium trafficker in Hawaii in the early 1920's, bringing the only charge we could; tax evasion. At that time, millions of dollars were being laundered through financial institutions, going untaxed and being used to purchase assets. 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.

In 1970, Congress passed the Bank Secrecy Act (BSA). With the enactment of the BSA came the introduction of the Currency Transaction Report (CTR, Form 4789), Report of International Transportation of Currency or Monetary Instruments (CMIR, Form 4790) and Report of Foreign Bank and Financial Accounts (FBAR, Form TD F 90-22.1).

The BSA created the paper trail needed by law enforcement to track untaxed dollars and the millions of dollars being laundered through U.S. banks. IRS has been able to follow this paper trail to disrupt and dismantle, through investigation, prosecution and forfeiture of assets, the country's major drug and money laundering organizations.

Today's IRS

While tax fraud and tax evasion are IRS Criminal Investigation's number one enforcement priority, currency reporting and money laundering enforcement are emphasis areas as well.

Statistical Data - Money Laundering Enforcement
Money LaunderingStatistics Includes confinement to federal prison, halfway house, home detention or a combination thereof.

Currency Reporting

The Currency Transaction Report (CTR) came into existence with the passage of the Currency and Foreign Transactions Reporting Act, better known as the Bank Secrecy Act (BSA), in 1970. By 1975 only 3,418 CTRs had been filed in the United States.

When the first version of the CTR was introduced the only way a suspicious transaction of less than $10,000 was reported to the government was if a bank teller called an agent and provided the information. This was due, primarily, to the concern by financial institutions about the Right to Financial Privacy. On October 26, 1986, with the passage of the Money Laundering Control Act, the Right to Financial Privacy was no longer an issue. As part of the Act, Congress had stated that a financial institution could not be held liable for releasing suspicious transaction information to law enforcement. As a result, the next version of the CTR had a suspicious transaction check box at the top. This was in effect until April 1996 when the Suspicious Activity Report (SAR) was introduced.

Currency reporting has changed since its introduction in 1970. There are now several different requirements for several different types of financial institutions as well as non-financial institutions. 
The various currency forms, their reporting requirements and the number filed in calendar year 2002 can are shown in this chart:

Other industries are required to file Suspicious Activity Reports as well. The US Department of Treasury’s Financial Crimes Enforcement Network can provide additional information on this topic.

Federal Statutes

Internal Revenue Code - IRS has sole investigative jurisdiction for criminal violations of the Internal Revenue Code (IRC), Title 26 of the United States Code. The IRC, Section 61(a) defines gross income as ". . . all income from whatever source derived." This has been held by the courts to include income earned from illegal activities such as drug trafficking, embezzlement, extortion, healthcare fraud, bankruptcy fraud and numerous other crimes. The primary criminal statutes include evasion of income tax, false income tax returns, and failure to file tax returns, among others.

Additionally, IRC, Section 6050 I, requires anyone involved in a trade or business, except financial institutions, to report currency received for goods or services in excess of $10,000 on a Form 8300. This requirement has created a significant impediment to the use of illicit profits by narcotics traffickers and others engaged in illegal activity for the purchase of luxury items such as vehicles, jewelry and boats. Financial institutions report similar information on a Currency Transaction Report.

Federal Statutes and Acts Passed by Congress

Title 31, USC Section 5331 – was passed in 2001 as a result of the USA Patriot Act and duplicates the reporting provisions of IRC, Section 6050I (Form 8300). Dual reporting of this information will now be made to both the IRS and the Treasury Department's Financial Crimes Enforcement Network (FinCEN).

Title 31 USC Section 5332 –Also as a result of the USA Patriot Act was the passage of Title 31 USC 5332, Bulk Cash Statute. Criminal Investigation has jurisdiction to investigate violations of this statute. This affects anyone who transports or attempts to transport currency or other monetary instruments of more than $10,000, from a place within the United States to a place outside of the United States, or from a place outside the United States to a place within the United States, and knowingly conceals it with the intent to evade the reporting requirements of 31 USC 5316. 

Title 18 USC Section 1960 – IRS has the jurisdiction to investigate violations under Title 18 USC 1960 which requires Money Service Businesses to be registered with the Federal Government.

Bank Secrecy Act – The Currency and Foreign Transactions Reporting Act, Public Law No. 91-508, Title II, along with financial institution record-keeping requirements, became known as the Bank Secrecy Act (BSA). The BSA mandates the reporting of certain currency transactions conducted with a financial institution, (Form 4789), the disclosure of foreign bank accounts (TD F 90-22.1), and the reporting of the transportation of currency exceeding $10,000 across United States borders (Form 4790).

Money Laundering Control Act of 1986 – Criminal Investigation investigates and recommends criminal prosecution for violations of Title 18, USC, Sections 1956 and 1957. These statutes make it illegal to conduct certain financial transactions with proceeds generated through specified unlawful activities, such as narcotics trafficking, Medicare fraud and embezzlement, among others.

Asset Forfeiture – The asset forfeiture program is one of the federal government’s most effective tools against drug trafficking, money laundering, and organized crime. In conjunction with other federal, state, and local law enforcement agencies, Criminal Investigation uses asset forfeiture statutes to dismantle criminal enterprises by seizing and forfeiting their assets. Most of Criminal Investigation's seizures and forfeitures are the result of Title 18 and Title 31 money laundering and currency investigations. 

IRS Supports National Strategies and Initiatives

Criminal Investigation supports national law enforcement strategies and initiatives by investigating and recommending prosecution of domestic and international narcotics traffickers and related money-laundering organizations. Criminal investigators follow the money trail, tracing the profits from the illegal activity back to the criminal.

National Money Laundering Strategy

In July 2002, the U.S. Departments of Treasury and Justice released the Money Laundering Strategy for 2002. This strategy reflects a national commitment to a coordinated, effective fight against money laundering and other financial crimes. The primary goals of the strategy are:

1. Measure the effectiveness of the Anti-Money Laundering efforts

2. Focus law enforcement and regulatory resources on identifying, disrupting and dismantling terrorists financing networks

3. Increase the investigation and prosecution of major money laundering organizations and systems

4. Prevent money laundering through cooperative public-private efforts and necessary regulatory measures

5. Coordinate law enforcement efforts with state and local governments to fight money laundering throughout the United States

6. Strengthen International money laundering regimes

Criminal Investigation supports this strategy through the investigation and prosecution of domestic and international narcotics traffickers and related money laundering organizations.

FY 2004 Examples of Money Laundering Fraud Investigaitons
Summaries of investigations have been written from public record documents filed in the district courts where the case was prosecuted

• FY 2003 Archive Examples of Money Laundering Fraud Investigaitons

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