Part 2 — Money laundering series. Money laundering has been a focus in the media of late, due to the alleged non-compliance with, and circumvention of US Anti-Money Laundering (AML) regulations by international banking institutions situated in the United States which provide correspondent services to other foreign financial institutions.Correspondent banking occurs when one financial institution provides services to another financial institution to move funds, exchange currencies, cash monetary instruments, or carry out other financial transactions.One banking institution's correspondent activities were the subject of a recent special report to the United States Senate. Released July 17, 2012, the 340-page document executive summary focused on five key AML/terrorist issues that impacted correspondent banking in the United States including, opening US correspondent accounts for high risk affiliates without conducting due diligence; facilitating transactions that hinder US efforts to stop terrorists, drug traffickers, rogue jurisdictions, and others from using the US financial system; providing US correspondent services to banks with links to terrorism; clearing bulk US dollar travellers cheques despite signs of suspicious activity; and offering high risk bearer share corporate accounts.The report noted that the bank fully cooperated with their investigation.Money laundering risks and threats are far greater than just one country's financial industry. Illicit funds flows are an estimated $2 trillion annual global affliction according to various anti-money laundering organisations.No matter the size, type of financial institution, jurisdiction, cash flow business or individuals involved, the criminal single-minded goal is the same: moving the money into legitimate investment structures that can be recirculated domestically, or internationally. Money laundering makes the proceeds of criminal activity resemble legal income, profits, or transactions. End result, the “cleaning up of dirty money by passing it in some way through a legitimate financial institution so that the washed money can be transferred through to credible businesses and easily exchanged hard currencies.Laundering happens in steps:1. First, some method (often innovative, sometimes just plain dumb) is used to get the illicit funds into a credible financial institution or high cash flow money business.2. Once deposited, the funds are spread into various accounts, then transferred into other jurisdictions in developed layers of legal complexity, such as shell companies, trusts, etc3. Finally, after many multilayered transactions, the money re-enters the financial system, relinked to the same individuals but now perfectly pure, seen as derived from legitimate sources.Illicit funds flows involve a number of high cash flow business: casinos, money services businesses, insurance industry, securities and futures, precious metals/jewellery industry and mortgage brokers, according to the FinCen website.Here are a couple of generic methods to hide or launder money, evade taxes, and circumvent reporting profits. Warning: many more sophisticated methods exist.Fiddled automobile salesThe auto dealer artificially lowers the prices of his car inventory to unrealistic sales ranges, say $9,000 for a fully-loaded SUV (actual price — $38,000). The purchase documents reflect this low price while the difference in cash is agreed on by the paying customer. The dealer then carefully deposits the cash in his various local banks, always staying below the $10,000 reporting threshold for suspicious activity reports (SARS). Banking officials became suspicious (I wonder why?) when their AML detection team noticed more than thirty of these deposits each month. Jail time and fines for AML and tax fraud.The bank teller's new relationshipProfessing true love and undying loyalty, the boyfriend asks his teller girlfriend to prove her devotion. “I can't get an account open because I just lost my job. I just need you to deposit this cash for me in a few accounts like yours, your 93 year-old auntie's, some account that isn't used very much, etc. It is only for a few days, then you can give me the money back in US dollars, or you can wire it out for me to the US. It won't hurt anyone, they will never know.”True love wins, and Ms bank teller duly obliges even though the amount of money is a lot more than she expected. The first question she did not ask — where did this money come from? AML officers notice sudden high deposit / withdrawal activity in dormant accounts. Guess who gets caught, loses the job (is now on the do-not-hire for future finance jobs), and faces prosecution and jail time? Was it love or expedient manipulation?The complicit conniving cruisersThis is a true story from many years long ago. Oh my, they sat in front of us, all tanned and relaxed. Such a great cruise they are on — stopping in ports all along the Caribbean. They've come to the bank to review their old portfolio (over $1 million USD). Within five minutes of producing their US passports, and a limited discussion regarding asset allocation, it was very clear they had a different motive.“Well, whenever we take a cruise, we always over estimate the number of travellers cheques we need. This cruise is all-inclusive, so we aren't spending our cruising savings. We thought we'd just put the difference in our account here in Paradise.”With that they produced $25,000 in unused travellers cheques. I glanced sideways at the personal banker on their account, and then left the room to find the department compliance officer.In short shrift, we informed this elderly couple (early seventies) that we were closing their account, and where would they like the money to be wired to their accounts in the United States. The husband became irate, threatening us with legal action, and they stated they were leaving to consult with their attorney. The wife stood up and in the hurry, dropped her big carpet-type shopping bag. Well, at least another $30,000 — $50,000 in rolled US greenbacks fell onto the floor.And there you go, that's how minor (morphing into major) money got moved illegally, at least in one couple's case by cruising from port to port way back when.Just a little bit here, a little bit there skimmed off their convenience store cash transactions back home — out of the United States into offshore accounts. Cruising schemes like theirs are no longer tolerated with the AML international banking centre compliance in place today.Finally, tax fraud. A little known fact relative to tax regulations in the US — tax evasion activities using wire or mail fraud across borders is also a predicate for money laundering.Update to “Are we gamblers?” Moneywise, August 03, 2012, Facebook in the United Kingdom announced last week that real cash online gambling will be available for UK users only. Gosh, I didn't know that social interaction involved gambling.Martha Harris Myron CPA PFS CFP (USA) TEP is Director of Tax Services at Patterson Partners Ltd providing integrated cross-border tax, estate, investment advisory and related strategic planning services through entities in Bermuda and the United States. She authors a weekly financial column for The Royal Gazette, Bermuda and has been internationally featured in AICPA CPA Insider and various news aggregators. For additional information, please contact mmyron@patterson-partners.com or call 296 3528 http://www.patterson-partners.com