Follow the MAPP: Develop an Aggressive Way to Fight Money Laundering

Joe’s got a problem. He runs a small, family-owned plastics manufacturing business and he runs it quite well. That’s not the difficulty – he makes a lot of money for his relatives. The problem is that he’s tired of giving so much of it to Uncle Sam. Joe figures it’s time to start washing some cash.

There are two major reasons for laundering money – concealing currency from illegal activities (drugs, fencing operations, gambling, etc.) and hiding legal cash from the Internal Revenue Service to evade taxes. Joe isn’t into drug running and doesn’t have blackjack tables in the back office. He just decides that instead of reporting all his income to the IRS, he’s going to launder it and make it available to himself later.¹  

One night, Joe invites his family’s insurance salesman over to the house for coffee. Joe purchases an annuity from the salesman and gives him $9,500 in cash for his first deposit, which is $500 lower than the minimum Joe is required to report to the IRS. He will be able to withdraw money from the annuity with a minimal penalty. What Joe doesn’t know is that the insurance company has begun an aggressive program to fight money laundering; when Joe makes another $9,500 contribution, the company immediately notices he has exceeded the $10,000 limit in any 12-month rolling period and reports his transactions to the IRS. If the insurance company wasn’t trained to look for possible money laundering red flags, Joe would have continued his sweet scheme and eventually withdrawn thousands of tax-free bucks.

Despite the sincere efforts of legislative personnel and law enforcement authorities for the past 20 years, they continue to struggle with deterring money laundering and enforcing laws that make it illegal. More than $500 billion is laundered around the world annually.² Large corporations must take a major role in preventing money laundering because they’re the money launderers’ prime targets.

Compliance units must not only ensure their companies are complying with federal, state, and local laws and regulations, they must also address the issues, determine their exposure to risk, and formulate a plan to minimize that risk. While a good compliance program may conform to the IRS guidelines for monetary reporting, an elite compliance program will combat the root causes of money laundering.

These four steps can help you MAPP out a plan to fight money laundering within your organization.
Monetary intake point identification
Analyze exposure
Procedure development
Produce relationships

Monetary Intake Point Identification 

Any area or department that has the potential to receive cash or monetary instruments must be identified. These could include the mail (both government and private carriers), on-site clerks or administrative personnel, bank lockboxes, sales associates, brokers, and vendors.

Payment in the form of cashier’s checks, travelers’ checks, money orders, or bank checks commonly comes through the U.S. Postal Service, a private carrier such as Federal Express, or into a post office box. Make sure that every employee who has some contact with the mail be given the procedures for recording and reporting transactions.

“Walk-in” cash transaction business, especially in the retail industry, should be closely monitored. Clerks and administrative personnel are key intake points and must be trained to determine which cash and monetary instruments are “reportable” or “suspicious.” Personnel training doesn’t have to be extensive, and most employees will enjoy learning about money-laundering schemes.

Banks offer lock-box storage for businesses that conduct a large volume of transactions and want the money deposited directly into their accounts. Businesses receive daily accounting figures from the bank, which can be compiled into spreadsheets for analysis and reporting.

Even though it’s a dubious practice, sales personnel “in the field” sometimes receive cash or monetary instruments for goods or services. Additionally, brokers and outside vendors – though not considered employees – occasionally may receive money from customers. Businesses should have procedures that either limit or prohibit receiving this money or require strict and prompt reporting if it’s accepted. And finally, customer service departments should encourage the use of personal checks and credit cards to limit the company’s liability. (Obviously, if the company receives fewer payments by cash or monetary instrument, and receives more in personal checks, company checks, or credit cards, there’s less risk of money laundering because there’s less cash.)

Analyze Exposure 

After all potential intake points are identified, analyze these areas to determine risk or exposure by sampling the amount of cash and/or monetary instruments over a period of time. The research is only valid with adequate sample sizes and time frames. For example, if a company has 20 facilities across the country that receive customer payments, a sample of one Midwest facility may not be representative. Perhaps a sample of a facility in the Midwest, the East, the South, and the West would provide a better picture. Seasonal sales also must be considered. A sample of four facilities may be adequate; however, if that sample is taken only in the month of July and it’s for a manufacturer of snow shovels, obviously, the validity of the research is skewed.

The research, which will indicate the amount of risk at every intake point, will determine resource allocations for programs to fight money laundering such as personnel hours, computer resources, file space, etc.

Procedure Development 

A sophisticated program to fight money laundering requires strong and consistent procedures, such as

• being familiar with changing IRS regulations, and the Bank Secrecy Act;
• developing a comprehensive log format;
• formulating compliant deadlines;
• knowing your customer; and
• communicating the procedures to all key personnel.

Procedures must be monitored constantly. Every link in the chain must be strong; all employees must adhere to the procedures to protect against money laundering.

Random audits should be performed occasionally within the various exposure areas. Subsequent checks must be made to ensure the monetary instrument lists are being communicated to a centralized log or spreadsheet for cumulative analysis. In other words, if a client sends cash through the mail one week, and the next week gives cash to an agent or broker in the field, a cumulative log will accurately represent his activities.

Produce Relationships 

A successful program to fight money laundering requires constant networking and communication with employees. The catch phrase for this step is “know your employee.” Identify key personnel within each area, make them aware of the program’s goals, and let them know they are critical gears in the operation. Also, ongoing employee training and communications are essential so they’ll know their responsibilities and aren’t circumventing procedures by taking “short cuts” in their work.

Key personnel must maintain logs of incoming cash and/or monetary instruments and forward them to the compliance unit, investigation unit, tax department, or whatever operation is deemed responsible for the 8300 and Suspicious Activity Report (SAR) forms for the IRS. (A company must complete the IRS’s 8300 form when it receives in any 12-month period cash and/or monetary instruments exceeding $10,000.) These records must be stored in one area and maintained in a cumulative log.

Strong relationships with senior management also are critical. They must become partners in the fight against money laundering and know that their resources are being used wisely.

U.S. banks, insurance companies, and other financial institutions are spending approximately $300 billion per year to upgrade their computer systems in an effort to combat money laundering.3 While high-tech system enhancements are necessary, the MAPP method helps to achieve a logical, common-sense, and low-cost approach to “covering all the bases.”

Large, complex corporations have multiple sites and monetary intake points, which increase the incidences of money laundering. However, the methodical MAPP process can help determine the potential of money laundering, set up controls to minimize corporations’ risk, and produce elite programs to fight this insidious fraud.

Dean Reeves, CFE, is a special investigation unit procedures consultant for a major insurance company. He was awarded the 1997 Association of Certified Fraud Examiner’s Distinguished Achievement Award as the runner-up to the Walker Award. 

1This is a fictitious money laundering case.
2Leslie Alan Horvitz, “Creativity Keeps Criminals Awash in Laundered Money,” Insight on the News, 12, no. 22 (June 10, 1996): 38(2).
3Arnaud De Borchgrave, “Technology Explosion as Criminal Jackpot,” Insight on the News, 13, no. 31 (Aug. 25, 1997): 48(1).

SIDEBAR 

Money Laundering is Big Business 

Money laundering is the disguising of the existence, nature, source, ownership, location, and disposition of property derived from criminal activity. It’s big business. The United Nations estimates that money produced by narcotics trafficking and other illegal activities might exceed $400 billion annually.

In most instances, the goal of money washing is to conduct transactions in cash (currency) in such a way as to conceal the true nature of transactions. Problems occur regarding large volumes of cash – transporting it, converting small denomination bills to larger denomination bills, and converting cash into assets, which can be invested or spent.

Placement 

Placement of funds into a financial institution is the initial step in the money-laundering process. Legislation has been developed to prevent launderers from depositing or converting large amounts of cash at financial institutions or taking cash out of the country because the fraud is most often detected at this stage.

Placement can take any number of forms. If the money launderer has a large amount of cash, he simply can move the money out of the country in a suitcase and deposit it in an offshore bank. Another choice is to break up the money into smaller amounts and deposit it into bank accounts or purchase cashier’s checks, traveler’s checks, or money orders. The process of breaking transactions up into smaller amounts to evade the reporting requirements is known as “smurfing,” a term derived from the small, blue cartoon characters. A sophisticated smurfing operation might involve hundreds of bank accounts in dozens of cities.

Layering 

If the placement of the initial funds goes undetected, financial transactions can be designed in complex patterns to prevent detection. This stage – referred to as layering – represents the most difficult area of detection. Once the funds have been deposited into a financial institution, a launderer can move the funds around by using layers of financial transactions designed to confuse the audit trail. The money even can be transported out of the country through wire transfers.

Integration 

The final stage in the laundering process is the integration of the assets back into the economy as an apparently legitimate business transaction. This stage of the process is also difficult to detect. However, the chances for detection are improved if the assets integration process creates a paper trail (such as deeds for real estate, invoices, loan documents, Currency Transaction Reports, checks, etc.) and if there is cooperation from informants or foreign entities.

A money-laundering scheme won’t be successful until the paper trail is eliminated or made so complex that individual steps can’t be traced easily. The number of steps used depends on how much distance the money launderer wishes to put between the illegally earned cash and the laundered asset into which it’s converted. More steps may make tracing funds more difficult, but it also lengthens the paper trail and increases chance the transaction will be reported.

Financial institutions routinely issue negotiable instruments such as cashier’s checks and money orders in exchange for cash. Criminals prefer these negotiable instruments for two reasons: because they’re “bearer instruments,” and the holder can use them or deposit them without having to prove the source of the funds. Also, they’re “liquid” assets because the holder can use them immediately.

Following is an example of how a money-laundering scheme operates. Alberto Barrera, dubbed “Papa Smurf” by the federal agents investigating him, ran a rather sophisticated smurfing operation out of Miami involving bank accounts in cities all over the country. Barrera and his other smurfs would fly to Phoenix, Denver, Omaha, Portland, and other cities, to visit various banks and purchase cashier’s checks and money orders in amounts less than $10,000. Barrera’s group would then travel to other cities and deposit some of the previously purchased check and money orders in accounts controlled by Barrera and then buy even more cashier’s checks and money orders before the group traveled on to more cities. Once they converted or deposited the money, they transferred much of it to offshore banks. Investigators estimated that Barrera laundered more than $12 million between September 1983 and March 1984. (The full details behind the investigation of Barrera are contained in the book, “The Money Launderers,” by Robert E. Powis.)

Using a Legitimate Business to Launder Funds 

One of the most common methods of laundering funds is to filter the money through a legitimate business. Legitimate businesses offer the criminal the appearance of a legitimate source of reportable income for tax purposes. In addition, such a business provides a “base of operations” from which a number of other criminal activities can be conducted, such as fencing stolen property.

There are three methods that are commonly used to hide assets or launder money through a business: overstatement of reported revenues, overstatement of reported expenses, and balance sheet laundering.

Overstatement of Reported Revenues 

Overstating reported revenues is a way of disguising money from non-business sources by adding it to the records of a business. Here’s an example. ABC Used Cars encourages customers to pay with cash. The cash-paying customer receives a discount up to 25 percent. The invoice, however, makes no mention of the cash discount and the company reports the full sales amount as income. Depending on the number of cars sold, the company can launder thousands of dollars in illegal income.

Overstatement of Reported Expenses 

The disadvantage of overstating revenues is that taxes eventually will be due on the reported income. Therefore, if a company overstates its revenue, it’ll also have to overstate its expenses to offset its tax liability. Additionally, money can be taken from the business and used for other purposes such as payoffs, buying illegal goods, or investing in other criminal ventures.

Overstating expenses can be accomplished very easily by reporting payments for supplies never received, professional services never rendered, or wages for fictitious employees. For example, ABC Used Cars reports wages for three mechanics and an assistant manager who don’t exist. The company also reports payments of more than $200,000 a year to several lawyers, accountants, and other “consultants” who do little, if any, actual work.

Depositing Cash and Writing Checks in Excess of Reported Revenues and Expenses (Balance Sheet Laundering) 

Rather than attempting to disguise money as normal business revenue, excess funds can simply be deposited into the bank account of the business. This technique is known as balance sheet laundering because it’s independent of the money that flows in and out of the business. In another example, ABC Used Cars deposits an additional $30,000 per month in its account, although there are no recorded sales for this amount. At the end of the year, the company has an extra $360,000 in cash in its account.

This type of scheme can be detected by examining the revenue records of the business. Every legitimate asset in a company’s possession had to have come from somewhere. Therefore, there should be some form of documentation for every legitimate asset.

Favorite Businesses for Hiding or Laundering Money 

Businesses that deal in large amounts of cash sales have always been popular for money laundering. Such businesses make accurate audits difficult. These types of businesses include bars, restaurants, and nightclubs. These businesses charge relatively high prices, and customers vary widely in their purchases. Sales are generally in cash, and it’s notoriously difficult to match the cost of providing food, liquor, and entertainment with the revenues they produce. Wholesale distribution businesses historically have been a prominent part of money laundering. The activities required to run this type of business are diverse and difficult to measure, thereby allowing for easy inflation of expenses. Because of the large volume of shipment, it’s ideally suited for transporting contraband.

(Source: “Fraud Examiners Manual, Third Edition,” pp. 1.1601 – 1.1605, © 1998 Association of Certified Fraud Examiners)