U.S. Treasury report highlights laundering risk of cash deposits

June 17, 2015

Between 2008 and 2012 a group of Florida-based drug traffickers tied to a Mexican cartel laundered their dirty cash by depositing it into accounts at a local branch of a national bank. The traffickers’ Texas-based suppliers then withdrew the money from the accounts as cash and turned it over to couriers who smuggled it into Mexico.

That anecdote, included in the U.S. Treasury Department’s National Money Laundering Risk Assessment released Friday, highlights a scheme now considered to be “widely used among drug traffickers.” The Treasury report, an updated version of a document made public a decade ago, aims to help banks evaluate risk.

As the largest U.S. banks try to meet their legal obligations to avoid helping drug traffickers and other criminals launder ill-gotten gains, one of their most daunting challenges is dealing with cash deposits, especially those that people make into the accounts of others, say anti-money laundering experts.

There are legitimate reasons for so-called third-party cash deposits, such as parents sharing money with children or business managers banking receipts. A senior compliance officer at one of the largest U.S. banks said “99 percent” of such transactions are above board.

But the remainder, however few, are allowing the drug cartels to readily move money around and out of the country, John Tobon, assistant special agent in charge of ICE homeland security investigations in Miami, said in an interview. Tobon, who plays a key role in U.S. efforts to combat cartel money laundering, would prefer banks stop allowing the transactions.

From the standpoint of risk – not only of laundering money but also of landing the bank in the crosshairs of regulators or the Justice Department – banks that allow third-party cash deposits are “running with scissors,” Tobon said.

The Bank Secrecy Act (BSA), the primary U.S. law aimed at combating money laundering, allows banks to decide what products and services to offer as long as they manage the risk.

Failure to comply with the BSA carries significant civil and criminal penalties. In 2012, HSBC entered into a $1.9 billion settlement with U.S. authorities after weaknesses in its anti-money laundering program allowed drug cartels to launder hundreds of millions of dollars.

The big banks generally rely on employee training, customer identification protocols and automated monitoring systems to distinguish between legitimate and drug-tainted cash deposits, experts say.

Tobon, who uses bank reports and law enforcement tactics to track cartel money flows, says those efforts are not enough. As he sees it, “nothing good can come from” third-party cash deposits, “even under the best of circumstances.”

“There is no law on the books that prohibits you running with scissors. But you do not run with scissors because you say ‘Oh, that is kind of a risky activity so I’m not going to do it.’ And you advise other people not to do it,” he said.

Of the four largest U.S. banks, only JPMorgan Chase & Co has barred such deposits. Early last year, it stopped allowing third parties to deposit cash into customers’ personal accounts. It requires identification from anyone placing currency into a business account.

Spokesmen for the other three U.S. banking giants — Bank of America, Citi, and Wells Fargo — said their institutions have in place appropriate controls to manage risk and comply with the BSA. All declined to disclose the details of their institutions’ controls focused on third-party cash deposits, with some citing concerns that criminals might use the information to their advantage.

However, without being too specific, compliance officers at some of the banks said privately that common tactics include reducing dollar thresholds at which identification is demanded from depositors, using well-tuned automated systems to monitor for suspect activity, and training front-line personnel on how to spot cash third-party depositors who might be up to no good.

When banks detect any transactions that seem to be linked to illicit activity they report them to the Treasury Department via so-called Suspicious Activity Reports (SARs) which are than made available to law enforcement authorities.

Tobon said JPMorgan’s decision was a “fantastic thing” because the bank “came to the realization that certain types of business are not worth having.” He added, however, that he has not seen a substantial change in the total number of SARs filed by the large banks on third-party cash deposits, which suggests cartel-linked launderers may have simply taken their business elsewhere.

JPMorgan’s decision

JPMorgan’s policy came as it was operating under two regulatory consent orders and a deferred prosecution agreement with the Justice Department over alleged lapses in its anti-money laundering program.

“We were looking for every way that we could to be kind of forward leaning and make sure that we mitigate the risk,” Pamela Dearden, the bank’s managing director of financial crimes compliance, said in an interview.

The goal was to “do things more preventatively on the front end,” and business executives and compliance officials worked together and decided to focus attention on third-party cash deposits, Dearden said.

“We were seeing lots of accounts being opened, lots of cash being deposited into them, filing lots of SARs, and closing those accounts. And we said ‘How could we break that cycle?'” she said.

Troublesome transactions

Federal authorities have found that members of a criminal ring operating in multiple states will visit local branches of a national bank to deposit cash into accounts opened by paid accomplices, according to Treasury’s money laundering report. Accomplices in other states then withdraw the money as cash, sometimes within minutes.

The criminals, who rely on these schemes to move large sums of ill-gotten gains around the country rather than transporting or mailing cash, tend to keep their deposits and withdrawals under $10,000, the document states.

In some cases the cash is withdrawn near the U.S.-Mexico border and is smuggled across the frontier. In other instances, it is not withdrawn at all and the funds are used to buy export goods that are shipped overseas and sold with the proceeds benefiting the traffickers in so-called trade-based money laundering schemes.

Banks are required to make a Currency Transaction Report to authorities on any deposit or withdrawal involving more than $10,000, a process that involves requesting identification and recording the transactor’s identity.

Criminals depositing cash into the account of a paid accomplice therefore have ample reason to evade these requirements. Even if the bank becomes suspicious and files a SAR, and perhaps even closes the account, the depositor and the person withdrawing or redirecting the funds can remain anonymous.

A warning from within

A bank executive concerned about the risk posed by third-party cash deposits brought the matter to the attention of Thomson Reuters, warning the transactions could limit the success of recent efforts by federal authorities to root-out trade-based money laundering in Los Angeles and Miami.

Last year, at the request of Tobon and other federal authorities, the U.S. Treasury Department began ordering thousands of export businesses in areas deemed high-risk for cartel money laundering to step-up their reporting of cash payments from customers. Authorities had tracked the flow of dirty cartel cash to these areas and knew some businesses were knowingly accepting it as payment for goods.

But the concerned banker said Treasury’s effort to force these businesses to report cartel cash might be rendered moot by money launderers who side-step the businesses and pump the dirty cash directly into their bank accounts via third-party deposits in amounts under the CTR threshold.

“If the point is to identify the businesses receiving cash, and the people depositing the cash, the government still fails on both counts,” the banker said. “The (export) businesses that are already non-compliant still won’t (report the transactions) and there won’t be a CTR from the bank.”

Tobon said he hopes banks would spot any such “criminal countermeasures” and file SARs that could be used to enhance investigations. But he said authorities could do without such leads if banks would just stop accepting the third-party deposits.

“If third-party deposits disappeared tomorrow, it would not hamper law enforcement efforts. In some instances it would help us funnel that activity into areas where we have a lot of visibility,” he said.

A spokeswoman for the Office of the Comptroller of the Currency (OCC), which regulates large banks in the United States, declined to weigh-in when asked whether banks should take third-party cash deposits.

“These are bank business decisions,” OCC spokeswoman Stephanie Collins said in an email.

Treasury’s Financial Crimes Enforcement Network, which administers the BSA and issued the orders targeting the export businesses, declined comment.

(This article was produced by Thomson Reuters Regulatory Intelligence. Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter: @RiskMgment)

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