A BSA/AML program is a system designed to assist institutions in their fight against money laundering and terrorist financing. In many jurisdictions, government regulations require financial institutions as well as money service businesses such as money transmitters, check cashers, casinos, etc. At a minimum, the anti-money laundering program should include:
Written internal policies, procedures and controls;
A designated AML compliance officer;
On-going employee training; and
Independent review to test the program
Beneficial ownership identification
Collectively, these are considered the “Five Pillars of AML”. Please note, it is not uncommon to see “Four Pillars” being employed in compliance literature. This is incorrect as the institution of FinCEN’s Beneficial Ownership Rule created the fifth pillar in May 2018.
A financial institution’s compliance program is comprised of the Three Lines of Defense:
The first line of defense (or "front line") includes relationship managers and other customer-facing employees who are generally tasked with the onboarding of initial customer relationships. They are responsible for ensuring that adequate information is obtained so that adequate customer due diligence can be conducted.
The second line of defense generally consists of all “back office” compliance functions including sanctions, BSA, human resources, and technology. The second-line defense reviews the effectiveness of controls used to mitigate risks, provides information to the first line, and investigates potentially suspicious activity.
The third line of defense is the financial institution’s internal audit functions. They are tasked with reviewing the compliance and efficacy of both the first and second lines of defense. They conduct independent periodic assessments of operations, controls, policies, procedures, training, etc.
Put simply, money laundering is the process of disguising the funds derived from criminal activity or a “predicate offense”. This involves any attempt to obscure the existence, nature, source, or ownership of money through the “laundering” process. It is comprised of three stages:
Placement: The placement of funds into a financial institution. Placement can often involve many types of transactions. One money launderer might break up a large amount of cash into smaller amounts and deposit it into one or many bank accounts to avoid detection. Another might transport a large amount of cash via suitcase to deposit in an off-shore financial institution to be wired back to their home country. Some choose to purchase cashier’s checks, money orders, or other monetary instruments. Placement can take many forms and largely depends on the size and scale of the criminal activity from which the funds are derived.
Layering: If placement is successful and the initial funds go undetected, financial transactions can be coordinated to prevent further detection. This can include the wiring of funds to other financial institutions, offshore banks, the purchase of goods and services, etc. These layers of transactions are designed to confuse any future audit trail.
Integration: Integration is the final stage in the laundering process. It is the integration of funds back into the economy in a way that avoids detection and appears legitimate. Money laundering cannot be successful until the paper trail is eliminated or made so complex that the flow of funds derived from criminal activity cannot be traced back to the predicate offense.