18-1

18-2

18

Organized Crime, Organized Crime, Counterterrorism, and Anti-Counterterrorism, and Anti-

money Launderingmoney Laundering

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

18-3

Criminal and Terrorist Organizations and Money

This chapter discusses criminal and terrorist organizations and the one thing they have in common: money.

Challenges to forensic accountants are in several areas:Working with law enforcement in analyzing financial records

relating to criminal and terrorist organizations.Working with law enforcement in tracing financial transactions

through financial and banking systems.Working with law enforcement in developing and managing

data-mining systems designed to help identify criminal and terrorist activities.

Working with client compliance programs intended to help in identifying and avoiding money-laundering problems.

18-4

The La Cosa Nostra (LCN)

The La Cosa Nostra (LCN) Originated in Italy, in the U.S., it developed into 5 families run

by a series of bossesLCN Activities

Drug trafficking, murder, assault, gambling, extortion, loan-sharking, labor racketeering, money laundering, arson, gasoline bootlegging, infiltration of legitimate businesses, stock market manipulation, and various other illegal frauds and schemes.

18-5

Labor Racketeering

The FBI defines labor racketeering as the domination, manipulation, and control of a labor movement that affects related businesses and industries.

The domination of labor unions has traditionally been one of LCN’s fundamental sources of power and profit.

A primary goal of labor racketeering has been to control labor health, welfare, and pension funds.

The FBI focuses its labor racketeering investigations in the major industrialized U.S. cites that traditionally have had strong union bases.

The main legal tool used by the FBI has been the Racketeer Influenced and Corrupt Organization (RICO) statute.

18-6

Gambling

Gambling has always been a mainstay of LCN. One type of illegal gambling traditionally controlled by LCN

is the numbers game. Bets are placed with bookies. Loan-sharking is closely related to gambling because

compulsive gamblers frequently overextend themselves and need to borrow money to cover their gabling debts.Mafia loan-sharks lend money at sky-high rates of interest.

The “vig” is added to the loan every week at the rate of about three to five points.

Fast-money loans: borrow $500 on Monday and pay back $900 on Friday.

18-7

Money Flows in the LCN

The sgarrista runs his own rackets but kicks up a high percentage of his profits to his immediate boss, the capo.

The capo takes whatever percentage he likes, but his cut is generally in the 50 to 70 percent range.

The money flows from the capo to the family boss, who has absolute authority in the organization. The capo normally gives the boss anywhere from 10 to 40 percent of the money he receives from soldiers.

LCN members frequently place all their legal assets (e.g., automobiles, houses, and bank accounts) in others’ names.

All financial dealings are strictly in cash.

18-8

Legal Investigations and LCN

The FBI uses a wide array of legal statutes and investigatory methods in combating organized crime. Title 18, United States Code, Section 1961 (Racketeer Influenced Corrupt Organizations).

A primary investigative tool that has met with great success has included covert monitoring, including the use of wire taps, bugs, and other listening devices.

18-9

Check Fraud and Asian Organized Crime

AOC has been heavily involved in check fraud. The typical scheme involves the following persons:Leader Well educated, frequently with a college degreeProcurer In charge of stealing legitimate checksCounterfeiter Expert in producing fake or duplicate payroll

checks, money orders, credit cards, bank checks, currency and identification cards.

The information broker Collects personal information on possible targets of impersonation.

Check passer This person specializes in negotiating stolen or counterfeit checks. The groups often negotiate only a small percentage of the checks they steal and sell the rest on the black market.

18-10

Terrorism

Islamic Background and InfluenceMuch of today’s worldwide terrorism has its roots in a radical

interpretation the Islamic religion. The teaching that Islam is under attack is of great theological

significance. Because Islamic terrorists’ beliefs are deeply rooted in their

religion, there is no room for compromise. They will accept nothing less than Islamic theocracy for the entire world.

The rise of the radical jihad in recent decades traces back to the Afghan War of the 1980s.

In time, the Western European countries became a magnet that drew Islamic radicals from a wide variety of countries.

18-11

The European Legal System and Terrorists

Some of the legal hurdles that have hindered prosecuting terrorism in EuropeEvidence Gathering ProblemsTerrorism not Clearly DefinedInability to Stop Plots in ProgressTransnational Investigation BureaucracyInability to Deport Terrorists

18-12

The European Terrorist Profile: Recruiting Process

Muslims Converted to JihadA large number of European Muslims have not integrated into

society. Much of the recruiting takes place in prisons. Recruiting often takes place in mosquesThe recruiting process usually begins in small groups and

progresses to one-on-oneAfter recruits are fully developed in jihadism, the recruiter may

assign them to a terrorist cell, or to training camps, or to one of the foreign wars where Islamists are fighting secular states

Nonmuslim recruits are especially desirableLone wolves and families also exist

18-13

Operation of Terrorist CellsSpiritual leadership Most terrorist cells are guided by

spiritual leaders who sometimes issue fatwas (religious pronouncements) giving the cell members the green light to kill innocent Muslims and non-Muslims.

Logistics support Includes making false documents, providing transportation across borders, making contacts, and identifying safe houses.

Weapons experts Some cell members are sent to specialized training camps where they acquire bomb-making and other military-type skills.

Financial support Some cells, especially those with dedicated terror missions, are financed by handlers who receive money from a wide variety of sources.

18-14

Money LaunderingMoney laundering involves practices that hide the

connection between the sources of funds and their ultimate use.

Whereas the money-laundering process in organized crime begins with dirty money and ends with clean money, the reverse is often true with terrorism.

Terrorist organizations are increasingly becoming criminal syndicates that raise money through the broad spectrum of illegal activities that include everything from petty street crime to extortion, human smuggling, and drug trafficking. These activities generate large amounts of money that cannot simply be deposited into bank accounts without drawing the attention of the authorities.

18-15

The Three-Step Money-Laundering Process

In the placement phase, the money launderer introduces illegally obtained profits into the financial system. The main objective of this phase is to get the money into the financial system in a way that cannot be traced to its illegal source.

In the layering phase, the money launderer uses complicated sets of transactions to move the money around the financial system and further distance it from its original illegal source. The main objective is to thoroughly destroy any audit trail that could trace the money back to its original placement in the financial system.

In the integration phase, the launderer moves the money a final time into accounts under his legal control to make it appear to come from a legitimate source.

18-16

Placement Methods

Smurfing (the most common approach)Cash smugglingNegotiable instrumentsCash exchange for negotiable goodsATM depositsCash-value insurance policiesCorporate bank accountsBuy a bankBuy a banker

18-17

Layering Methods

Informal Value Transfer System (IVTS)For example, they are called the hawala in Afghanistan,

Pakistan, and the Middle East; the hundi in India; he fe ch’ien in China; the phoe kuan in Thailand; and the black market peso exchange in South America.

Tax Havens and Off-Shore BanksBank Secrecy LawsOff-Shore TrustsShell CorporationsWalking AccountsBuy a BankFinancial Intermediaries

18-18

Integration Methods

Off-Shore Debit and Credit Off-Shore Consulting and Directors FeesCorporate LoansGamblingReal Estate FlipsUnder-the-Table Cash DealsStock PurchasesLegitimate BusinessesSham Import Transactions

18-19

Financial Crimes Enforcement Network and the BSA

Financial Crimes Enforcement Network (FinCEN) is organized under the U.S. Department of Treasury to oversee and implement policies to prevent and detect money laundering.

FinCEN’s primary enforcement tool is its application of the Bank Secrecy Act (BSA)

The BSA requires recordkeeping and reporting by banks and other financial institutions. FinCEN also provides intelligence reports to law enforcement agencies.

FinCEN requires banks and other financial institutions to file currency transaction reports (CTRs) for cash transactions of more than $10,000 and suspicious activity reports (SARs) for transactions that could be related to money laundering.

18-20

BSA Direct

CTR and SAR reports, along with other data, are then made available to authorized organizations through the BSA Direct

18-21

Money Laundering Laws and Penalties

BSA is one of a group of U.S. antimoney-laundering acts. Money Laundering Penalties

In the United States, penalties for money laundering are harsh. The statutes permit prison sentences of up to 20 years per money-laundering transaction. Fines may be as large as $500,000 per money-laundering transaction or twice the amount of the transaction, and any funds linked to such transactions may be subject of seizure and forfeiture.

18-22

BSA-Related Reporting Requirements

The Code of Federal Regulations (CFR) requires 3 things from financial institutions: internal compliance programs, reporting, and recordkeeping

Reporting Requirements IRS Form 4789, Currency Transaction Report (CTR) U.S. Customs Form 4790, Report of International

Transportation of Currency or Monetary Instruments (CMIR) Department of the Treasury Form 90-22.1, Report of Foreign

Bank and Financial Accounts (FBAR) Treasury Department Form 90-22.47 and OCC Form 8010-9,

8010-1, Suspicious Activity Report (SAR)  “Designation of Exempt Person” Form TDF 90-22.53 

18-23

Suspicious Activity Reporting Requirements

Suspicious activity reports must be filed for the following:Insider abuse involving any amount. Violations of federal law aggregating $5,000 or more when a

suspect can be identified. Violations of federal law aggregating $25,000 or more

regardless of a potential suspect. Transactions aggregating $5,000 or more that involve

potential money laundering or violations of the BSA Any transaction that has no business or apparent lawful

purpose or is not the type of transaction in which the particular customer would normally be expected to engage

Related regulations require banks to know their customers in order to be able to identify suspicious transactions.

18-24

Red Flags That Trigger SARs

Activity inconsistent with the customer’s business.Acts that appear oriented to avoid reporting or

recordkeeping requirements.Fund (wire) transfers without apparent good reasons.Insufficient or suspicious information provided by customer.Bank employee activities, such as lavish lifestyles.Unusual bank-to-bank transactions.Other suspicious customer activity such as depositing an

unusual number of large bills, deposits of musty or dirty bills, deposits by couriers rather than in person, and so on.

Certain types of customers and transactions in high-risk areas should be given special scrutiny.