Taxpayer Education and Communication
Small Business/Self Employed Operating Division
Money Laundering
Prevention
Presented by: David Vicente
TEC Anti-Money Laundering Specialist
Internal Revenue Service
Objectives
• Introduce the SB/SE Anti-Money Laundering
(AML) program
• Overview of AML law
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Internal Revenue Service
Money Laundering
• Engaging in financial
transactions to disguise:
– Origin
– True nature
– Ownership of illicit funds
• $1 to $3 trillion laundered
worldwide annually
• Tax evaders / criminals use large
cash payments to ”launder”
money from illegal activities
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Internal Revenue Service
Ways to Launder Money
• Through legitimate businesses
• Illegal businesses
• Off-shore shell companies
• Trading in gold, diamonds,
gems
• Smuggling
• Underground banking systems
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Internal Revenue Service
3 Stages of Money Laundering
1. Placement
Cash converted to monetary instruments
Deposited in financial institutions accounts
2. Layering
Funds moved to other financial institutions
to obscure origin
3. Integration
Funds used to acquire legitimate assets
Fund further activities
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Internal Revenue Service
Structuring
A series of related transactions:
• that a person could have conducted as one
transaction
and
• intentionally broke into several transactions in
order to fall outside the BSA reporting
requirements
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Internal Revenue Service
Structuring
• Can be done:
– Within a business
– Within a geographic area
– By purchasing multiple monetary
instruments
– By conducting the transactions over several
days
– Using one or more individuals to obtain
cash payments or make cash transactions
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Internal Revenue Service
Structuring Examples
• Two or more customers work together to
break one transaction into several transactions
• Purchase monetary instruments just under the
reporting threshold:
– Over several days or
– At two or more locations of different
branches of same money services business
on same or different days
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Internal Revenue Service
Bank Secrecy Act (BSA)
• Congress passed the Bank Secrecy Act in 1970
– Title 31
• USA PATRIOT Act (2002) strengthened law
• Reporting and recordkeeping required
establishes a financial trail where typically none
existed
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Internal Revenue Service
Importance of BSA Reports
• Protect your business from being exploited by
money launderers
• Identifies potential illegal activities
–
–
–
–
Tax evasion
Money laundering
Financial fraud and abuse
Terrorist financing
• Detects / prevents flow of illicit funds
• Identifies emerging threats through trend analysis
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Internal Revenue Service
BSA Reports
Reports are filed at the Detroit Computing Center
– Entered in Currency and Banking Retrieval
System (CBRS)
– Filed reports create an audit trail for cash
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Internal Revenue Service
Money Services Business (MSB)
Internal Revenue Service
A MSB is a business that offers one or more of the following
services:
•
•
•
Money orders
• Traveler’s checks
Check cashing
• Stored value
Currency dealing or exchange
AND
The business conducts more than $1,000 in money services
business activity with the same person (in one type of
activity) on the same day
•
OR
The business provides money transfer services in any
amount
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Internal Revenue Service
MSB Registration
• Required to register with FinCEN
– MSBs established before 12/2001 - by December
2001
– MSBs established after 12/2001 - 180 days to
register
• MSBs not required to register:
– Branch or agent of an MSB, Post Office and
Fed/State governments
– MSBs that provide only stored value cards
• Failure to register - $5,000 each day/5-years
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Internal Revenue Service
MSB Required to:
Renew registration with FinCEN
– Every two years
– By December 31
First renewals due 12/31/03
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Internal Revenue Service
Recordkeeping
MSB must retain for five years:
– Copy of filed registration
– Estimate of business volume
– Ownership and control
information
– Agent list
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Internal Revenue Service
MSB Also Required to:
• Report transactions over $10,000 – CTR
• File Suspicious Activity Reports
• Implement an AML compliance program
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Internal Revenue Service
Suspicious Activity Reports
(SARs)
Internal Revenue Service
SAR
MSB required to file a SAR when it knows / suspects
that:
•
Source of funds derived from illegal activity or conducted
to disguise funds from illegal activity
•
Transaction structured to evade BSA requirements
•
Appears to serve no known business or apparent lawful
purpose
•
Uses the MSB to facilitate criminal activity
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Internal Revenue Service
MSBs Who Must File SAR
•
Issuers of traveler’s checks or money orders
•
Sellers / redeemers of traveler’s checks or
money orders
•
Money transmitters
•
Currency exchangers
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Internal Revenue Service
SAR Filing Threshold
For transactions conducted by money services
businesses:
• Involves or aggregates funds of $2,000 or
more
• Involves or aggregates funds of $5,000 or
more that are identified from a review of
clearance records
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Internal Revenue Service
SAR
• File within 30 days of becoming aware of a
suspicious transaction
• Keep the SAR and supporting documentation for
five years
• Penalties may be assessed if required SAR forms
are not filed
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Internal Revenue Service
Compliance Program
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Internal Revenue Service
Compliance Program
• USA PATRIOT Act Section 352 Financial institutions must establish anti-money
laundering programs
• “Financial institution” includes entities already
subject to federal regulation such as:
–
–
–
–
Banks
Money services businesses
Registered securities broker-dealers
Futures commission merchants
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Internal Revenue Service
Compliance Program
• “Financial institution” now includes businesses,
which have not been subject to federal regulation
• FinCEN is considering new regulations for:
– Dealers in precious metals, stones, or jewels
– Real estate closings and settlements
– Vehicle sales
– Travel agencies
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– Insurance agencies
Internal Revenue Service
Compliance Program Must Include
• System of internal controls to ensure
ongoing compliance
• Independent audit function
• Training of personnel
• Designation of a compliance officer
• Procedures for using all available
information to comply
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Internal Revenue Service
Form 8300
Report of Cash Payments
Over $10,000
Received in a Trade or Business
Internal Revenue Service
Who Must File Form 8300
• Individual
• Company
• Corporation
• Partnership
• Association
In a trade or business
who receives more than
$10,000 in cash in a
single or related
transactions
• Trust
• Estate
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Internal Revenue Service
Form 8300
• Use the revised form for all transactions after
December 31, 2001
– Revised - December 2001
– Known as IRS/FinCEN Form 8300
• File within 15 days of payment
• Penalty for non-compliance
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Internal Revenue Service
Report of Foreign Bank and
Financial Accounts (FBAR)
TD F 90-22.1
Internal Revenue Service
FBAR
• Reporting obligation even if the accounts
produce no taxable income
• FinCEN delegated authority to assess
penalties to IRS
• SB/SE Compliance conducts reviews on FBAR
filing requirements and assesses penalties
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Internal Revenue Service
Who Must File FBAR
• A US person with a financial interest in a
foreign account and
• The foreign financial account is over $10,000
at any time during the year
Must file an FBAR by June 30 of the
following year
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Internal Revenue Service
SB/SE Compliance AML Structure
• Compliance territory manager identified in each
Area (16) has AML responsibility
• 33 AML Compliance groups
• 350 full time examiners to ensure that quality
examinations are conducted
• Current emphasis - increased enforcement
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Internal Revenue Service
Identify Cases for Examination
• Use published services
• Internet research
• Analysis of Currency and Banking Retrieval
System (CBRS) information
• Reliance on information received during exams
• Information from Criminal Investigation
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Internal Revenue Service
Title 31 BSA Examination
Receipt of appointment letter 3493 and Form
4564, Information Document Request (IDR) for:
• Written policy statements
• Monthly bank statements
• Daily and monthly work records, summaries
and reconciliations
• Copies of filed BSA reports
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Internal Revenue Service
Title 31 BSA Examination
• Not an income tax audit
• Each type of financial service is examined
separately
• Power of Attorney (POA) –
– Use a general power of attorney valid under
state law
– Cannot use Form 2848
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Internal Revenue Service
Title 31 BSA Examination
• Owner / manager / employees interviewed
who:
– Handle cash transactions and money
transmissions
– Are responsible for filing BSA reports
– Review day to day compliance
– Are responsible for operating or supervising
AML compliance program
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Internal Revenue Service
Title 31 BSA Examination –
Interview Focus
•
•
•
•
•
•
•
•
•
Policies and procedures
Internal controls and cash controls
BSA knowledge
Related entities
Compliance programs
Training
Method of keeping books and records
Internal approval authority
Reporting and recordkeeping responsibilities
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Internal Revenue Service
Title 31 BSA Examination –
Interview Content
• Presence and effectiveness of:
– AML compliance program and
– Internal controls
• Procedures used to ensure that the information
in the reports and records is complete and
accurate
• Training of employees relative to:
– BSA regulations and
– Any written or oral policies or procedures regarding
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cash transactions and money transmissions
Internal Revenue Service
Title 31 BSA Examination –
Interview Content
• Amount of cash on hand, sources and uses of
cash, and cash controls
• Local competition/competitors offering the
same or similar services
• Type of computer system used
• Any related entities
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Internal Revenue Service
Closing Title 31 BSA Examination
• Notification of Apparent Violation, Letter 1112,
is issued when violations are:
– Technical, minor, infrequent, isolated, or not
substantive and the violations do not meet the
criteria for referral to Treasury
– Report of Findings and Recommendations details
apparent violations and necessary corrective actions
– Acceptance statement
• Penalties assessed by FinCEN
• To appeal penalties, file suit in federal court
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Internal Revenue Service
IRS 8300 Review
Receipt of appointment letter 2277 and Form
4564, Information Document Request (IDR) for:
• Checking / savings account records
• Deposit slips for checking / savings accounts
• Sales journal, accounts and notes receivable
records
• Invoices
• Cash receipts journal
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Internal Revenue Service
IRS 8300 Review
• Not an income tax examination
• Power of Attorney (POA) – Use Form 2848
• Owner / manager / employees interviewed
• Books and records inspected
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Internal Revenue Service
IRS 8300 Review – Interview Focus
•
•
•
•
•
•
•
•
•
Who is responsible to file 8300s / handle cash
8300 and 6050I knowledge
Internal controls for cash transactions
Number and types of bank accounts
Types of records maintained
If any 8300s have been filed
Procedures to ensure 8300 complete / correct
Procedures to notify customers
Related entities
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Internal Revenue Service
IRS 8300 Review
Inspect books / records for:
• Transactions involving the receipt of reportable
cash in excess of $10,000
• Consecutive or related reportable transactions in
excess of $10,000
• Ensure that Forms 8300 correctly / timely filed
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Internal Revenue Service
Closing the 8300 Review
• Determinations made
• Closing conference
• No closing letter issued
• If unagreed, IRS appeals process and tax court
rights
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Internal Revenue Service
Resources
• Websites
www.msb.gov
www.fincen.gov
www.irs.gov
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Internal Revenue Service
Taxpayer Education and Communication
Small Business/Self Employed Operating Division
Presented by: David Vicente
TEC Anti-Money Laundering Specialist
Phone: (510) 637-2199
Email: david.w.vicente@irs.gov
Internal Revenue Service
Questions