Crooks are everywhere, and you never know when your business might come into contact with someone who is trying to launder money. In this article, you'll learn about money laundering, the U.S. law relating to money laundering, and what you must do as a business person to make sure you don't run afoul of money laundering regulations.
What Is Money Laundering?
Money laundering is transactions and activities used to hide the real source of money. In many cases, an "illegal enterprise" (as the IRS calls them) is attempting to make dirty money (from these illegal activities, such as a drug deal, for example) look legitimate — clean, that is. Hence the money is "laundered."
Business Outsider says money laundering is an international problem.
From corrupt politicians and drug cartels to tax cheats and alimony deadbeats, more or less everybody’s doing it.
How Does Money Get Laundered?
The principle of money laundering is to get the cash into the financial system without revealing the source of the money. Let's say someone has cash from an illegal deal. The person attempts to pay with cash so that the cash gets into the financial system without having to reveal where it came from.
How money is laundered usually operates in a three-stage process for money laundering. In the first stage (placement), "dirty" money is introduced into the financial system, usually in small deposits. In the second stage (layering), the money is distributed or dispersed. And in the third stage (integration), the money is re-introduced into the economy, and it's used to buy large-ticket items like houses or businesses.
Why Is Money Laundering a Crime?
While it might seem obvious, money laundering is criminal activity for several reasons. The IRS is one federal agency tasked with tracking these ill-gotten gains, primarily because this income isn't taxed. Even illegal gains are taxable, as Al Capone found out in 1930 when he was convicted of tax evasion.
Even more serious than avoiding taxations, the U.S. Treasury says
Money laundering facilitates a broad range of serious underlying criminal offenses and ultimately threatens the integrity of the financial system.
Not the least of these crimes are drug trafficking and terrorism, so it's necessary for the U.S. government and other governments to be tough on money launderers.
What's the Law on Money Laundering?
Two U.S. Laws relate directly to attempts to curtail money laundering activities. The Bank Secrecy Act of 1970 included requirements for banks and financial institutions to report certain types of transactions, and large cash transactions.
In 1986, Congress passed the Money Laundering Control Act that makes money laundering a specific federal crime. It prohibits specific criminal acts relating to financial transactions (defined very broadly) that attempt to hide where the funds came from, who owns the funds, or who controls them. This law can prosecute violations with no minimum transaction amount.
More recent laws have been enacted mainly to banks with more stringent regulations and requirements for identification of bank customers.
What About Financial Transactions Outside the U.S.?
Money launderers often work with offshore accounts (bank accounts outside the U.S.). Anyone with offshore assets is supposed to report them to the IRS to foil attempts to hide money overseas. The relevant law is called FATCA (the Foreign Account Tax Compliance Act). This law requires reporting of large foreign assets, with minimums set depending on your tax filing status. If your foreign assets are under the minimum, you don't have to file a report for the tax year in question.
What Do I Have to Do to Comply With Anti-Money Laundering Laws?
Even if your business isn't a bank, you may be the victim of a money-laundering scheme. If your business may have large transaction amounts (from equipment sales or real estate transactions), or if you do a lot of business in cash (a restaurant, for example), you should be aware of where money is coming from into your business. This principle, in the banking industry, is called "Know Your Customer."
Specifically, federal law requires you to report any large cash transactions over $10,000 to the IRS. There is a specific form you'll need to use to report these transactions — Form 8300. Note these are cash transactions, which are untraceable through the financial system.