The United States and the Money Laundering Process (Portfolio)
Video Transcript:
Video Transcription:
New York state's banking regulation body accused Standard Chartered Bank of assisting Iran to launder $250 billion between 2001 and 2007. Regulators charged the bank with knowingly engaging in a number of different fraudulent activities to assist Iranian financial institutions with its dollar-denominated transactions around the world. This case demonstrates why the U.S. banking system is so attractive to money launderers.
According to the New York Department of Financial Services, Standard Chartered Bank facilitated transactions from Iran that helped sustain a global threat to peace and stability. The chief investigator in the case admitted that he did not know how much of that money went to Iran's nuclear program or terrorist organizations.
Standard Chartered Bank facilitated the alleged money laundering activities by altering reports on the source of wire transfers. According to investigators, one way the bank disguised transfers from Iran was by using a series of codes to indicate money transfers from Iranian sources. Bankers reported the Iranian-sourced money to be coming from Standard Chartered Bank's headquarters in London in order to avoid legal scrutiny into Iranian-sourced transactions.
Standard Chartered Bank is certainly not alone in being accused of knowingly engaging in money laundering. More recently, banks like HSBC, Bank of America and Wachovia have been investigated and accused of helping Mexican drug traffickers launder their illicit funds through the American banking system.
The U.S. has some of the strictest anti-money laundering laws in the world, plus a regulatory environment capable of investigating reported cases. So it would seem strange that ostracized actors like Iranian banks and Mexican drug traffickers would risk moving their funds through the U.S. banking system.
But for those who have the right connections and can provide a large enough incentive, moving funds through the U.S. banking system is one of the most effective ways to launder money. Once money passes through the U.S., it is generally considered low risk. Investigators are constantly looking into financial transactions around the world trying to spot anomalous activity that could indicate criminal financial flows. Those investigators are going to scrutinize transactions that originate from less regulated banking systems like the Seychelles or Liechtenstein much more than transactions from the U.S.. Once money passes through the U.S., it's generally considered about as clean as it can get. That's why the U.S. is such an attractive banking system for criminals and rogue states.
The process of laundering money goes through three steps: placement, layering and integration. Placement is the introduction of the illegitimate funds into a financial institution -- with or without the institution's knowledge. Layering is the concealment of the original source of the funds by moving them through different banks, investments, loans and other financial vehicles. Finally, once the source of the funds has been misconstrued through layering, the money is integrated into the legitimate economy through the purchase of goods like cars, property or art.
According to the allegations, Standard Chartered Bank played its role in the layering step of the money laundering process. It used its legitimacy as part of the U.S. banking system to convince investigators that the money was clean so that when it came time to integrate the money, very few questions would be asked.
While the U.S. does have a reputation for having relatively strict anti-money laundering laws, the sheer size of the U.S. banking system means that regulators can't police every single transaction. Because of the size of U.S. financial markets, regulators have to rely on banks to self-police and report suspicious activity that passes through. When banks self-regulate though, they are faced with the question of how much risk they are willing to take on in order to make money. The riskier a transaction gets, the more potentially lucrative it is. Standard Chartered allegedly reaped hundreds of millions of dollars in fees from the illegal transactions. If the customer is lucrative enough, banks will justify the risk.
Enforcement of anti-money laundering laws will never be perfect. Banks employ a team of lawyers to conduct cost-benefit analysis of engaging in risky but lucrative transactions. Regulations don't stop money laundering; they simply make money laundering more expensive to conduct. This ensures that the U.S. banking system will tolerate the most lucrative money laundering operations.
