Alerts

Russian Spies, Red Flags and Corporate Liability

Alerts / July 15, 2010

Life imitated spy movies last Thursday, when ten people accused of being Russian secret agents pled guilty in the United States District Court for the Southern District of New York to charges of conspiring to act as unregistered foreign agents. The spies were rounded up in late June and the details of the FBI investigation do not disappoint: invisible ink, bag swaps and honey traps, all of which culminated in a Cold War-style prisoner exchange. So why should companies that are not involved in international espionage care about this criminal prosecution? The answer is that the Department of Justice (DOJ) used one of its favorite tools to charge most of these defendants: eight of these spies were accused of conspiracy to commit money laundering.

A Criminal Law That Casts a Wide Net

When DOJ wants to strengthen charges against an individual or corporate defendant, pursue crimes committed in foreign jurisdictions or broaden a case to include a wider network of individuals and entities, it often relies upon criminal money laundering laws. Under these statutes, it is generally prohibited to knowingly receive the proceeds of any one of a number of crimes (including fraud, embezzlement, misappropriation, bribery, tax evasion, export control violations or falsely classifying goods, among others) and to engage in any one of a number of different transactions with those illicit proceeds (including transactions intended to disguise their source, to conceal their location, to avoid a reporting requirement, to transfer them across a United States border or to promote the underlying activity). Although a defendant must know that funds are criminal proceeds in order to commit a money laundering crime, in some circumstances, knowledge can be based on deliberate indifference—failure to make appropriate inquiries when faced with red flags for suspicious activities.

“When financial institutions fail to [properly monitor the origins of funds flowing into our financial system...], they will be held accountable.”

 -- Assistant Attorney General Lanny Breuer

 

Accordingly, individuals that engage in seemingly ordinary transactions involving the proceeds of a crime run the risk of liability for violating criminal money laundering laws. The Russian spies, for example, were accused of transferring thousands of dollars in cash, delivering ATM cards and purchasing and renting residences. On its face, this description could refer to something as innocuous as a weekend at a B&B in Vermont, but because the money involved the proceeds of a crime, the defendants were accused of committing a money laundering offense. A conviction for money laundering can result in fines of double the amount of the funds in question and up to 20 years in prison.

Individual Misconduct, but Corporate Liability

A money laundering investigation can lead to charges not only for the criminal actors, but also for companies involved in the transactions. In tandem with DOJ, the enforcement arms of the Department of the Treasury can also impose substantial civil penalties on certain companies that fail to comply with the suspicious activity reporting requirements of the Bank Secrecy Act (BSA) (31 U.S.C. § 5318(g); 31 C.F.R. § 103.18) or fail to implement satisfactory policies, procedures and controls, supported by sufficient staffing, training and independent testing (31 U.S.C. § 5318(h)).

DOJ has been clear that it will aggressively police the behavior and compliance programs of financial institutions and other companies. In March of this year, when DOJ announced the guilty plea of Pamrapo State Bank (which was accused of conspiring to conceal illegal activity by failing to file currency transaction reports and suspicious activity reports and willfully failing to maintain adequate money laundering programs) Assistant Attorney General Lanny Breuer reinforced the message: “This case is a good example of how disregarding reporting and compliance can turn into a crime. Today’s guilty plea by Pamrapo Savings Bank should remind financial institutions, large and small across the country, of the high price they will pay for ignoring the law.” Similarly, DOJ settled criminal charges with ABN AMRO, which according to DOJ both facilitated illegal transactions on behalf of institutions in countries sanctioned by the Treasury Department and also failed to maintain adequate anti-money laundering procedures. When announcing its settlement in May, pursuant to an agreement that required the company to forfeit $500 million, DOJ’s Breuer had this to say: “When financial institutions fail to [properly monitor the origins of funds flowing into our financial system...], they will be held accountable.”

Looking at Your Own Company for Red Flags—KNOW YOUR CUSTOMER

The best defense to potential liability for money laundering and related forfeiture actions is a comprehensive Anti-Money Laundering/Bank Secrecy Act compliance program designed to identify and block transactions involving suspected proceeds of a crime. If your company trades publicly, operates in developing countries and high-risk jurisdictions, facilitates international transactions, provides financial services, is subject to the requirements of the BSA or otherwise is at risk of DOJ scrutiny, you should take care to minimize the risk of engaging in money laundering activities. A strong compliance program should ensure that all state and federal transaction reporting requirements are met. All companies involved in large transactions, particularly financial services companies, should adopt stringent know-your-customer policies and become adept at identifying the types of transactions and customers that might be high-risk, such as payments from non-bank financial institutions or customers whose business activities are not transparent or who come from a country that poses a high risk for money laundering. It is essential that companies train employees to be alert to these and other potential red flags indicating that a customer’s funds may be from illegal activity. Most importantly, your company should police itself vigorously and take swift action to investigate, remedy and possibly report any wrongdoing, as the government will be less inclined to resort to hardball tactics when dealing with a company that places compliance above secrecy.

Russian spies may be far and few between, but money laundering is a daily threat against which corporate counsel and compliance officers must remain ever vigilant. For more information, please contact John J. Carney (jcarney@bakerlaw.com or 212.589.4255), George A. Stamboulidis (gstamboulidis@bakerlaw.com or 212.589.4211) or Dennis O. Cohen (dcohen@bakerlaw.com or 212.589.4288). We hope you find this information helpful.


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