For Release: November 30, 2000

Contact: june.a.gates@clev.frb.org, 216/579-2048


Money Laundering: Understanding the Wash Cycle

Over the last 30 years, lawmakers have enacted a broad array of domestic legislation to combat money launderers. However, in our zeal to catch criminals we must weigh the benefits of legislation and regulation against the costs they impose on financial institutions and their customers, say Federal Reserve Bank of Cleveland researchers Paul Bauer and Rhoda Ullmann.

Writing in the Bank's Economic Commentary, Bauer, an economic advisor, and Ullmann, a research assistant, describe the money laundering process, examine the motivation behind the evolving statutes, and explain the Federal Reserve System's supporting role in enforcing them.

Bauer and Ullmann define money laundering as "any attempt to engage in a monetary transaction that involves criminally derived property." The foundation of U.S. money laundering laws is the Bank Secrecy Act (BSA) of 1970, which requires financial institutions to create and preserve a "paper trail" for various types of transactions. By filing various forms, financial institutions aid law enforcement authorities in the fight against money laundering.

But the forms also impose real costs on the institutions and on legitimate customers, say the Fed researchers. The Financial Crimes Enforcement Network (FinCEN) estimated that reporting and recordkeeping costs associated with BSA compliance in 1999 totaled $109 million, which does not include the costs of training and monitoring personnel, modifying computer programs, or inconveniencing legitimate customers.

The forms' effectiveness has also been questioned. Former Federal Reserve Governor Larry Lindsey observed that between 1987 and 1996, banks filed 77 million currency transaction reports; these led to only 3,000 money laundering cases. Of the 7,300 defendants charged in those cases, only 40 percent were sentenced.

Looking ahead, Bauer and Ullmann outline several developments in the fight against money laundering that warrant monitoring. They note that some of the Internet-based payment systems that are being developed seek to combine the speed of electronic transfers with the anonymity currently provided by currency. Such a combination would appeal strongly to launderers, say the researchers. More positive developments include a recent increase in international cooperation and proposed legislation that would give the Treasury the power to prevent U.S. banks or brokerage houses from transacting business in countries that allegedly tolerate money laundering.

 

 

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