Formed in 1989 by the G7 countries, the FATF is an intergovernmental body whose purpose is to develop and promote an international response to combat money laundering. The FATF Secretariat is housed at the headquarters of the OECD in Paris. In October 2001, FATF expanded its mission to include combating the financing of terrorism. FATF is a policy-making body that brings together legal, financial, and law enforcement experts to achieve national legislation and regulatory AML and CFT reforms. Currently its membership consists of 34 countries and territories and two regional organizations. In addition, FATF works in collaboration with a number of international bodies and organizations. These entities have observer status with FATF, which does not entitle them to vote, but permits them full participation in plenary sessions and working groups.
FATF has developed 40 recommendations on money laundering and 9 special recommendations regarding terrorist financing. FATF assesses each member country against these recommendations in published reports. Countries seen as not being sufficiently compliant with such recommendations are subjected to financial sanctions.
In an attempt to prevent dirty money from entering the US financial system in the first place, the United States Congress passed a series of laws, starting in 1970, collectively known as the Bank Secrecy Act. These laws, contained in sections 5311 through 5332 of Title 31 of the United States Code, require financial institutions, which under the current definition include a broad array of entities, including banks, credit card companies, life insurers, money service businesses and broker-dealers in securities, to report certain transactions to the United States Treasury. Cash transactions in excess of US$10,000 must be reported on a currency transaction report (CTR), identifying the individual making the transaction as well as the source of the cash. The US is one of the few countries in the world to require reporting of all cash transactions over a certain limit, although certain businesses can be exempt from the requirement. Additionally, financial institutions must report transaction on a Suspicious Activity Report (SAR) that they deem "suspicious", defined as a knowing or suspecting that the funds come from illegal activity or disguise funds from illegal activity, that it is structured to evade BSA requirements or appears to serve no known business or apparent lawful purpose; or that the institution is being used to facilitate criminal activity. Attempts by customers to circumvent the BSA, generally by structuring cash deposits to amounts lower than US$10,000 by breaking them up and depositing them on different days or at different locations also violates the law.
The financial database created by these reports is administered by the U.S.'s Financial Intelligence Unit (FIU), called the Financial Crimes Enforcement Network (FinCEN), which is located in Vienna, Virginia. These reports are made available to US criminal investigators, as well as other FIU's around the globe, and FinCEN conducts computer assisted analyses of these reports to determine trends and refer investigations.
The BSA requires financial institutions to engage in customer due diligence, which is sometimes known in the parlance as "know your customer". This includes obtaining satisfactory identification to give assurance that the account is in the customer's true name, and having an understanding of the expected nature and source of the money that flows through the customer's accounts. Other classes of customers, such as those with private banking accounts and those of foreign government officials, are subjected to enhanced due diligence because the law deems that those types of accounts are a higher risk for money laundering. All accounts are subject to ongoing monitoring, in which internal bank software scrutinizes transactions and flags for manual inspection those that fall outside certain parameters. If a manual inspection reveals that the transaction is suspicious, the institution should file a Suspicious Activity Report.
The regulators of the industries involved are responsible to ensure that the financial institutions comply with the BSA. For example, the Federal Reserve and the Office of the Comptroller of the Currency regularly inspect banks, and may impose civil fines or refer matters for criminal prosecution for non-compliance. A number of banks have been fined and prosecuted for failure to comply with the BSA. Most famously, Riggs Bank, in Washington D.C., was prosecuted and functionally driven out of business as a result of its failure to apply proper money laundering controls, particularly as it related to foreign political figures.
Image By Pen Waggener (Flickr: Economic Landscape) [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons