Trust Companies as Last Line of Defense in Preventing Anonymous Criminal Activity

Believe it or not, trust companies play a vital role defending the United States financial system from anonymous criminal activity.  Financial crime in the United States generates approximately $300 billion of proceeds per year according to the Department of Treasury.  Most of the money generated from domestic crime remains onshore, but the problem is exacerbated by the fact that the U.S. has become an attractive destination for billions of dollars of illicit funds generated abroad.  The scope of money laundering is massive as only a fraction is detected each year. Indeed, investigating such activity is akin to searching for the proverbial needle in a haystack.  This is why financial institutions are required to have a robust Anti-Money Laundering (“AML”) Compliance program dedicated to the detection and prevention of suspicious criminal activity.  Suspicious Activity Reports (“SARs”) filed with FINCEN provide leads for law enforcement and invaluable evidence for successful prosecutions.

All profit generating crime necessitates the laundering process to enable a criminal to enjoy the fruits of his or her labor.  The penultimate risk threatening the trust industry remains anonymity.  Personal trusts with a web of underlying shell corporations are ideal vehicles to disguise ownership, control, source of funds, and the true nature and purpose of the trust structure.   A hidden powerholder pulling the strings coupled with complex legal arrangements and sophisticated transactions enables successful execution of the money laundering process with relative ease.

Money laundering occurs in three distinct stages that may overlap depending upon complexity.  The first is placement where funds are deposited into bank accounts at home or abroad in a manner that avoids reporting thresholds.  Layering follows and is best described as a shell game where layers of transactions break the audit trail to separate the funds from the crime.  Lastly, the funds are integrated when money is transferred to an account(s) to purchase luxury goods or assets thereby legitimizing its source.  Dirty money is ultimately cleaned as a return on investment(s).

Shell corporations are legal entities; such as corporations, partnerships, and LLCs, registered with the state but conduct no physical operations and hold no significant assets.  They often serve as conduits for fund transfers or as nominee owners.  Anonymity is afforded to these entities because the United States maintains no public registry of beneficial ownership information and some states even permit the use of agents serving as directors and/or shareholders.  The lack of available information often results in an investigative dead end.

The misuse of anonymous shell corporations is a top enforcement priority and served as the primary catalyst behind the Treasury Department’s new Customer Due Diligence (“CDD”) Rule requiring financial institutions to capture the natural person beneficial owner(s) and controlling persons of legal entity clients.  Interestingly, most personal trusts do not fall within its purview as it only applies to legal entities registered with the state thus creating a glaring weakness for potential abuse.  Some companies have thankfully filled this void by requiring basic powerholder information at account opening.

Financial institutions have been effectively deputized by the Treasury to report suspicious activity and now serve as a depository for beneficial ownership information sought by law enforcement.  Financial institutions, therefore, must establish the true identity of the suspicious actor along with capturing evidence of the activity.  Until uniform standards are implemented to identify beneficial owners at the time of incorporation, trust companies are among the last line of defense in preventing anonymous criminal actors from abusing our financial system. The failure to capture hidden powerholders allows completion of the laundering process absent detection.

First State Trust Company takes its regulatory obligations very seriously.  We have implemented a robust control environment which proactively identifies, monitors, and manages our AML risk.  Knowing Your Client (“KYC”) is the bedrock principle underlying AML regulations.  We accordingly KYC all powerholders associated with our personal trusts and capture the beneficial owners of all legal entity clients.  We understand our clients’ wants, needs, and how our role can best accomplish the trust’s purpose.  We recognize the importance of truly knowing our client to not only provide exceptional customer service, but to protect our clients and ourselves from anonymous criminal activity.

Michael McElwee, JD

Assistant Vice President, Compliance/AML Officer

The posts expressed are views of FSTC and are not intended as advice or recommendations. For informational purposes only.