Due Diligence in Other "Risky Businesses"

Money gained through crime has to be “cleaned” (laundered) before it can be safely used in the legal market. More and more people are finding themselves entangled in complex schemes designed to move money from the black market into regular legal commerce. The practice of money laundering has the potential to affect many lines of business. But some industries have been found to be more likely to attract criminals as a result of the prevalence of cash transactions (e.g. real estate) and the lack of transparency that prevails (e.g. fine art). 

Attorneys are getting tricked into allowing funds acquired through fraud to pass through their escrow accounts; people involved in real estate transactions in all cash deals are finding that the funds came from a sanctioned buyer; cutting edge businesses who accept cryptocurrency are later learning that the source of funds was the proceeds of a crime. 

There are consequences to those who are unwittingly drawn into a money laundering scheme that may not immediately be perceived. Being the subject or an unknowing participant in a fraudulent financial transfer may cause financial and reputational damage that can be difficult to recover from. 

Prevention is always best because after the fact, it is difficult to pick up the pieces and make those defrauded whole. The criminals have by then disappeared. The U.S. government has been behind the rest of the world in preventing money laundering. Through a recent bill, The Enablers Act, Congress is starting along the path to implement anti-money laundering (AML) regulations to make it more difficult for US-based businesses to be duped into facilitating financial crimes. The Enablers Act is expected to be approved as a part of the annual National Defense Authorization Act. 

Once enacted, the following industries will have to comply with anti-money laundering (AML) protocols and suspicious activity reporting under the Bank Secrecy Act:

• persons who provide investment advice for compensation; 

• persons who trade in works of art, antiques, or collectibles; 

• attorneys, law firms, or notaries involved in financial or related activity on behalf of another person; 

• certain trusts and company service providers; 

• certified public accountants and public accounting firms; 

• persons engaged in the business of public relations, marketing, communications, or other similar services in such a manner as to provide another person anonymity or deniability; and 

• persons engaged in the business of providing third-party payment services.”

Other industries the Treasury Department has determined to be risky due to “a lack of timely access to beneficial ownership information of legal entities and lack of transparency” include: 

• Real Estate

The recent trend of lightning speed cash offers for high-value property has created an easy way for criminals to launder money when purchasing homes. For real estate buyers who do not require a mortgage loan, purchase property in the name of a legal entity or in the name of a close associate for legitimate or illegitimate purposes, no system exists to confirm the ultimate beneficial owner nor verify the source of funds used in such transactions.  Further, as home pricings are subject to artificial inflation and property is an appreciating asset, criminals use real estate to both clean and invest their funds. 

• Cryptocurrency

A bill passed in November 2021 and taking effect in early 2024 will require businesses and individuals accepting $10,000 or more in cryptocurrency to be reported using a specific tax form that includes the sender’s name, date of birth, and taxpayer identification number. Failure to comply with this mandate could result in a $250,000 fine and up to five years in prison. Also in 2021, the Office of Foreign Asset Control began requiring members of the virtual asset industry to put in procedures to ensure that they do not engage, directly or indirectly, in transactions with sanctioned individuals or entities.

“Risky businesses” need to begin to conduct know-your-client (KYC) due diligence on their investors, vendors, business partners and high paying customers in order to reduce that risk that the money they are receiving is not from proceeds of crime. The following industries are considered “risky” as they can be attractive to money launderers as a result of their cash-intensive nature and lack of regulation:

• Cannabis businesses.

• Laundromats.

• Parking Garages. 

• Convenience stores.

• Restaurants.

• Retail stores.

• Liquor stores

• Cigarette distributors.

• Privately owned automated teller machines (ATM).

• Vending machine operators.

Hrbek Law is here to assist with your preparation and compliance with pending legislation by taking the guesswork out of Anti-Money Laundering (“AML”) compliance by providing Know-Your-Client audits for our clients whose lines of business are determined to be “risky.”