QUESTION
We recently completed your AML audit test and found that mortgage fraud and money laundering differ. This became clear when we learned that layering occurred on one of our loans.
Three people were involved in a mortgage fraud scheme. Two stole the personal information, and the other one used that information to obtain a fraudulent loan. She became our borrower. Once the borrower received the loan's proceeds, some of the funds were transferred to the other two accomplices. We were shocked.
Our question involves finding out how to identify mortgage fraud as distinct from money laundering.
What is the difference between fraud and money laundering?
ANSWER
Conducting the test of the Anti-Money Laundering Program is statutorily required. Each Residential Mortgage Lender and Originator[i] ("RMLO") must adopt a policy and procedure for Anti-Money Laundering in recognition of its obligations under the Bank Secrecy Act ("BSA"), other related money laundering regulations, the requirements of the Financial Crimes Enforcement Network (FinCEN), and federal and state licensing agencies.
Testing every twelve months is recommended but not later than every eighteen months. An audit of the procedures must be conducted either internally, pursuant to FinCEN guidelines, or by an independent, external auditor entirely independent of the BSA Officer. Most clients retain us to conduct the audit test every twelve months. Our firm was the first in the country to offer AML testing for RMLOs.[ii]
You can request information about our AML policy, testing, and training HERE.
Simply stated, fraud creates value for the fraudster. Money laundering is the process by which that value enters the financial system and then moves around within and exits the financial system.
Money laundering is the criminal practice of processing ill-gotten gains, or "dirty" money, through a series of transactions; in this way, the funds are "cleaned" so that they appear to be proceeds from legal activities. In effect, money laundering is the process of disguising funds derived from illicit activity in order to permit the use of the funds without the detection of the illegal activity that produced the funds.
Fraud negatively impacts an organization's balance sheet, as the fraud will likely result in a loss of assets. The goal of a fraud is to steal value from the financial services provider.
On the other hand, money laundering often boosts the balance sheet of a financial institution, as it results in greater use of the organization's products and services and more fee income. Money launderers are accustomed to paying a premium to place their funds in the financial system and often are less sensitive, if not indifferent, to the costs of moving such funds within the financial system.
FinCEN has amassed substantial data on mortgage fraud. Traditional mortgage fraud involves homebuyers and/or lenders who falsify information to obtain a home loan. Other forms of mortgage fraud have proliferated in recent years and may include a plethora of scams, such as mortgage rescue and loan modification scams, reverse mortgage scams, rent-to-own scams, and bait-and-switch scams.
Scammers may pose as lawyers, credit counselors, forensic loan auditors, mortgage loan auditors, or foreclosure prevention auditors. Indeed, in our AML tests and risk assessments, we have found that in both money laundering and terrorist financing, criminals can exploit loopholes and other weaknesses in the financial system to launder criminal proceeds, finance terrorism, or conduct other illegal activities, and, ultimately, hide the actual purpose of their activity.
Terrorist Financing and Money Laundering
Since I'm providing an understanding of the difference between mortgage fraud and money laundering, I think this is a good place to clarify the difference between terrorist financing and money laundering. Many people think they're the same, but that is not true.
Money laundering and terrorist financing are distinctly different criminal acts. However, as the law enforcement community has investigated how terrorists finance their activities, they have found that money laundering is often a necessary part of financing terrorist efforts.
Although the motivation differs between traditional money launderers and terrorist financiers, the actual methods used to fund terrorist operations can be the same or similar to those used by other criminals who launder funds. For example, terrorist financiers use currency smuggling, structured deposits or withdrawals from bank accounts, purchases of various types of monetary instruments, credit, debit, or prepaid cards, and funds transfers.
Getting back to the concept of "clean" funds versus "dirty" funds, terrorist financing may involve either of them. Clean funds are funds obtained from ostensibly legitimate sources, such as personal employment, donations to a charitable organization, or the good faith purchase of goods – the purpose of which is the intention to use or contribute the proceeds therefrom to fund terrorist activities.
Dirty funds, however, are those obtained through criminal activities. Terrorists have reportedly relied on extortion, kidnapping, narcotics trafficking, smuggling, fraud, theft, robbery, identity theft, and the use of conflict diamonds[iii] to raise money for their activities.
Money laundering is typically described as occurring in three stages: placement, layering, and integration. However, as more financial transactions are conducted electronically, the lines between the three phases are gradually blurring.
Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
[i]
Briefly put, a person who accepts a residential mortgage loan application or
offers or negotiates terms of a residential mortgage loan.
[ii] Residential
mortgage lenders and originators (RMLOs – known as “mortgage companies” and
“mortgage brokers” but not individual loan originators) were subject to the
Bank Secrecy Act’s (BSA) anti-money laundering regime pursuant to a regulation
published in the Federal Register on February 14, 2012 by FinCEN, a part of
Treasury that implements the U.S.’s anti-money laundering regime. Under the new
rules, RMLOs are required to develop and implement an anti-money laundering
program (AML Program) and begin suspicious activity reporting (SAR filings) by
August 13, 2012.
[iii] Conflict
diamonds originate from areas controlled by forces or factions opposed to
legitimate and internationally recognized governments and are used to fund
military action in opposition to those governments, or in contravention of the
decisions of the United Nations Security Council.
