In the United States, actions by banks to prevent money laundering are not only a regulatory requirement, but also an act of self-interest. All financial institutions, both banks and non-banks, are susceptible to money laundering activities. However, banks have taken the lead in developing programs to prevent and detect money laundering, which their non-bank counterparts would do well to emulate. Money laundering as well as the underlying criminal activity -- fraud, counterfeiting, narcotics trafficking, and corruption -- weaken the reputation and standing of any financial institution. A bank tainted by money laundering accusations from regulators, law enforcement agencies, or the press faces serious challenges to its reputation.

As a result, over the past decade U.S. banks have developed comprehensive programs to prevent their activities from being abused for money laundering.

To implement effective anti-money-laundering procedures, banks must understand the laundering process. Basically, that process has three stages, each of which involves interaction with a financial institution:

• Placement -- physically disposing of cash proceeds derived from illegal activity.

• Layering -- separating illicit proceeds from their source by creating complex layers of financial transactions designed to hamper the audit trail, disguise the origin of such funds, and provide anonymity to their owners.

• Integration -- placing the laundered proceeds back into the economy in such a way as to appear as resulting from legitimate business activity.

Law enforcement agencies and regulators require financial institutions to adopt procedures to guard against and report suspicious transactions that occur at each of these stages. Accordingly, U.S. banks strive to conduct due diligence in order to prevent the use of its institution for criminal purposes.

Due diligence increases the likelihood that the bank complies with established laws and regulations and decreases the likelihood that the bank will become a victim of money laundering, fraud, or other illegal activities. Moreover, it protects the bank's good name without interfering with good customer relationships.

U.S. banks have typically adopted procedures to apply scrutiny at the time a client opens an account and to monitor ongoing activity through the account. What follows is a summary description of what comprises a successful anti-money-laundering program.

Identification Procedures: A bank must develop and implement comprehensive procedures for opening accounts, establishing loan and other business relationships, and conducting transactions with non-account holders. The bank must know the true identity of a a customer, including the beneficial owner, requesting any of its services. Identification must be verified to prevent establishment of accounts for fictitious beneficiaries.

In addition, the bank must know the customer's business or professional activities; sources of the customer's income, wealth, or assets; and the specific source of the money subject to transactions at the bank. The purpose of the account should be noted. The bank should develop a sense of the types of transactions in which the customer normally engages. When opening a client account, bank personnel should know whether the client may be included in a high-risk category, indicating the need for enhanced monitoring.

Monitoring Procedures: Internal systems must be in place for identifying and monitoring transactions that appear to be suspicious. Suspicious activity includes transactions for which no legitimate activity can be ascertained. It also may include transactions that fall outside the parameters that the bank establishes. What is important to note is that, given the huge number of transactions banks process each day, banks cannot monitor every single transaction. Banks must therefore assess the risk inherent in doing business with a specific type of account, with a specific geographic area, and with a specific type of transaction.

A bank should review any single transactions or series of transactions that exceed a money threshold set for its typical services: opening deposits; monthly wire transfers; transactions in cash, traveler's checks, money orders, bank checks, third party checks, cashier's checks; internal transfers; credit facilities; and trading -- including the buying and selling of currencies, options, and precious metals.

Additionally, significant increases in activity should be monitored. Accounts that may have a high risk for suspicious transactions -- such as accounts of non-bank financial institutions, offshore accounts, personal investment company accounts, correspondent accounts, accounts subject to subpoena or other legal process, accounts of politicians, accounts from high-risk jurisdictions lacking effective anti-money-laundering controls -- should receive greater scrutiny. A bank should set thresholds and change them from time to time to check whether they remain adequate. Once a bank system has identified possible suspicious activity, trained personnel must investigate whether the transactions represent legitimate business activity. If no information can substantiate such legitimate activity, the bank has the duty to file a suspicious activity report.

Training Procedures: Banks should conduct ongoing education programs for bank staff to review money laundering techniques, anti-money-laundering procedures, changes in applicable laws and regulations, and the kind of transactions that may warrant investigation. Regular training should include how to identify and follow up on unusual or suspicious activities. The bank should train not only all personnel who have account relationships but also appropriate back office personnel. All new employees should be provided with guidelines concerning anti-money-laundering procedures.

Auditing and Accountability: A bank should conduct annual audits of each department's compliance with due diligence policies and procedures. Each employee should receive a copy of the written anti-money-laundering procedures and sign an attestation that he or she has read them, understands them, and will abide by them. Evaluations of personnel should include how well each employee adheres to the bank's anti-money-laundering policy.

Anti-Money-Laundering Unit: Banks should establish adequately staffed and trained independent departments responsible for the development and enforcement of the bank's anti-money-laundering policy and procedures. It is important that these units be independent of business units -- sometimes they are a part of the compliance, control, or legal departments. In addition to developing and enforcing the bank's procedures, the units should investigate transactions referred to them that may be suspicious. Instances of suspicious activity must be communicated to the anti-money-laundering unit in order to file reports of suspicious activity as required by law.

Role of Senior Management: What perhaps is the most important element of a successful anti-money-laundering program is the commitment of senior management, including the chief executive officer and the board of directors, to the development and enforcement of the anti-money-laundering objectives. Senior management must send the signal that the corporate culture is as concerned about its reputation as it is about profits, marketing, and customer service.

It is important to realize that no anti-money-laundering program is going to be 100 percent successful. Money launderers employ increasingly sophisticated techniques to avoid banks' detection programs. Nonetheless, a program like the one outlined above greatly improves a bank's ability to prevent and detect money laundering and to satisfy government requirements that it has been duly diligent in preventing access to those who would conduct illegitimate transactions. In short, such a program enhances the bank's ability to preserve its reputation for integrity and risk-adverse practices.

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Note: The opinions expressed in this article do not necessarily reflect the views or policies of the U.S. government.