What is an IRS Reverse Money Laundering Sting? Dangers for Businesses

Money laundering involves taking “dirty” money gained from criminal activity and making it appear “clean” through legal transactions and businesses. The IRS and other government agencies sometimes conduct “reverse” money laundering stings to catch criminals in the act.

In a reverse sting, undercover agents pose as money launderers willing to funnel illicit profits through their accounts and businesses. They tell targets they can clean dirty money for a fee. Unknowing criminals think they are working with real money launderers, not realizing it’s a setup.

How Reverse Stings Work

There are two common ways these stings operate:

• Undercover agents pretend to be professional money launderers. Criminals seeking their services get introduced through informants or while the agents are undercover in criminal groups.
• Agents pose as people wanting to hire money launderers. Launderers think they are getting a new client, not realizing it’s a sting.

In both cases, the targets believe they are dealing with real criminal funds – even though the money is provided by the government. When they accept and process the money, they can be arrested for money laundering.

Why Conduct Reverse Stings?

Reverse stings are an important tool for identifying and disrupting money laundering networks. Benefits include:

• Allows agents to infiltrate laundering rings and gather evidence on key players.
• Catches criminals “red-handed” in the act of laundering.
• Provides probable cause for arrests and asset seizures.
• Can lead to cooperating informants who provide intelligence.

Without reverse stings, building cases against professional launderers can be very difficult due to lack of evidence. The stings provide direct proof of criminal conduct.

Legal Basis

Reverse stings are authorized under federal money laundering laws. Defendants can be charged if they believe they are laundering real criminal profits, even if the money is actually from the government.

This legal theory was upheld in United States v. Manzella, where the court ruled defendants could be convicted for laundering FBI funds they believed were drug trafficking proceeds.

Casinos Highly Vulnerable

As cash-intensive businesses, casinos are prime targets for money laundering schemes. Criminals use various methods to funnel dirty money through casinos and make it appear legitimate.

Common techniques include structuring cash deposits and withdrawals to avoid reporting requirements, purchasing casino chips and then redeeming them later, or wiring funds from offshore accounts.

IRS criminal investigators are very active in pursuing money laundering and tax cases at casinos. Owners must be vigilant in detecting suspicious transactions and guarding against unknowingly being used to clean criminal cash.

Red Flags for Businesses

All cash-based businesses are at risk for money laundering exploitation. Warning signs may include:

• Customers who try to disguise identities or avoid reporting requirements.
• Requests to commingle legal and illegal funds in accounts.
• Suspicious wire transfers from foreign banks.
• Purchases and payments made in cash only.
• Transactions that make no business sense.

Firms should have robust anti-money laundering programs to detect and report suspicious activity. Penalties for being an unknowing accomplice can be severe.

Avoiding Entrapment Claims

Reverse stings must be conducted carefully to avoid entrapment allegations. Strong cases depend on showing the target was “predisposed” toward crime before the sting.

Tactics like initiating contact, aggressively pursuing targets, or making lavish promises could give the defense an argument. Agents must follow guidelines to avoid inducing otherwise innocent people.

Money Laundering Penalties

Money laundering convictions often lead to stiff criminal fines, asset forfeiture, and years in prison. Businesses can also face huge civil liabilities.

Potential charges include:

• Money laundering conspiracy
• Illegal money transmitting
• Structuring to evade reporting
• Operating an unlicensed money business

Sentences are enhanced when violations are part of an underlying crime generating illegal profits.

Cooperation Mitigates Punishment

If caught laundering money, either wittingly or unwittingly, businesses should fully cooperate with investigators. Providing information on accomplices and illicit funds can lead to greatly reduced charges and penalties.

However, companies should consult counsel before volunteering anything, as admissions could lead to charges. There are complex issues regarding rights and liabilities.

Take Threat Seriously

The bottom line is money laundering and terrorism financing are major government priorities. Agencies like the IRS are aggressively targeting abuses through undercover stings, informants, and data mining.

Firms operating cash-intensive businesses must make anti-money laundering compliance a top priority. Implementing robust detection policies, training employees, and avoiding suspicious transactions are essential.

Unknowingly assisting money launderers can still lead to prosecutions that devastate companies. The risks demand serious preventive action.