Regulation of Cyber Banking [Vis-A-Vis Money Laundering, Fraud, Tax Collection]

Regulation of Cyber Banking [Vis-A-Vis Money Laundering, Fraud, Tax Collection]


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Regulation of Cyber Banking [Vis-A-Vis Money Laundering, Fraud, Tax Collection]

The internet has revolutionized every aspect of human life, including the banking industry. In the recent years, advancements in internet technology have resulted in the development of a wide range of products and services. Besides making it easier for financial institutions to gather, sort, and use the information provided by their clients in different ways, it has altered the cost equation of providing banking products and services. Through cyber banking, it has become easier for customers to access their desired products and services and numerous other items from the convenience of their homes and businesses without having to physically walk into a bank. However, the fact that criminals have taken advantage of cyberbeing to carry out various illegal activities. Given the prevalence of such cybercrimes, it is important to consider the regulation of cyber banking in relation to money laundering, fraud, and tax collection.

Money laundering is considered to be the biggest criminal threat created by internet banking. According to Douglas (2000), money laundering is a term that refers to the process of introducing illegally acquired funds into the world’s financial system without arousing any suspicion. In most cases, the process is done by depositing the money into a bank, using it to carry out a number of transactions in order to create a veiled or confusing trail for auditors, and later withdrawing the clean money. In the recent past, the virtual gaming industry has become a multi-billion business that provides criminals with the potential to launder their wrongfully acquired riches. It is estimated that more than $500 billion dollars pass through this industry every year as more and more criminal organizations are using these avenues to launder their dirty money through virtual casinos (Sharman, 2008). Through the use of properly structured bets, criminal organizations are able to make huge profits though offshore casinos. Given the unprecedented potential that online gaming provides to criminals to launder their dirty money, there have been increased calls for more stringent laws and regulations to counter the online money laundering menace. Since the inception of the Money Laundering Control Act in 1986, all forms of criminal proceedings are considered to be illegal. Thus, the only way through which criminals can be able to use their illegally accessed profits is by laundering them so as to facilitate their usage since using the money before it has been ‘cleaned’ can result in the criminal enterprise being prosecuted, charged for tax evasion, or questioned about the origin of the funds. Through money laundering, criminals seek to make it impossible or increasingly difficult for law enforcement agencies to detect their illegal activities.

Since the early 1970s, the US federal government has sought for numerous ways to prevent all aspects of tax evasion and money laundering. Given the rising concern in the United States that criminals were using foreign banks to decontaminate their illegally acquired funds and to avoid the necessary American taxes, Congress passed the Bank Secrecy Act to supplement its already existing Bank Records and Foreign Transactions Act. According to this Act, all transactions that exceed $10,000 should be reported to the relevant authorities as suspicious transactions to commence an inquiry into potential money laundering activities (Yeoh, 2014). Even though the Act was quite controversial at the time, it is still upheld up to date by all financial and non-financial institutions and individuals moving more than $10,000 into or out of the country. Still, the regulations introduced through the Act were incapable of preventing money laundering in the United States, resulting in the passing of the Money Laundering Control Act (MCLA) that criminalized all forms of money laundering and structuring for all forms of criminal and civil forfeitures of money and property that was associated with laundering. The Act also outlawed the process of breaking up significant amounts of money with the intention of evading the $10,000 limit that is required for reporting to the authorities. In 1978, the MCLA also introduced the Financial Privacy Act which provides banks with partial protection in regards to disclosing customer information when they detect any signs of money laundering. The Act was followed by the enactment of the Money Laundering Prosecution Improvements Act in 1988 which introduced strict penalties on any individuals that offers assistance to money launderers, including corrupt bankers and accountant by increasing the level of cooperation between such individuals and the financial institutions that have employed them. In 1994, Congress passed the Money Laundering Suppression Act with the objective of merging the emerging differences between the various anti-laundering regulations that had been passed in the past. The new Act also rationalized the process of monitoring and reporting all financial crime without necessarily forcing the affected financial institutions to undergo costly reporting procedures and other unnecessary forms of liability. Later on, the Electronic Funds Transfer Act (EFTA) containing a stronger enforcement mechanism was passed in an effort at regulating the movement of money through electronic medium. Under Regulation E of this Act, the federal government provides the basic liabilities, rights, and responsibilities of both the financial institutions and all individuals who use electronic services to transfer money (Saperstein, Sant, & Ng, 2015). Presently, the Electronic Funds Transfer Act is the only regulation in the United States that addresses issues pertaining to cyber banking.

Fraud is another crime that became increasingly prevalent with the advent of internet banking. In the recent time, a majority of consumers depend on their personal computers and the internet to access bank services at their convenience. However, while the advantages of faster and more reliable online services for bank customers are evident, the threats posed by these facilities and the approaches for preventing or recovering from cybercrimes are not fully addressed by existing laws and regulations. Every year, millions of people become victims of identity theft, fraud, and scams that often commence with an e-mail or text message that seems to be from a genuine, trusted organization asking the consumers to validate or bring their personal information up-to-date. Likewise, felons create phony websites for such things as credit repair services that they use to trap consumers to enter their personal information.

Some of the regulations that have been passed to protect online consumers from fraud include advance authorization under Regulation E of the Electronic Funds Transfer Act in which only the individual sanctioned by the consumer is allowed to transfer funds that will be occurring on a frequent basis, at considerably regular intermissions, and will not entail any further action by the owner of the account to carry out the transfer (Berger, 2013). Title 18 of the Bank Fraud Statute makes bank fraud illegal in the United States, by stating that any individual who knowingly carried out or attempts to carry out a scheme aimed at defrauding a financial institution or obtaining money, assets, or properties which is owned or controlled by the financial institution through false pretenses, promises, or representations is liable for a fine that should not exceed more than $1,000,000 or a prison sentence that should not exceed 30 years (Berger, 2013). The law forbids forging and knitting of cheques, failing to disclose fundamental personal information on loan applications, diverting funds from a bank account, or carrying out unauthorized activities through one’s credit card. Unlike other provisions, Title 18 does not address issue related to bribery, banking bad checks, or money laundering.

Section 7201 of the United States Code provides regulations against tax evasion in the United States. According to the Act, any individual who seeks to defeat or evade tax in the United States is liable to penalties that include a felony conviction, a fine not exceeding $100,000, and a prison sentence of not more than 5 years (Bird, & Davis-Nozemack, 2016). Such lawful actions can only be taken once the prosecutor shows proof of unpaid federal tax, wilful violation of the law, and an affirmative act that is equal to tax evasion (Ranney, 2017). Similar to the other laws regulating all forms of illegal activities through online banking, Section 7201 provides the Internal Revenue Service (IRS) with a legal platform to bring charges against those who willingly attempt to dodge or defeat the taxman.

The high rate of cybercrimes that are carried out through internet banking services have led to the inception of numerous laws and regulations aimed at preventing incidences of money laundering, fraud, and tax evasion. As from the 1970s, the US federal government has introduced numerous laws to prevent all forms of tax evasion and money laundering through the Money Laundering Control Act in 1986, Bank Secrecy Act, Money Laundering Control Act, Electronic Funds Transfer Act, and Section 7201 of the United States Code. Regulation E of the Electronic Funds Transfer Act and Title 18 of the Bank Fraud Statute are used in regulating fraud in the United States by stipulating the penalties applicable to those that carry out such crimes.


















Berger, M. A. (2013). Not So Safe Haven: Reducing Tax Evasion by Regulation Correspondent Banks Operating in the United States. Journal of International Business and Law, 12(1), 51-87.

Bird, R., & Davis-Nozemack, K. (2016). Tax Avoidance as a Sustainability Problem. Journal of Business Ethics, 1-17.

Douglas, J. L. (2000). Cyberbanking: Legal and Regulatory Considerations for Banking Organizations. North Carolina Banking Institute, 4(1), 59-127.

Ranney, J. A. (2017). Wisconsin and the Shaping of American Law. University of Wisconsin Pres.

Saperstein, L., Sant, G., & Ng, M. (2015). The Failure of Anti-Money Laundering Regulation: Where Is the Cost-Benefit Analysis. Notre Dame L. Rev. Online91, 1.

Sharman, J. C. (2008). Power and Discourse in Policy Diffusion: Anti‐Money Laundering in Developing States. International Studies Quarterly52(3), 635-656.

Yeoh, P. (2014). Enhancing effectiveness of anti-money laundering laws through whistleblowing. Journal of Money Laundering Control17(3), 327-342.

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