In 1899, a young lad was borne to two American-Italian parents in New York City. Alphonese Capone, or “Al” as he was known, got off to a rough start. He was in a gang by the age of 13, and had a side hustle as a bouncer at bars and brothels. It would be this latter job that would lead to his life long nickname, ”Scarface”, when a patron, unhappy with how Al had insulted his sister, would slash the left side of his face with a knife three times.
By the age of 20, Al moved to Chicago. Rising quickly in the ranks of organized crime, he became the bodyguard and confidant to one of the city’s most notorious gangsters. His timing would turn out to be fortuitous. That year, in 1919 the United States ratified its 18th constitutional amendment, the prohibition of the manufacture, sale and transportation of Alcohol. Known as Prohibition, Alcohol would remain unavailable through legal channels until 1933. For years, the US Temperance Society had lobbied to control Alcohol, believing that Alcohol was the root of many, if not most, of US society’s ills. One branch, the Anti Saloon League, or ASL, grew to be one of the most effective lobbyists in political history, and the 18th amendment had been its crowning achievement.
Unfortunately for the ASL and its fellow organizations, prohibition itself became the basis for an unprecedented wave of violence, bootlegging, and crime. And, at the heart of it, in Chicago, was the young gangster Al Capone. A few years into prohibition, Al had taken over his boss’s criminal enterprise. His old boss, Johnny Torrio had a near fatal skirmish with another gang, and barely survived. He chose to retire, and the now 26-year-old Al took over running his empire.
Al’s enterprise was making money hand-over-fist selling bootleg Alcohol. As their profits surged, they needed a way to hide their earnings and make them “legitimate”. At that point in time, one of the most effective ways to do this was by churning their money into legitimate enterprises which had high cash volumes. It turned out that one of the most effective ways to do this was to hide his ill-gotten proceeds by mixing them in with the legitimate cash turnover of restaurants, nightclubs and laundromats.
Yep, that’s right money laundering is called money laundering because at one time it actually involved a real laundromat!
Al Capone is still impacting your investments today.
You might have noticed in the last few years that whenever you open a financial account, or move larger sums of money, you might have to fill out more paperwork, or get asked more questions by your banking and investment advisors. Those of us who work in Financial Services are subject to a wide range of regulatory measures aimed at limiting the ability of criminals and other unsavory groups from laundering money. Here’s just a few:
- We have to physically see your photo ID to setup a new account, or view two pieces of ID that confirm your name & date of birth and name & address.
- If you are opening an account for a corporation, we need to know who the directors and controlling entities are for the corporation. We may also need to get their ID verified as well.
- We may not be able to send money to your bank account from your investment account unless you have previously provided us with authentication that it is your account, and you have signed off that we are allowed to send money directly to your account.
- We can’t send funds to a bank account with a different name on it than is on your investment account.
- For certain situations, we have to ask you if you, or your immediate family, have any relatives who might be a politically exposed person – ie, a politician, senior political figure, or at the rank of general or above in a military found anywhere in the world. If so, we have to log and report these details. Part of our anti-money laundering legislation is to track account transactions of people who are considered at high risk – and being related to senior government officials is one of the risk criteria.
These are just a few of the limitations I run into on a day-to-day basis, and there are many, many more. On top of all of this, we advisors have a requirement to report any suspicious transactions to FINTRAC, Canada’s anti-money laundering agency. And, we have to update our firm’s anti-money laundering policies every year or two….the task I will be doing this week, right after you read this message!
Given that our firm has a specialty in charitable giving, we run into these particular issues quite frequently. Some insurance and financial companies have interpreted the Anti-money laundering rules in a very strict fashion, and this can be a real problem for Charitable Entities. We have had requests for an ID check on the president of a university, as well as board members for various organizations. I’d like to give a huge thank you and shout-out to my dear friend and CAGP colleague Yolanda Benoit of the BC SPCA and her colleague Andrew Rutherford, who decided to fight back on one of these requests a year or so ago. Yolanda felt that one of the requests she received was going a step too far, and mentioned this to Andrew, who then went on a deep dive reached out directly to FINTRAC. FINTRAC was kind enough to provide Andrew with a letter indicating that the insurer did not need to go to the extent of verification they were requesting. It was a positive change for the sector as a whole, and led to a change in process for that insurer.
I do understand why my sector is very strict on handling Money Laundering issues. You may have read in the news in the last few weeks, that the US government recently imposed some of the largest penalties in history on the USA arm of one of our Canadian Big Five banks. The penalties and restrictions will effectively gut the growth of their US operations for many years. The price of non-compliance, is very, very high.
At the end of the day, while we may find some of the questions advisors must ask clients, or the strict rules around transferring money between accounts a pain-in-the-butt, these rules exist for a very important reason: to ensure that criminals and foreign agents aren’t able to hide illegally earned financial gains from law enforcement. Without these rules, the world would be a much more dangerous place.
Al Capone was also taken down by a regulator.
For years, Chicago struggled with Capone and his henchmen running their crime racket freely, seemingly untouchable despite the many serious and violent acts he and his gang committed. He had been arrested for a variety of issues including prohibition violations, vagrancy, perjury and other minor crimes, but seemed to be able to slip out of any serious consequences, despite being labelled as “Public Enemy #1” in Chicago.
In 1931, it would be a federal charge of tax evasion, and ironically, a sexually transmitted disease that would take him down. Finally outsmarted not by police investigators, but an accountant name Frank J Wilson, the government was able to use its highly punitive tax laws to put Capone in prison for 11 years. Wilson, who along with his team, reviewed nearly two million documents over several years. This work is often credited with creating the field of forensic accounting. During his imprisonment, Capone became more and more ill from Syphilis, which he had likely contracted during his stint as a bouncer at a brothel. The disease eventually caused significant brain damage. While one of the first people treated with Penicillium during his imprisonment, it was too late in his infection to prevent severe neural injury from the syphilis. By 1946, a psychological assessment showed he had decayed to the mentality of a child. A year later, a stroke and a heart attack would put an end to his life.
I’ve always found it intriguing that Al Capone’s legacy is our modern anti-money laundering rules, as well as the birth of forensic accounting. His unsavory story is also ironic in that it was not the police who took him down – but instead, his tax return, and a determined accountant. Sometimes, the pen is indeed mightier than the sword!
Ryan