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Money laundering |
Money laundering is the practice of engaging in financial transactions in order to conceal the identity, source, and/or destination of money, and is a main operation of the underground economy.
In the past, the term "money laundering" was applied only to financial transactions related to organized crime. Today its definition is often expanded by government regulators (such as the United States Office of the Comptroller of the Currency) to encompass any financial transaction which generates an asset or a value as the result of an illegal act, which may involve actions such as tax evasion or false accounting. As a result, the illegal activity of money laundering is now recognized as potentially practiced by individuals, small and large businesses, corrupt officials, members of organized crime (such as drug dealers or the Mafia), and even corrupt states, through a complex network of shell companies and trusts based in offshore tax havens. A few examples of money laundering are smurfing or kiting.
The increasing complexity of financial crime, the increasing recognized value of so-called "financial intelligence" (FININT) in combating transnational crime and terrorism, and the speculated impact of capital extracted from the legitimate economy has led to an increased prominence of money laundering in political, economic, and legal debate.
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The act of "money laundering" was not invented during the Prohibition era in the United States, but many techniques were developed and refined then. Many methods were devised to disguise the origins of money generated by the sale of then-illegal alcoholic beverages. Following Al Capone's 1931 conviction for tax evasion, mobster Meyer Lansky transferred funds from Florida "carpet joints" (small casinos) to accounts overseas. After the 1934 Swiss Banking Act, which created the principle of bank secrecy, Meyer Lansky bought a Swiss bank to which he would transfer his illegal funds through a complex system of shell companies, holding companies, and offshore accounts.1
The term "money laundering" does not derive, as is often said, from Al Capone having used laundromats to hide ill-gotten gains. It was Meyer Lansky who perfected money laundering's older brother, "capital flight," transferring his funds to Switzerland and other offshore places. The first reference to the term "money laundering" itself actually appears during the Watergate scandal. US President Richard Nixon's "Committee to Re-elect the President" moved illegal campaign contributions to Mexico, then brought the money back through a company in Miami. It was Britain's Guardian newspaper that coined the term, referring to the process as "laundering."2
If a person is making thousands of dollars in small change a week from a business (not unusual for a store owner) and wishes to deposit that money in a bank, it cannot be done without possibly drawing suspicion. In the United States, for example, cash transactions and deposits of more than a certain dollar amount are required to be reported as "significant cash transactions" to the Financial Crimes Enforcement Network (FinCEN), along with any other suspicious financial activity which is identified as "suspicious activity reports." In other jurisdictions suspicion-based requirements are placed on financial services employees and firms to report suspicious activity to the authorities. Methods to conceal the source are therefore required.
One method of keeping this small change private would be for an individual to give money to an intermediary who is already legitimately taking in large amounts of cash. The intermediary would then deposit that money into an account, take a premium, and write a cheque to the individual. Thus, the individual draws no attention to himself, and can deposit his cheque into a bank account without drawing suspicion. This works well for one-off transactions, but if it occurs on a regular basis then the cheque deposits themselves will form a paper trail and could raise suspicion.
Another method involves establishing a business whose cash inflow cannot be monitored, and funneling the small change into this business and paying taxes on it. All bank employees however are trained to be constantly on the lookout for any transactions which appear to be an attempt to get around the currency reporting requirements. Such shell companies should deal directly with the public, perform some service-related activity as opposed to providing physical goods, and reasonably accept cash as a matter of business. Dealing directly with the public ensures plausible anonymity of source.
An example of a legitimate business displaying plausible anonymity of source would be a hairstylist. Since it would be unreasonable for them to keep track of the identity of their customers, a record of their transaction amounts must be ostensibly accepted as prima facie evidence of actual financial activity. Service-related businesses have the advantage of anonymity of resources. A business that sells computers has to account for where it actually got the computers, whereas a plumbing company merely has to account for labor, which can be falsified. Reasonably accepting cash means the business must regularly perform services that total less than $500 on average, since above that amount most people pay with a check, credit card, or other traceable payment method. The company should actually function on a legitimate level. In the plumbing company example, it is perfectly reasonable for a lot of the business to involve only labour (no parts), and for some business to be paid for in cash, but it is unreasonable for all of their business to involve no parts and only cash payment. Therefore the legitimate business will generate a legitimate level of parts usage, as well as enough traceable transactions to mask the illegitimate ones.
Corrupt politicians and lobbyists also launder money by setting up personal non-profits to move money between trusted organizations, so that donations from inappropriate sources may be illegally used for personal gain.
Many jurisdictions adopt a list of specific predicate crimes for money laundering prosecutions as a "self launderer" (the UK has an "all-crimes" regime). In addition, AML/CFT laws typically have other offences such as "tipping off," "willful blindness," not reporting suspicious activity, and conscious facilitation of a money launderer/terrorist financier to move his/her monies.
The "money laundering" legislation in the United Kingdom, under Sections 327 to 340 of the Proceeds of Crime Act 2002 (PoCA), and all of the Money Laundering Regulations 2003 and 2007, is wide-ranging and encompasses mere possession of criminal or terrorist property as well as its acquisition, transfer, removal, use, conversion, concealment, or disguise.3 In the UK "money laundering" need not involve money (it relates to assets of any kind, both tangible and intangible, and to the avoidance of a liability) and need not involve laundering either (a thief's possession of the assets he himself stole is included). There is no lower limit to what has to be reported - a suspicious transaction involving a single £5 note may be required to be reported. All persons (not just financial services employees and firms) are technically required to report, and obtain consent for, their own involvement in crime or suspicious activities involving money or assets of any kind. So in the UK a thief who steals a vest from a clothes store commits a "money laundering" offence because he has possession of an asset derived from crime. He is technically required to seek consent from law enforcement for his continued possession of the vest if he is to avoid risk of prosecution for "money laundering."
The UK legislation also creates a money laundering offence where a person enters into, or becomes concerned in, an arrangement which facilitates (by whatever means) the acquisition, retention, use, or control of criminal property by another person. This has impacted upon lawyers and other professional advisers in the UK who act for a client whom they suspect may possess criminal property of any kind.
Because the UK legislation is wide-ranging, the UK FIU authority, the Serious Organised Crime Agency, receives a large volume of suspicious activity reports (SARs) - in 2005 just under 200,000 SARs were received. The number of SARs received appears to be growing by almost 50% each year.
The UK legislation was relaxed slightly in 2005 to allow banks and financial institutions to proceed with low value transactions involving suspected criminal property without requiring specific consent for every transaction (but the reporting of all transactions is still required).
WikiCrimeLine Money Laundering regulations: England and Wales
The Bank Secrecy Act of 1970 requires banks to report cash transactions of $10,000.01 or more. The Money Laundering Control Act of 1986 further defined money laundering as a federal crime. The USA PATRIOT Act of 2001 expanded the scope of prior laws to more types of financial institutions, added a focus on terrorist financing, and specified that financial institutions take specific actions to "know your customer" (KYC).
In the United States, Federal law provides (in part): "Whoever ... knowing[ly] ... conducts or attempts to conduct ... a financial transaction which in fact involves the proceeds of specified unlawful activity ... with the intent to promote the carrying on of specified unlawful activity ... shall be sentenced to a fine of not more than $500,000 or twice the value of the property involved in the transaction, whichever is greater, or imprisonment for not more than twenty years, or both."4
While money laundering typically involves the flow of "dirty money" (criminal proceeds) into a "clean" bank account or negotiable instrument, terrorist financing frequently involves the reverse flow: apparently clean funds converted to "dirty" purposes. A hawala may launder drug proceeds and help fund a terrorist, netting the incoming and outgoing funds with only occasional small net settlement transactions.
The Supreme Court of the United States on June 2, 2008, rendered 2 judgments in favor of defendants, narrowing the application of the federal money-laundering statute.
First, in a 9-0 decision, ponente Justice Clarence Thomas reversed Acuna, Mexico's Humberto Cuellar's conviction and ruled that "hiding $81,000 in cash under the floorboard of a car and driving toward Mexico is not enough to prove the driver was guilty of money laundering; instead, prosecutors must also prove the driver was traveling to Mexico for the purpose of hiding the true source of the funds." The Court further ruled "that federal prosecutors have gone too far in their use of money laundering charges to combat drug traffickers and organized crime; that money laundering charges under the Money Laundering Control Act of 1986, Sec. 18 U. S. C. § 1956(a)(2)(B)(i) apply only to profits of an illegal gambling ring and cannot be used when the only evidence of a possible crime is when a courier headed to Texas-Mexico border with $ 81,000 in cash (proceeds of a marijuana transaction); it cannot be proven merely by showing that the funds were concealed in a secret compartment of a Volkswagen Beetlecar; instead, prosecutors must show that the purpose of transporting funds in a money laundering case was to conceal their ownership, source or control; the secrecy must be part of a larger “design” to disguise the source or nature of the money."
Second, in a 5 to 4 ruling, Justice Antonin Scalia reversed Efrain Santos of Indiana and Benedicto Diaz's convictions for money laundering based on cash from an illegal lottery. Scalia ruled that the law referred to the "proceeds of some form of unlawful activity; paying off gambling winners and compensating employees who collect the bets don't qualify as money laundering; the word “proceeds” in the federal money-laundering statute, 18 U. S. C. §1956,and §1956(a)(1)(A)(i) and§1956(h), applies only to transactions involving criminal profits, not criminal receipts; those are expenses, and prosecutors must show that profits were used to promote the illegal activity." Congress enacted the 1986 statute after the President's Commission on Organized Crime stressed the problem of "washing" criminal proceeds through overseas bank accounts and legitimate businesses. It imposes a 20-year maximum prison term and heavy fines.56789
In India Prevention of Money-Laundering Act, 2002 has been passed which came into effect since 1st of July, 2005. As per Section 3 of the Act, Offence of money-laundering covers those persons or entities who directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime and projecting it as untainted property, such person or entity shall be guilty of offence of money-laundering.
Section 4 of the Act prescribes punishment for money-laundering with rigorous imprisonment for a term which shall not be less than three years but which may extend to seven years and shall also be liable to fine which may extend to five lakh rupees and for the offences mentioned in paragraph 2 of Part A of the Schedule, the punishment shall be upto ten years.
Section 12 (1) prescribes the obligation on Banking companies, financial institutions and intermediaries (a) to maintain certain records detailing the nature and value of the transaction whcih may be prescribed, whether such transactions comprise of a single transaction or a series of transactions integrally connected to each other, and where such series of transactions take place within a month; 12 (b) to furnish information of transactions referred to in clause (a) to the Director within such time as may be prescribed and to (c) verify and maintain the records of the identity of all its clients, As per Section 12 (2), the records referred to in sub-section (1) as mentioned above, is required to be maintained for a period of ten years from the date of cessation of the transactions between the clients and the banking company or financial institution or intermediary, as the case may be.
The provisions of the Act is frequently reviewed and various amendments have been passed from time to time.
In Bangladesh, the issue of money laundering has been dealt with by the Prevention of Money Laundering Act, 2002(Act No. VII of 2002). In terms of section 2 (tha) of the Prevention of Money Laundering Act, 2002 , “Money Laundering means (a) Properties acquired or earned directly or indirectly through illegal means; (b) Illegal transfer, conversion, concealment of location or assistance in the above act of the properties acquired or earned directly of indirectly through legal or illegal means.” In this Act, “Properties means movable or immovable properties of any nature and description”.
The primary method of anti-money laundering is the requirement on financial intermediaries to know their customers - usually termed KYC (know your customer) requirements. With good knowledge of their customers, financial intermediaries will often be able to identify unusual or suspicious behavior, including false identities, unusual transactions, changing behaviour, or other indicators that laundering may be occurring. But for institutions with millions of customers and thousands of customer-contact employees, traditional ways of knowing their customers must be supplemented by technology. Bank and corporate security directors can also play an important role in fighting money laundering. 10
Information technology can never be a replacement for a well-trained investigator, but as money laundering techniques become more sophisticated, so too is the technology used to fight it. Before anti-money laundering programs became commonplace, the Bank Secrecy Act required financial institutions to file Currency Transaction Reports for cash transactions of $10,000 or more in the U.S. These CTRs prove invaluable for investigators, but money launderers began to structure their transactions to avoid the reporting requirements. As a result, the U.S. passed laws against structuring transactions to avoid the reporting requirements, and most structuring would trigger a Suspicious Activity Report by the financial institution.
Current Anti-money laundering software packages include capabilities of name analysis, rules-based systems, statistical and profiling engines, neural networks, link analysis, peer group analysis, and time sequence matching. In addition, there are specific KYC solutions that offer case-based account documentation acceptance and rectification, as well as automatic risk scoring of the customer (taking account of country, business, entity, product, transaction risks) that can be reviewed intelligently. Other elements of AML technology include portals to share knowledge and e-learning for training and awareness.
Financial Crimes Enforcement Network (FinCEN), is an organization created by the United States Department of the Treasury. FinCEN receives Suspicious Activity Reports from financial institutions, analyses them, and shares their data with U.S. law enforcement agencies and equivalent Financial Intelligence Units (FIUs) of other countries. One of its strategic goals is to improve information-sharing through eGovernment. It offers training and advice to organizations of foreign governments to help improve the efficacy of their anti-money laundering programs.
After September 11, 2001, money laundering became a major concern of the United States's war on terror, although critics argue that it has become less and less an important matter for the White House. Based in Luxembourg, Clearstream International, a central securities depository and clearing house or "bank of banks" which practices "financial clearing," centralizing debit, and credit operations for hundreds of banks, was accused of being a major operator of the underground economy via a system of un-published accounts; Bahrain International Bank, owned by Osama bin Laden, would have profited from these transfer facilities.1 The scandal prompted André Lussi, Clearstream's CEO, to resign on December 31, 2001; several judicial investigations were opened; and the European Commission was interpelled by Members of the European Parliament (MEPs) Harlem Désir, Glyn Ford, and Francis Wurtz, who asked the Commission to investigate the accusations and to ensure that the June 10, 1990 directive (91/308 CE) on control of financial establishment was applied in all member states, including Luxembourg, in an effective way.11
The international response to the underground economy has been coordinated by the Financial Action Task Force on Money Laundering ("FATF," also known by its French acronym of "GAFI"), whose original 40 principles form the basis of most international responses to money laundering activity. A further 8 principles, designed to counteract funding to terrorist organisations, were added on June 30, 2003, in response to the September 11, 2001, with another added 22 October 2004, to form what are now known as the "40 + 9" principles of anti-money laundering and combatting the financing of terrorism (AML/CFT). Compliance with, or a movement towards compliance with, these principles is now seen as a requirement of an internationally active bank or other financial service entity.
Numerous regulatory and governmental authorities quote figures for estimated amounts of money laundered annually, either worldwide or within a national economy. A frequently cited figure is 2-5% of the worldwide global economy put forward by the IMF. However, it has been noted in academic circles that such figures are usually simply "best guesses". In 1997 the FATF, an arm of the OECD set up to combat money laundering, frankly admitted "the vast majority of FATF members lack sufficient data to support any credible estimate."12 Although admissions of that nature are no longer maintained, there is still a dearth of hard data as to the actual amounts of money laundered worldwide. Some academic commentators have expressed real concerns about the reliability and basis of figures used by governmental and multinational organizations.
| “ | We are faced with the problem that there has been little work to develop an objective academic analysis of the true extent of laundering, which means that we do not have a framework within which the appropriateness of legislative measures can be evaluated. Without this, it is difficult to challenge the 'alarmist' position of the authorities whereby such estimates have been put forward, quoted and repeated, becoming, through such reptition, seemingly established truths. It can be argued ... that global estimates are little more than informed guesses: "large numbers are frequently thrown around without serious support" (Reuter and Trumen, 2005, p.56), re-produced to the point at which they gain, through mere repetition, [they are perceived to have] some form of reliable accuracy.13 | ” |
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Lists of miscellaneous information should be avoided. Please relocate any relevant information into appropriate sections or articles. (July 2007) |
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