Money laundering

Money laundering is the practice of engaging in a series of financial transactions to conceal the ownership, source, control or destination of illegally gained money. Ultimately, it is the process by which the proceeds of crime are made to appear to have a legitimate origin. The crime proceeds involved can be generated by any number of criminal acts, including drug dealing, corruption, accounting and other types of fraud, and tax evasion. The methods by which money may be laundered are varied and can range in sophistication from simple to complex.

Many regulatory and governmental authorities quote estimates each year for the amount of money laundered, either worldwide or within their national economy. In 1996 the International Monetary Fund estimated that two to five percent of the worldwide global economy involved laundered money. However, the FATF, an intergovernmental body set up to combat money laundering, admitted that "overall it is absolutely impossible to produce a reliable estimate of the amount of money laundered and therefore the FATF does not publish any figures in this regard." Academic commentators have likewise been unable to estimate the volume of money with any degree of assurance.

Regardless of the difficulty in measurement, the amount of money laundered each year is in the billions and poses a significant policy concern for governments. As a result, governments and international bodies have undertaken efforts to deter, prevent and apprehend money launderers. Financial institutions have likewise undertaken efforts to prevent and detect transactions involving dirty money, both as a result of government requirements and to avoid the reputational risk involved.

Methods

Money laundering often occurs in three steps: first, cash is introduced into the financial system by some means (“placement”), the second involves carrying out complex financial transactions in order to camouflage the illegal source (“layering”), and the final step entails acquiring wealth generated from the transactions of the illicit funds (“integration”). Some of these steps may be omitted, depending on the circumstances; for example, non-cash proceeds that are already in the financial system would have no need for placement.

Money laundering takes several different forms although most methods can be categorized into one of a few types. These include "bank methods, smurfing, [also known as structuring], currency exchanges, and double-invoicing."

• Structuring: Often known as "smurfing," it is a method of placement by which cash is broken into smaller deposits of money, used to defeat suspicion of money laundering and to avoid anti-money laundering reporting requirements. A sub-component of this is to use smaller amounts of cash to purchase bearer instruments, such as money orders, and then ultimately deposit those, again in small amounts.

• Bulk cash smuggling: Physically smuggling cash to another jurisdiction, where it will deposited in a financial institution, such as an offshore bank, with greater bank secrecy or less rigorous money laundering enforcement.

• Cash-intensive businesses: A business typically involved in receiving cash will use its accounts to deposit both legitimate and criminally derived cash, claiming all of it as legitimate earnings. Often, the business will have no legitimate activity.

• Trade-based laundering: Under- or over-valuing invoices in order to disguise the movement of money.

• Shell companies and trusts: Trusts and shell companies disguise the true owner of money. Trusts and corporate vehicles, depending on the jurisdiction, need not disclose its true, beneficial, owner.

• Bank capture: Money launderers or criminals buy a controlling interest in a bank, preferably in a jurisdiction with weak money laundering controls, and then move money through the bank without scrutiny.

• Casinos: An individual will walk in to a casino with cash and buy chips, play for a while and then cash in his chips, for which he will be issued a check. The money launderer will then be able to deposit the check into his bank, and claim it as gambling winnings.

• Real estate: Real estate may be purchased with illegal proceeds, then sold. The proceeds from the sale appear to outsiders to be legitimate income. Alternatively, the price of the property is manipulated; the seller will agree to a contract that under-represents the value of the property, and will receive criminal proceeds to make up the difference.

Laws by region

Many jurisdictions adopt a list of specific predicate crimes for money laundering prosecutions as a "self launderer".

Bangladesh

In Bangladesh, this issue has been dealt with by the Prevention of Money Laundering Act, 2002 (Act No. VII of 2002). In terms of section 2, "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”. To prevent these Illegal uses of money Bangladesh Govt. has introduced the Money Laundering Prevention Act. The Act was last amended in the year 2009 and all the Financial Institutes are following this act. Till today there are 26 Circulars issued by Bangladesh Bank under this act. To prevent Money laundering a banker must do the following:

• While opening a new account, the account opening form should be duly filled up by all the information of the Customer.
• The KYC has to be properly filled up
• The TP (Transaction Profile) is mandatory for a client to understand his/her transactions. If needed, the TP has to be updated at the Client’s consent.
• All other necessary papers should be properly collected along with the Voter ID card.
• If there is any suspicious transaction is notified, the BAMLCO (Branch Anti Money Laundering Compliance Officer) has to be notified and accordingly the STR (Suspicious Transaction Report) reporting has to be done.
• The Cash department should be aware of the Transactions. It has to be noted if suddenly a big amount of money is deposited in any account. Proper documents will be required if any Client does this type of transaction.
• Structuring, over/ under Invoicing is another way to do Money Laundering. The Foreign Exchange Department should look into this matter cautiously.
• If in any account there is a transaction exceeding 7.00 lac in a single day that has to be reported as CTR (cash Transaction report)
• All the Bank Officials must go through all the 26 Circulars and must use in doing the Banking.

Canada

The National Initiative to Combat Money Laundering, with the involvement of the Solicitor General of Canada, the RCMP, Justice Canada, Canada Customs and Revenue Agency, and, Citizenship and Immigration, began operation in 1998.

India

The Prevention of Money-Laundering Act, 2002 came into effect on 1 July 2005. Section 3 of the Act makes the offense of money-laundering cover those persons or entities who directly or indirectly attempt to indulge or knowingly assist or knowingly are party or are 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 offense 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 [elsewhere] the punishment shall be up to ten years.

Section 12 (1) prescribes the obligations on banks, financial institutions and intermediaries (a) to maintain records detailing the nature and value of transactions which 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; (b) to furnish information of transactions referred to in clause (a) to the Director within such time as may be prescribed and t records of the identity of all its clients. Section 12 (2) prescribes that the records referred to in sub-section (1) as mentioned above, must be maintained for ten years after the transactions finished.

The provisions of the Act are frequently reviewed and various amendments have been passed from time to time.

The recent activity in money laundering in India is through political parties corporate companies and share market.

United Kingdom

Money laundering and terrorist funding legislation in the UK is governed by four Acts of primary legislation:-

• Terrorism Act 2000
• Anti-terrorism, Crime and Security Act 2001
• Proceeds of Crime Act 2002
• Serious Organised Crime and Police Act 2005

The Proceeds of Crime Act 2002 contains the primary UK anti-money laundering legislation, including provisions requiring businesses within the 'regulated sector' (banking, investment, money transmission, certain professions, etc.) to report to the authorities suspicions of money laundering by customers or others.

Money laundering is widely defined in the UK. In effect any handling or involvement with any proceeds of any crime (or monies or assets representing the proceeds of crime) can be a money laundering offence. An offender's possession of the proceeds of his own crime falls within the UK definition of money laundering. The definition also covers activities which would fall within the traditional definition of money laundering as a process by which proceeds of crime are concealed or disguised so that they may be made to appear to be of legitimate origin.

Unlike certain other jurisdictions (notably the USA and much of Europe), UK money laundering offences are not limited to the proceeds of serious crimes, nor are there any monetary limits, nor is there any necessity for there to be a money laundering design or purpose to an action for it to amount to a money laundering offence. A money laundering offence under UK legislation need not involve money, since the money laundering legislation covers assets of any description. In consequence any person who commits an acquisitive crime (i.e. one from which he obtains some benefit in the form of money or an asset of any description) in the UK will inevitably also commit a money laundering offence under UK legislation.

This applies also to a person who, by criminal conduct, evades a liability (such as a taxation liability) - referred to by lawyers as "obtaining a pecuniary advantage" - as he is deemed thereby to obtain a sum of money equal in value to the liability evaded.

The principal money laundering offences carry a maximum penalty of 14 years imprisonment.

Secondary regulation is provided by the Money Laundering Regulations 2003 and 2007

One consequence of the Act is that solicitors, accountants, and insolvency practitioners who suspect (as a consequence of information received in the course of their work) that their clients (or others) have engaged in tax evasion or other criminal conduct from which a benefit has been obtained, are now required to report their suspicions to the authorities (since these entail suspicions of money laundering). In most circumstances it would be an offence, 'tipping-off', for the reporter to inform the subject of his report that a report has been made. These provisions do not however require disclosure to the authorities of information received by certain professionals in privileged circumstances or where the information is subject to legal professional privilege.

Professional guidance (which is submitted to and approved by the UK Treasury) is provided by industry groups including the Joint Money Laundering Steering Group and the Law Society.

However there is no obligation on banking institutions to routinely report monetary deposits or transfers above a specified value. Instead reports have to be made of all suspicious deposits or transfers, irrespective of their value.

The reporting obligations include reporting suspicions relating to gains from conduct carried out in other countries which would be criminal if it took place in the UK. Exceptions were later added to exempt certain activities which were legal in the location where they took place, such as bullfighting in Spain.

There are more than 200,000 reports of suspected money laundering submitted annually to the authorities in the UK (there were 240,582 reports in the year ended 30 September 2010 - an increase from the 228,834 reports submitted in the previous year). Most of these reports are submitted by banks and similar financial institutions (there were 186,897 reports from the banking sector in the year ended 30 September 2010).

Although 5,108 different organisations submitted suspicious activity reports to the authorities in the year ended 30 September 2010 just four organisations submitted approximately half of all reports, and the top 20 reporting organisations accounted for three-quarters of all reports.

The offence of failing to report a suspicion of money laundering by another person carries a maximum penalty of 5 years imprisonment.

Bureaux de change

All UK Bureaux de change are registered with Her Majesty's Revenue and Customs which issues a trading licence for each location. Bureaux de change and money transmitters, such as Western Union outlets, in the UK fall within the 'regulated sector' and are required to comply with the Money Laundering Regulations 2007. Checks can be carried out by HMRC on all Money Service Businesses.

United States

The approach in the United States to stopping money laundering is usefully broken into two areas: preventive (regulatory) measures and criminal measures.

Preventive

In an attempt to prevent dirty money from entering the US financial system in the first place, the United States Congress passed a series of laws, starting in 1970, collectively known as the Bank Secrecy Act. These laws, contained in sections 5311 through 5332 of Title 31 of the United States Code, require financial institutions, which under the current definition include a broad array of entities, including banks, credit card companies, life insurers, money service businesses and broker-dealers in securities, to report certain transactions to the United States Treasury. Cash transactions in excess of $10,000 must be reported on a Currency Transaction Report (CTR), identifying the individual making the transaction as well as the source of the cash. The US is one of the few countries in the world to require reporting of all cash transactions over a certain limit, although certain businesses can be exempt from the requirement. Additionally, financial institutions must report transaction on a Suspicious Activity Report (SAR) that they deem “suspicious,” defined as a knowing or suspecting that the funds come from illegal activity or disguise funds from illegal activity, that it is structured to evade BSA requirements or appears to serve no known business or apparent lawful purpose; or that the institution is being used to facilitate criminal activity. Attempts by customers to circumvent the BSA, generally by structuring cash deposits to amounts lower than $10,000 by breaking them up and depositing them on different days or at different locations also violates the law.

The financial database created by these reports is administered by the U.S.’s Financial Intelligence Unit (FIU), called the Financial Crimes Enforcement Network (FinCEN), which is located in Vienna, Virginia. These reports are made available to US criminal investigators, as well as other FIU’s around the globe, and FinCEN will conduct computer assisted analyses of these reports to determine trends and refer investigations.

The BSA requires financial institutions to engage in customer due diligence, which is sometimes known in the parlance as “know your customer.” This includes obtaining satisfactory identification to give assurance that the account is in the customer’s true name, and having an understanding of the expected nature and source of the money that will flow through her accounts. Other classes of customers, such as those with private banking accounts and those of foreign government officials, are subjected to enhanced due diligence because the law deems that those types of accounts are a higher risk for money laundering. All accounts are subject to ongoing monitoring, in which internal bank software scrutinizes transactions and flags for manual inspection those that fall outside certain parameters. If a manual inspection reveals that the transaction is suspicious, the institution should file a Suspicious Activity Report.

The regulators of the industries involved are responsible to ensure that the financial institutions comply with the BSA. For example, the Federal Reserve and the Office of the Comptroller of the Currency regularly inspect banks, and may impose civil fines or refer matters for criminal prosecution for non-compliance. A number of banks have been fined and prosecuted for failure to comply with the BSA. Most famously, Riggs Bank, in Washington D.C., was prosecuted and functionally driven out of business as a result of its failure to apply proper money laundering controls, particularly as it related to foreign political figures.

In addition to the BSA, the U.S. imposes controls on the movement of currency across its borders, requiring individuals to report the transportation of cash in excess of $10,000 on a form called Report of International Transportation of Currency or Monetary Instruments (known as a CMIR). Likewise, businesses, such as automobile dealerships, that receive cash in excess of $10,000 must likewise file a Form 8300 with the Internal Revenue Service, identifying the source of the cash.

Criminal sanctions

Money laundering has been criminalized in the United States since the Money Laundering Control Act of 1986. That legislation, contained at section 1956 of Title 18 of the United States Code, prohibits individuals from engaging in a financial transaction with proceeds that were generated from certain specific crimes, known as “specified unlawful activities” (SUAs). Additionally, the law requires that an individual specifically intend in making the transaction to conceal the source, ownership or control of the funds. There is no minimum threshold of money, nor is there the requirement that the transaction succeed in actually disguising the money. Moreover, a “financial transaction” has been broadly defined, and need not involve a financial institution, or even a business. Merely passing money from one person to another, so long as it is done with the intent to disguise the source, ownership, location or control of the money, has been deemed a financial transaction under the law.

In addition to money laundering, the law, contained in section 1957 of Title 18 of the United States Code, prohibits spending in excess of $10,000 derived from an SUA, regardless of whether the individual wishes to disguise it. This carries a lesser penalty than money laundering, and unlike the money laundering statute, requires that the money pass through a financial institution.

According to the records compiled by the United States Sentencing Commission, in 2009, the United States Department of Justice typically convicted a little over 81,000 people; of this, approximately 800 are convicted of money laundering as the primary or most serious charge.

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.

Laundered or not?

Money obtained by an illegal action is not, of itself, laundered money in most jurisdictions (an exception being the United Kingdom where mere possession of the proceeds of any crime is itself capable of being a money laundering offence). The laundering offence comes from the attempt to conceal its source, not because the transaction was itself illegal (which is a separate offence).

The Supreme Court of the United States on June 2, 2008, rendered two judgments in favour of defendants, narrowing the application of the federal money-laundering statute.

In a unanimous opinion written by Justice Clarence Thomas, the Court 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." That is, the prosecution had not made its prima facie case. 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 198, 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 the Texas-Mexico border with $81,000 in cash proceeds of a cannabis transaction; it cannot be proven merely by showing that the funds were concealed in a secret compartment of a Volkswagen Beetle; 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."

Later, in a divided decision, the Court reversed the convictions of Efrain Santos of Indiana and Benedicto Diaz for money laundering based on cash from an illegal lottery. In the plurality opinion, Justice Antonin Scalia wrote 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 clarified the meaning of the statute in the Fraud Enforcement and Recovery Act of 2009, defining proceeds explicitly to include both profits and gross receipts.

Enforcement

See also: Know your customer

The first defense against money laundering is the requirement on financial intermediaries to know their customers—often termed KYC know your customer requirements. Knowing one's customers, financial intermediaries will often be able to identify unusual or suspicious behavior, including false identities, unusual transactions, changing behaviour, or other indicators of laundering. But for institutions with millions of customers and thousands of customer-contact employees, traditional ways of knowing their customers must be supplemented by technology. Many Companies provide software and databases to help perform these processes. Bank and corporate security directors can also play an important role in fighting money laundering.

Technology

Information technology can never be a replacement for a well-trained investigator, but as money laundering techniques become more sophisticated, so too does the technology used to fight it. Anti-money laundering software filters customer data, classifies it according to level of suspicion, and inspects it for anomalies. Such anomalies would include any sudden and substantial increase in funds or a large withdrawal. Smaller transactions that meet certain criteria may be also be flagged as suspicious. For example, structuring can lead to flagged transactions. The software will also flag names that have been placed on government "blacklists" and transactions involving countries that are thought to be hostile to the host nation. Once the software has mined data and flagged suspect transactions, it generates a report.

The various software packages are capable of name analysis, rule-based systems, statistical and profiling engines, neural networks, link analysis, peer group analysis, and time sequence matching. Also, 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.

This software is not used exclusively to track money laundering, but more often the common theft of credit cards or bank details. Unusual activity on an account may trigger a call from the card issuer to make sure it has not been misused.

FATF: Financial Action Task Force against Money Laundering

Formed in 1989 by the G7 countries, the Financial Action Task Force on Money Laundering (FATF) is an intergovernmental body whose purpose is to develop and promote an international response to combat money laundering. In October 2001, FATF expanded its mission to include combating the financing of terrorism. FATF is a policy-making body, which brings together legal, financial and law enforcement experts to achieve national legislation and regulatory AML and CFT reforms. Currently, its membership consists of 34 countries and territories and two regional organizations. In addition, FATF works in collaboration with a number of international bodies and organizations. These entities have observer status with FATF, which does not entitle them to vote, but permits full participation in plenary sessions and working groups.

FATF has develop 40 Recommendations on money laundering and 9 Special Recommendations regarding terrorist financing. FATF assesses each member country against these recommendations in published reports. Countries seen as not being sufficiently compliant with such recommendations are subjected to financial sanctions.

Notable cases

• Bank of New York: $7 billion of Russian capital flight laundered through accounts controlled by bank executives, late 1990's

• Nauru: $70 billion of Russian capital flight laundered through unregulated Nauru offshore shell banks, late 1990's

• Sani Abacha: $2-5 billion of government assets laundered through banks in the U.K.,Luxembourg, Jersey (Channel Islands), and Switzerland, by president of Nigeria.

• Bank of Credit and Commerce International: Unknown amount, estimated in billions, of criminal proceeds, including drug trafficking money, laundered during the mid-1980's.

See also

• Anti-money laundering software
• Confiscation
• FATF
• Front organization
• Identity fraud
• Offshore banking
• Organized Crime
• Parcel mule scam
• Political corruption
• Racket
• Shell (corporation)
• Smurfing (crime)
• Swiss Banks
• Tax evasion
• Terrorist financing
• USA PATRIOT Act
• White collar crime

References

• Anti money laundering software and methods

External links

• Template:Dmoz
• UNODC - United Nations Office on Drugs and Crime - on money-laundering and countering the financing of terrorism