Money laundering

Money laundering, the metaphorical "cleaning of money" with regard to appearances in law, is the practice of engaging in specific financial transactions in order to conceal the identity, source and/or destination of money and is a main operation of 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) or of cults, and even corrupt states or intelligence agencies, through a complex network of shell companies based in offshore tax havens.

The increasing complexity of financial crime, the increasing recognised 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. In many jurisdictions, money laundering is seen as an "activity based" offense.

A brief history of money laundering

Modern development of money laundering

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 where he would transfer his illegal funds through a complex system of shell companies, holding companies and offshore accounts ^[1]..

The term of "money laundering" itself does not derive, as is often said, from the story that Al Capone 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]

International initiatives against money laundering

The 1980s witnessed the international trend for the criminalization of money laundering as a discrete crime. The US and the UK have done so in 1986, and the 1988 Vienna Convention has required State Parties to introduce this crime in their domestic legal systems. In 1989, the FATF was created. Its first report, issued in 1990, recommended the criminalization of money laundering. In 1991, the European Union required its Member States to 'prohibit' the laundering of funds derived from drug offences; the original Directive was revised in 2001 and replaced by another in 2005.

September 11, 2001 and the international response to the underground economy

After September 11, 2001, money laundering become a major concern of the US Bush administration'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 a clearing house or "a bank of banks" which practice "financial clearing", centralizing debit and credit operations for hundreds of banks, has been 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 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 10 June 1990 directive (91/308 CE) on control of financial establishment was applied in all member states, including Luxembourg, in an effective way ^[3].

The international response to the underground economy has been co-ordinated 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 counter-terrorism funding (AML/CTF). 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.

Several FATF-style regional bodies exist, such as the Asia/Pacific Group on Money Laundering.

Process

Money laundering is often described as occurring in three stages: placement, layering, and integration.^[4]

Placement: refers to the initial point of entry for funds derived from criminal activities.
Layering: refers to the creation of complex networks of transactions which attempt to obscure the link between the initial entry point and the end of the laundering cycle.
Integration: refers to the return of funds to the legitimate economy for later extraction.

Examples

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 $10,000 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.

Irregular Funding

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 check to the individual. Thus, the individual draws no attention to himself, and can deposit his check into a bank account without drawing suspicion. This works well for one-off transactions, but if it occurs on a regular basis then the check deposits themselves will form a paper trail and could raise suspicions.

Captive business

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 primae facia 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 fictitious labor. 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 labor (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. Each of the above examples is flawed in one or more ways and serves only to illustrate the specific feature being discussed. The hairstylist example is flawed because the hairsylist would have to account for their employees, while plumbers usually provide warranties on their work, which necessarily includes the names and addresses of the customers.

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.

Legal considerations

By the strictest definition of the term, anyone who assists in concealing the proceeds from his transactions is considered a money launderer. An individual therefore may be unwittingly employed by money launderers, and may still be criminally liable in many jurisdictions. However, the act of concealing money is different from that of laundering it, though many make the mistake of putting both actions under the term of laundering.

UK Legislation

The 'money laundering' legislation in the United Kingdom, under Sections 327 to 340 of the Proceeds of Crime Act 2002 (PoCA), is wide-ranging and encompasses mere possession of criminal or terrorist property as well as its acquisition, transfer, removal, use, conversion, concealment or disguise ^[5]. 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 (SAR s) - in 2005 just under 200,000 SAR s were received. The number of SAR s 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).

USA legislation

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."^[6]

Fighting money laundering

The prime method of fighting money laundering (a process usually termed "AML" or anti-money laundering) is the requirement on financial intermediaries to know their customers - usually termed KYC (know your customer) requirements. With a 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.

Using information technology

Information technology can never be a replacement for a well trained officer, but as money laundering techniques become more sophisticated, so too is the technology used to fight it. Early anti-money laundering programs flagged transactions exceeding a certain amount. This proved to be ineffective because money launderers soon adjusted their schemes to avoid detection. Deutsche Bank uses a world-wide information system to monitor potentially illegal transactions. With this system, the bank has cut the number of employees dedicated to preventing money laundering from 50 to only four. ^[7]

Financial Crimes Enforcement Network (FinCEN), an organization created by the United States Department of the Treasury, makes its databases available to 40 different agencies in the world. 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.

Anti-money laundering software packages are now beginning to reach the early mainstream phase. Gartner Research recently shortlisted 6 example vendors that include NetEconomy, Mantas and SAS. Each are programmed to recognize scenarios, find relationships between accounts, assign trust ratings, and detect suspicious behaviour. Other respected anti-money laundering software producers are Searchspace, STB Systems and ACI Worldwide. For Real-Time AML requirement, ReadiMinds is one vendor.