Definition of money laundering:
Money laundering is generally regarded as the practice of engaging in financial transactions to conceal the identity, source, and/or destination of illegally gained money by which the proceeds of crime are converted into assets which appear to have a legitimate origin. In the United Kingdom the statutory definition is wider. It is common to refer to money legally obtained as “clean”, and money illegally obtained as “dirty”.
An illegal act in which one makes illegally obtained money appear to be legally obtained. For instance, one may route money obtained in drug trafficking through a shell company to give it the veneer of legitimacy. One formerly common example is the practice of exchanging illegally obtained money for coins and placing them into a soda machine. One then deposits money from the soda machine such that it looks like the money came from the purchase of sodas rather than from its real source.
Act of Money laundering
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 (tha), “Money Laundering means (a) Properties acquired or earned directly or indirectly through Illegal means; (b) Illegal transfer, 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”
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 2001
- Serous Organized 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 activates 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 jurisdiction (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 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 of offences carry a maximum penalty of 14 years imprisonment
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 report has been made. These provisions do no 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.
The reporting obligations include reporting suspicions relating to gains from conduct carried out in other 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.
Although 5,108 differed organizations submitted suspicious activity reports to the authorities in the year ended 30 September 2010 just four organizations submitted approximately half of all reports, and the top 20 reporting organizations 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 license for each location. Bureaux de change and are required to comply with the Money Laundering 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.
In U.S. law. “reasonably accepting cash” means the business must regularly perform services that on average are less than $500 each. It is assumed that above that amount most people pay with a check, a credit card. or another (traceable) payment method. The company should actually function on a legitimate level. In the hairstyler example, it is perfectly reasonable for a lot of the business to involve mostly labour (dyes and machine oil and so forth being relatively small concerns), and for most transactions to be settled in cash.
Multinational Banks and the washing of dirty money : the money laundering
The modern bank is a multifaceted financial institution, staffed by multiskilled personnel conducting multitask operations ranging from retail business to corporate business, personal banking to syndicated and balance sheet to off-balance sheet operations. The modern bank has had to re-engineer in the face of growing competition from the non-bank financial institutions, and fast-moving communication technology. In response, banks have merged, restructured, downsized, and increased productivity by investing in information technology
(IT)- driven methods. However, the banking sectors face a further threat from two sources. First, banks have become an important conduit in the process of ‘money laundering’. Money laundering (ML) raises the danger that a bank’s face the threat of prosecution from the law enforcement agencies for not reporting suspicious financial transactions to the supervisory authorities. In the last decade of the twentieth century, the banks have been forced to tread a fine line between confidentiality- a term that is synonymous with banking and reputational and legal considerations. The term ‘money laundering’ conjures up pictures of seedy individuals, mob bosses, Colombian drug barons and Russian Mafiosi, in the process of disguising the proceeds of their ill-gotten gains. The picture is not entirely invalid but from a modern perspective it is incomplete. Modern-day money laundering involves sophisticated procedures involving the banks, lawyers, accountants and, at first glance, reputable firms in legitimate businesses. The revelations of the Bingham Report (1993) into the activities of the Bank of Credit and Commerce International (BCCI) indicate the difficulty and nature of supervision. More recently, the Bank of New York (BONY) has admitted cooperating with an investigation into alleged $10 million money- laundering connection with Russian sources, which shows that even the prestigious banks are not exempt from infiltration.
This chapter examines the economics of money laundering, its scope and scale of activity, the motivation, the method, the danger to the financial system and the proposed methods of dealing with it. Section 2 begins with the nature of the activity, the participants and the measured scale of the activity as seen by the various official international agencies, section 3 outlines the microeconomics of money laundering. It sets out the motivation for conducting money- laundering operations and the choice set faced by the principal players, Section 4 discusses the macroeconomic implications of the activity, in particular how the activity impinges on asset markets, capital flows and the setting of domestic monetary policy. Sections 5 presents the international efforts to combat money laundering. Section 6 summarizes and concludes.
2 Money Laundering : Scale, Scope And Typology
According to Drage (1992, p. 418),
[M]money laundering is the process by which criminals attempt to conceal the true origin and ownership of the proceeds of their criminal activities. If done successfully, it also allows them to maintain control over those proceeds, and ultimately to provide a legitimate cover for their source of income.
While such a definition covers the underlying purpose of money laundering it is incomplete because it gives the impression that all such activity is the result of serious criminal activity. While drug trafficking, loan sharking, illegal gambling, embezzlement, extortion, illegal trafficking, loan sharking, illegal gambling, embezzlement, extortion, illegal trafficking in arms, prostitution and slavery represent the principal source of proceeds in money laundering, less violent but no less serious activity such as tax evasion, regulatory evasion and smuggling also forms part of the picture. The 1997 report of the Financial Action Task Force (FATF) also refers to bank fraud, credit card fraud, investment, advance fee and bankruptcy fraud. The geographic distribution of money- laundering activity takes in financial crimes from the Scandinavian countries to organized criminal activity in Italy, Japan, Colombia, Russia, Eastern Europe, Nigeria and the Far East.
By its very nature, the scale of money- laundering activity defies measurement. Estimates of its size are necessarily non-rigorous. The FATF report (1997, pp. 6-8) used three indirect methods for estimating the scale of money laundering. The first method is the extrapolation of world drug production based on global crop projections, consumption and export of drugs in each producer county, estimated production of psychotropic substances, street prices of drugs, and financial flows within individual countries. The second method is the extrapolation from the consumption needs of drug users. The third is extrapolation from the consumption needs of drugs users. The third is extrapolation from drug seizures by law enforcement agencies applying multipliers ranging from 5 to 20 per cent. FATF estimate that sales of cocaine, heroin and cannabis amounted to about $122 billion per year in the US and Europe, of which 50-70 per cent (as much as $85 billion) could be available for laundering and subsequent investment.
FATF also quote a UN study that the frug trafficking market amounted to $300 billion in 1987. The widely cited figure for the scale of money laundering activity is $300-500 billion a year (Quirk, 1996). The Financial Times (18 October 1994) reported that according to US and UK officials, money laundering amounts to a global figure of $500 billion (2 per cent of gross world product). Most recently The Economist quoted an estimate of money laundering as $1.5 trillion (5 per cent of gross world product) (The Economist, 1999, p. 17)
The Process of money laundering involves three basic steps:
- Placement- the introduction of cash into the banking system or legitimate trade;
- Layering- separating the funds its criminal origins by passing it through several financial transactions; and
- integration- aggregating the funds with legitimately obtained money.
Until the 1970, banks would generally accept large cash deposits without question, even from unknown customers. In the deposits without question, even from unknown customers. In the 1980s, legislation in the US, the UK and other Western economies began to tackle the problem with allowances in their respective laws for the confiscation of proceeds from money laundering. During the 1990s, the authorities increasingly placed the burden on the banks to disclose suspicious transactions to the financial authorities. In the UK and the US, the tension between customer confidentiality and the demands of the financial policing authorities is particularly acute where the banks cab be threatened with prosecution for knowingly or unknowingly aiding the money- laundering process. The banks are forced to walk a delicate middle way between the compulsion to disclose and the contractual obligations of confidentiality to the customer. The UK Money Laundering Regulating of 1993 require banks to report
any suspicious transactions, and transactions over $10,000. Procedures are procedures are to be in place for the verification of the identity of clients. Record-keeping procedures are to be set up and specialized staff concerned with money laundering matters employed with responsibilities for disclosure (Norton, 1994, p. 45) Failure carries a maximum penalty of two years; imprisonment a fine, or both.
Guidance notes from the Bank of England (1990, 1993) to banks and building societies under the ‘know your customer’ rules have driven the deposit-taking institutions to taking a stronger interest in their clients’ financial matters.
The ‘know your customer’ principle is reinforced by the Basle Committee on Banking Regulation, 1988. The European Community Directive of 1991 extends money-laundering legislation beyond the narrow confines of drug trafficking by requiring member states to introduce legislation to require banks and financial institutions to carry out checks and make reports on transactions that carry the risk of money laundering (Cullen, 1993)
The response of the money-laundering industry to the regular reporting of large currency transaction has been to divide large deposits into several smaller sums, making deposits in several banks, or even several branches of the same bank. This process in know as restructuring of deposits and referred to as ‘smurfing’. Money is surfed into banks by cash deposits through automated teller machines (ATMs). However, this process is time intensive and launders relatively small amounts of money. Larger sums of money flow through the banking system though electronic communications systems.4
The FATF reports refer to the use of ‘shell corporations’ that are chartered and set up offshore or the use of legitimate businesses with high cash sales and turnover as convenient vehicles for money laundering. Offshore international business companies (IBCs) are relatively easy to set up and can operate in an environment of minimal reporting conditions and cost effectiveness.
A recent UN report, Financial Havens, Banking and Money
Laundering (see Courtenay, 1999) recognizes that IBCs are at the heart of the money-laundering problem. It recommends that the best way to discriminate good from bad IBCs is not to recognize entities that do not have full authority to do business in their same jurisdiction Figure 19.1 shows the number of IBCs by jurisdiction. While not all IBCs are involved in dubious activity the concentration of the usual suspects is strongly indicative. Besides ‘shell companies’ the businesses that attract money laundering are casinos bureau de bookmaking and jeweler shops. The laundered funds are mixed in with the revenues of legitimate businesses and then typically invested in real estate or newly privatized industries. A better method for laundering money is to buy a bank. From the
Figure 19.1 Number of IBCs jurisdiction
Seychelles in the Indian Ocean, to the Cayman Islands where there are 560 banks with combined asses to $billion, several small offshore economies offer relatively low set-up costs for banks. 5 In some countries such as Russia, banks are controlled by criminal organizations.6 Complicity by bank employees has been noted in the FATE report of 1997.An account is opened with the aid of the bank employee and large deposits and withdrawals conducted, but activity ceases and a few thousand dollars retained in the account a few months before a bank audit. The audit notes an account that has little activity and is deemed less suspicious.
A method that is widely used by ethnic groups from Africa or Asia is the ‘collections account’ This takes small credits from different individuals into one account, which is then remitted abroad. Such a method is used legitimately by immigrant workers to remit funds to their home country. The ‘payable-through-accounts’ poses a particular challenge to the ‘know your customer’ policy.
These are demand deposit accounts in a financial institution maintained by foreign banks or corporations. The foreign chant ion maintained by foreign banks or corporations. The foreign bank channels at the deposits and chaques of its customers in the local bank and the foreign customers have signatory authority as sub-account holders. Many banks that offers such facilities are unable to verity the identity of their customers.
A further method that is popular with ethnic groups from Africa and Asia is the hawala, hundi or ‘underground banking’ system. The system involves the transfer of funds between counties but outside the legitimate banking system. Its advantage is that it does not involve any paper records. The process involves a broker that has a correspondent relationship with another broker in another country. The broker, which may be an ordinary grocer shop, has a customer that requires funds abroad. The corresponding broker in the foreign country may have a customer that wishes to remit funds to the home country. Two brokers will match the amounts with their respective correspondent customers and balance their books by transferring the net amount between them. The system depends on considerable trust – records are kept to a minimum. Many of these transactions are not money laundering in the accepted sense but remain outside the conventional banking system for the purpose of avoiding exchange and other regulatory controls. A common technique of laundering that has potential tax advantages is the method of ‘loan-back’. The launderer transfers the cash to
another country (usually by currency smuggling) and then deposits the proceeds as security for a bank loan, which is then credited back to the original country. The remittance of the laundered cash in the form of a loan has the appearance of a legitimate international loan with the potential for a reduction in tax liability. The loan-back scheme is illustrated in Figure 19.2. The scheme shows the cash generated from drug transactions being smuggled into the Caribbean and placed with a ‘shell company’ which deposits the proceeds in a Swiss bank in the name of a Swiss ‘shall company’. A legitimate loans taken from a London bank based on guarantees given by the Swiss ‘shell company’. The loan is eventually repaid by the Swiss company. The laundering process of the loan-back scheme has been made more efficient by the use of electronic funds transfer (EFT) . The globalization of financial services has also created a highway of cash transfer that is indistinguishable from legitimate traffic. As in the example of the loan-back scheme described above, much of the cash from drug transactions returns to the US after payment of expenses, bribes and wages, fro investment in legitimate enterprises property or financial securities.
‘Payable-through accounts’ is one technique that is used to transfer money in and out of the country. By this method a number of foreign customers are authorized to make cash deposits and withdrawals, including EFT. The ‘know your customer’ policy of banks is subverted by this process as the foreign customers are known to the bank by a name only. The FATF report also recognizes lack of traceable transactions and the use of encryption software can make transactions totally secure in the future.
Story of money laundering of multinational bank
building in New York City. Alarmed Citibank executives read the top story on the front pages of that day’s newspapers: Raul Salinas de Gortari [brother of former Mexican President Carlos Salinas de Gortari] had been arrested the day before in Mexico. They knew it was only a matter of time before investigators would arrive and begin to ask questions about the deposits made by Raul Salinas at Citibank.
Around that time, Citibank of New York was transferring Juarez drug cartel money to Uruguay and Argentina, where on the morning of March 1, 1995, there was panic on the 17th floor of the Citicorp-Citibank Mexican drug lord Amado Carrillo Fuentes and his associates went calmly about their business, with help from local politicians and businessmen. Not long after, investigations would reveal that in 1998-99, more than $300 million belonging to Mexican drug traffickers went through Citibank.
The money laundering suggests that if the activity becomes more costly, the incentive to engage in such activity will diminish. The imposition of penalties on financial institutions will increase the riskiness of laundering activity and increase the premium paid by the criminals to launder illegitimate funds. The crime and tax evasion literature suggests that a reduction in the return from illegitimate activities will lead to a tendency towards legitimate activity.
1. Handbook of International Banking
Andrew W. Mullineux
Professor of Global Finance, University of Birmingham, UK
Professor of Finance, University of Birmingham, UK