“Multinational banking has accelerated the scope of money laundering in the world.”Discuss

1. Introduction

Money laundering is a financial crime involving illegal money. Money laundering has been present for a long time and with the increase of multinational banks and technology it is on the rise more than ever. Though mostly used by criminal to validate their money; this illegal process has also been used by many individuals and corporations. People and corporations involve in money laundering to evade tax. Banks being a legal organization do not endorse money laundering yet now they are being used to launder money all over the world. Recently in Bangladesh, allegations were raised against Islami Bank of Bangladesh Limited, Social Islami Bank Limited and HSBC Bank about being involved in money laundering and funding the terrorists. Despite the presence of Anti-Money Laundering laws in most of the countries, it has become a concerned issue everywhere.

2.0 Money Laundering

The term ‘money laundering’ is typically used to refer to any financial transaction that was meant to be kept secret, but was eventually found out. In many cases it refers to the process of concealing a source of money, which is often earned by illegal means such as drug trafficking, health care fraud, and smuggling, just to name a few.

As per stipulations contained in Section 2 of the Prevention of Money Laundering Act 2002 (Act No. 7 of 2002) in Bangladesh “Money Laundering” means[1]

                (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 or indirectly through legal or illegal means;”

2.1 Forms of money laundering

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.[2]

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”.[3]

Structuring: Often known as “smurfing”, 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.

Bulk cash smuggling: Physically smuggling cash to another jurisdiction, where it will be 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.

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 their 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 account, and claim it as gambling winnings.

Real estate: Real estate may be purchased with illegal proceeds, and 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.

Black salaries: Companies might have unregistered employees without a written contract who are given cash salaries. Black cash might be used to pay them.

3.0 Money Laundering Scenario in Bangladesh

Money laundering has been a constant problem for our country. Generally “Hundi” is one of the major causes of money laundering in Bangladesh. Recently two banks of Bangladesh,  Islami Bank of Bangladesh Limited, Social Islami Bank Limited along with HSBC Bank were found involved in money laundering for terrorist activities[4]. Bangladesh Bank is always monitoring the money laundering activities. Recently they found out that Destiny Group is involved in money laundering from Bangladesh[5]. Anti-Corruption Commission (ACC), Bangladesh Bank (BB) and other financial institutions are still trying to collaborate their activities to fight money laundering[6].

4.0International Money Laundering

Estimates arising from forecasts bases on regression lines and those of economic intelligence units indicate that globally Money Laundering amounts to more than US$ 2 trillion to US$ 2.5 trillion annually (i.e. about 6-8% of World GDP 2006 [44.444 trillion]), through formal channels as against an observed figure of US$ 500 billion to One Trillion in 2004 within the banking sector only.[7] Money-laundering is not only economically destabilizes for an economy but also exposes it to terrorist attacks, threatening the integrity and sovereignty of the nations concerned. It conceals the huge, illegal profits generated by unscrupulous organized criminal groups in various fields of crime.

5.0 Banks: Medium, Regulator & Cause

Multinational Banks have been widely used for money laundering. The flow of funds via the banking system has been fueled due to secrecy and non-transparency norms observed by large part of the banking systems globally. Banks have a central role to play in limiting the menace, however have fallen to be instruments in the money laundering process. The money laundering activities have been subject of eight prior investigations in US. According to the US Permanent Subcommittee’s Report (2001), there are five major factors which create money laundering vulnerabilities:

  • Role of private bankers.
  • Private banks as client advocates.
  • Powerful customers.
  • Corporate culture of secrecy& lax controls.
  • Competitive nature of the industry.

It is clearly visible in the case as to how vulnerable are the Banks and how they turn to becoming the medium and cause for money laundering. Cases before enforcement agencies have shown that some of the more common laundering methods used are: the Black Market Peso Exchange, cash smuggling (couriers or bulk cash shipments), Black dollar, gold purchases, structured deposits to or withdrawals from bank accounts, purchase of monetary instruments (cashier’s checks, money order, traveler’s checks, etc.), wire transfers, purchase of derivative products (as seen in 9/11 attack) and forms of underground banking, particularly the Hawala[8] system.

In addition to the general factors cited above, the actual products and services offered by the private bank also tend to create opportunities for money laundering.

  • Multiple Accounts: A striking feature of the private bank accounts examined is their complexity. Private bank clients often have many accounts in many locations. Some are personal checking, money market or credit card accounts. Others are in the name of one or more shell companies and multiple investment accounts are common. The reality right now is that private banks allow clients to have multiple accounts in multiple locations under multiple names and do not aggregate the information. This approach creates vulnerabilities to money laundering by making it difficult for banks to have a comprehensive understanding of their own client’s accounts.
  • Secrecy Products: Most private banks offer a number of products and services that shield a client’s ownership of funds. They include offshore trusts and shell corporations, special name accounts, and codes used to refer to clients or fund transfers.
  • Movements of Funds: Current account transactions at private banks routinely involve large sums of money. The size of client transaction increases the banks vulnerability to money laundering by providing an attractive venue for money launderers who want to move large sums without attracting notice. In addition, most private banks provide products and services that facilitate the quick, confidential and hard-to-trace movement of money across jurisdictional lines.
  • Credit: Another common private bank service involves the extension of credit to clients. Several private bankers told the subcommittee that private banks urge their private bankers to convince clients to leave their deposits in the bank and use them as collateral for large loans. This practice enables a bank to earn a fee not only on the deposits under their management, but also on the loans.
  • Development of Off-Shore Banking: Originally, off-shore centers were quite literally islands, hence the expression. Today the term is used rather loosely for financial centers, which operate within a low tax regime; this enables international transfers of money to take place with a great deal of facility and with no hindrance to capital flows.

ð                  The development of the offshore banking sector has made it difficult to prevent money laundering.

ð                  Competitiveness is deemed to be inconsistent with tight monitoring and control, and offshore banks and corporations attract funds largely because they promise both anonymity and the possibility of tax avoidance, and in some cases, tax evasion.

ð                  The Cayman Islands, the Netherlands Antilles, Aruba and Cyprus are all examples of offshore banking heavens that have been used or confirmed to be used by criminal organizations for laundering the proceeds from their illicit activities.

ð                  Such centers offer offshore attractive opportunities for the transfer and secretion of funds in places where they are relatively safe from identification and seizure by law enforcement.

5.0 Anti-money laundering Laws in 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 or indirectly through legal or illegal means”.

To prevent these Illegal uses of money, the Bangladesh government 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.
  • The Transaction Profile (TP) 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 any suspicious transaction is noticed, the Branch Anti Money Laundering Compliance Officer (BAMLCO) has to be notified and accordingly the Suspicious Transaction Report (STR) 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 lakh in a single day that has to be reported as Cash Transaction Report (CTR).
  • All bank officials must go through all the 26 circulars and use them.

6.0 Global Anti-Money laundering laws

6.1 United States

United States approach to stop money laundering includes two stages.

  • 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, to report certain transactions to the United States Treasury. Cash transactions in excess of US$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.
  • 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).

6.2 India

The Prevention of Money-Laundering Act, 2002 came into effect on 1 July 2005. Section 12 (1) prescribes the obligations on banks, financial institutions and intermediaries

  • 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;
  • to furnish information of transactions referred to in clause to the Director within such time as may be prescribed and the 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. It is handled by the Indian Income Tax Department. The provisions of the Act are frequently reviewed and various amendments have been passed from time to time.

6.3 United Kingdom

Money laundering and terrorist funding legislation in the UK is governed by four Acts of primary legislation[9]:-

  • Terrorism Act 2000
  • Anti-terrorism, Crime and Security Act 2001
  • Proceeds of Crime Act 2002
  • Serious Organized Crime and Police Act 2005
  • Money Laundering Regulations 2007

Money Laundering Regulations are designed to protect the UK financial system. If a business is covered by these regulations then controls are put in place to prevent it being used for money laundering.

7.0 Conclusion

Reviewing all the scenarios, I can say that the presence of multinational banks all over the world has increased money laundering. Money laundering through the international banking system is a problem that cannot be solved overnight, yet measure can be taken to restrict it as much as possible.Multinational banks willingly or unwillingly facilitate money laundering but with proper guideline and internal control banks should prevent money laundering. Banks shall establish clear lines of internal accountability, responsibility and reporting system. Primary responsibility for the prevention of money laundering rests with the business which must ensure that appropriate internal controls are in place and operating effectively and that bank staff are adequately trained. Where necessary, remedial action on customer  identification and due diligence must be undertaken for existing accounts, no matter  how long the relationship has been in operation. Remedial work must be done as soon as possible[10].

8.0 References

International Money Laundering Information Network. available from:-  http://www.imolin.org/imolin/index.html [Accessed 18 July,2012]

Financial Market Integrity Program Q&As, World Bank. available from:- http://siteresources.worldbank.org/FINANCIALSECTOR/Resources/Financial_Integrity_Program_QA.pdf [Accessed 18 July, 2012]

‘Money Laundering Basics’; available from:- http://money.howstuffworks.com/money-laundering1.htm [Accessed 13 July, 2012]

“Global Money Laundering and Terrorist Financing Threat Assessment”, Financial Action Task Force. available from:- http://www.fatf-gafi.org/dataoecd/48/10/45724350.pdf [Accessed on 13 July, 2012]

Bugyaki, Attila, ‘Methods and Techniques of Money Laundering’; available from:- http://penzmosasaticikkek.blogter.hu/259535/methods_and_techniques_of_money_laundering [Accessed on 13 July, 2012]

Hossain, Faruq. “Islami Bank, SIBL er maddhome jongi orthaon” Daily Prothom Alo18 July, 2012. available from:- http://www.prothom-alo.com/detail/news/274597[Accessed on 21 July, 2012]

Agarwal, J.D. Agarwal, A. (2006),‘Money Laundering : New Forms of Crime Victimization’; available from:-  http://www.iif.edu/data/iif/director/20061118-ML.doc [Accessed 18 July, 2012]

BB finds signs of money laundering’, The Daily Star, 09 July, 2012; http://www.thedailystar.net/newDesign/news-details.php?nid=241347 [Accessed 18 July, 2012]

Joint efforts to combat money laundering’,  The Daily Star, 1 December, 2008 http://www.thedailystar.net/newDesign/news-details.php?nid=65661 [Accessed 18 July, 2012]

‘HSBC to apologise for money-laundering’, The Daily Star, 17 July, 2012; available from:- http://www.thedailystar.net/newDesign/latest_news.php?nid=39146 [Accessed 18 July, 2012]

‘Guidelines on Prevention of Money Laundering’ IFIC Bank (2006); available from:- http://www.ificbank.com.bd/GUIDELINES%20ON%20PREVENTION%20OF%20MONEY%20LAUNDERING.pdf [Accessed 18 July,2012]

John L. E. Daniel C. P. “International Money Laundering: Enforcement Challenges and Opportunities” (1995); available from:- http://www.icclr.law.ubc.ca/Publications/Reports/Enforcement_Challenges.pdf [Accessed 21 July, 2012]

“In Focus”, Prime Bank, September 2010; available from:- https://www.primebank.com.bd/newsletter/Vol.%2002%20Issue%2009.pdf [Accessed 21 July, 2012]

“Anti-Money Laundering Literature Search”, World Bank; available from:- http://siteresources.worldbank.org/PSGLP/Resources/461605-1102715152029/aml_financial-banking-sector.pdf [ Accessed 21 July, 2012]

[1] Prevention of Money Laundering Act, 2009; available from:- http://bdlaws.minlaw.gov.bd/bangla_all_sections.php?id=1006 [Accessed 13 July, 2012]

[2] “Money Laundering Basics”; available from:- http://money.howstuffworks.com/money-laundering1.htm [Accessed 13 July, 2012]

[3] Bugyaki, A, ‘Methods and Techniques of Money Laundering’; available from:- http://penzmosasaticikkek.blogter.hu/259535/methods_and_techniques_of_money_laundering [Accessed on 13 July, 2012]

[4] ‘HSBC to apologise for money-laundering’, The Daily Star, 17 July, 2012; available from:- http://www.thedailystar.net/newDesign/latest_news.php?nid=39146 [Accessed 18 July, 2012]

[5]‘BB finds signs of money laundering’, The Daily Star, 09 July, 2012;http://www.thedailystar.net/newDesign/news-details.php?nid=241347 [Accessed 18 July, 2012]

[6]‘Joint efforts to combat money laundering’, The Daily Star, 1 December, 2008http://www.thedailystar.net/newDesign/news-details.php?nid=65661 [Accessed 18 July, 2012]

[7]Agarwal, J.D. Agarwal, A. (2006),‘Money Laundering : New Forms of Crime Victimization’; available from:-http://www.iif.edu/data/iif/director/20061118-ML.doc[Accessed 18 July, 2012]

[8]Hawala is an Arabic word meaning transfer (also known as hundi) is an informal value transfer system based on the performance and honor of a huge network of money brokers, which are primarily located in the Middle East, North Africa, the Horn of Africa, and South Asia. It is basically a parallel or alternative remittance system that exists or operates outside of, or parallel to traditional banking or financial channels.

[9]‘Money laundering’(2012); available from:- http://en.wikipedia.org/wiki/Money_laundering[Accessed 18 July, 2012]

[10] ‘Guidelines on Prevention of Money Laundering’ IFIC Bank (2006); available from:- http://www.ificbank.com.bd/GUIDELINES%20ON%20PREVENTION%20OF%20MONEY%20LAUNDERING.pdf [Accessed 18 July,2012]