Money Laundering and the Financing of Terrorism

What is Money Laundering?

by fsc.gov

 

Money Laundering is the process by which criminals attempt to conceal the true origin and ownership of the proceeds of criminal activities. If successful, the money can lose its criminal identity and appear legitimate.

Illegal arms sales, smuggling, and the activities of organised crime, including for example, drug trafficking and prostitution, can generate huge sums. Embezzlement, insider trading, bribery and computer fraud schemes can also produce large profits and create the incentive to "legitimise" the ill-gotten gains through money laundering. When a criminal activity generates substantial profits, the individual or group involved must find a way to control the funds without attracting attention to the underlying activity or the persons involved. Criminals do this by disguising the sources, changing the form, or moving the funds to a place where they are less likely to attract attention.


In summary, the money launderer wants to:-

1. place his money in the financial system, without arousing suspicion;

2. move the money around, often in a series of complex transactions crossing multiple jurisdictions, so it becomes difficult to identify its original source; and

3. then move the money back into the financial and business system, so that it appears as legitimate funds or assets.


What is Terrorist Financing?

United Nations 1999 International Convention for the Suppression of the Financing of Terrorism explains terrorist financing in the following way:

"Any person commits an offence within the meaning of this Convention if that person by any means, directly or indirectly, unlawfully and wilfully, provides or collects funds with the intention that they should be used or in the knowledge that they are to be used, in full or in part, in order to carry out

(a) An act which constitutes an offence within the scope of and as defined in one of the treaties listed in the annex (see 1-9 below); or

(b) Any other act intended to cause death or serious bodily injury to a civilian, or to any other person not taking an active part in the hostilities in a situation of armed conflict, when the purpose of such act, by its nature or context, is to intimidate a population, or to compel a government or an international organization to do or to abstain from doing any act."


The Convention also indicates that a person still commits an offence even if:

" the funds are not used to carry out an offence in (a) and (b) above;

" a person attempts to commit an offence as described above;

" a person participates as an accomplice in an offence as above; and

" a person organises or directs others to commit an offence as above, or contributes to the commission of one or more offences as above by a group of persons acting with a common purpose, where the contribution is intentional and is made with the aim of furthering the criminal activity or criminal purpose of the group, where such activity involves the commission of an offence as above, or is made in the knowledge of the intention of the group to commit an offence as above


1. Convention for the Suppression of Unlawful Seizure of Aircraft, done at The Hague on 16 December 1970.

2. Convention for the Suppression of Unlawful Acts against the Safety of Civil Aviation, done at Montreal on 23 September 1971.

3. Convention on the Prevention and Punishment of Crimes against Internationally Protected Persons, including Diplomatic Agents, adopted bby the General Assembly of the United Nations on 14 December 1973.

4. International Convention against the Taking of Hostages, adopted by the General Assembly of the United Nations on 17 December 1979.
5. Convention on the Physical Protection of Nuclear Material, adopted at Vienna on 3 March 1980.

6. Protocol for the Suppression of Unlawful Acts of Violence at Airports Serving International Civil Aviation, supplementary to the Convention for the Suppression of Unlawful Acts against the Safety of Civil Aviation, done at Montreal on 24 February 1988.

7. Convention for the Suppression of Unlawful Acts against the Safety of Maritime Navigation, done at Rome on 10 March 1988.

8. Protocol for the Suppression of Unlawful Acts against the Safety of Fixed Platforms located on the Continental Shelf, done at Rome on 10 March 1988.

9. International Convention for the Suppression of Terrorist Bombings, adopted by the General Assembly of the United Nations on 15 December 1997.



A brief history of money laundering


Al Capone's 1931 conviction for tax evasion leads to the modern practice of money laundering

The term "money laundering" is said to have evolved from the Prohibition era in the United States.
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 New Orleans slot machines 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.

ADDED NOTE: Actually, the Capone reference to money laundering, and the often repeated story that the term derives from his use of laundromats to hide ill-gotten gains, is mere myth. Capone, in fact, did not "wash" his money in an attempt to hide it from anyone, and consequently wound up running foul of the IRS. They nabbed him for tax evasion. Lansky, on the other hand, perfected money laundering's older brother, "capital flight." His theory was that if the IRS couldn't find it, they couldn't tax it, so he simply moved the mob's money offshore. The first reference to the term "money laundering" actually appears during the Watergate scandal. 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."


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 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. The scandal prompted André Lussi, Clearstream CEO, to resign on December 31, 2001; several juridical investigations were opened; and the European Commission was interpelled by European Members of Parliament (MPs) 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.


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.

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 his business (not unusual for a store owner), and he wishes to deposit that money in a bank, he cannot do so 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 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.


One method of keeping this small change private would be for an individual to give his money to an intermediary who is already legitimately taking in large amounts of cash. The intermediary would then deposit that money into his 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.


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.


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. It should be noted, however, that the act of concealing money is different than that of laundering it, though many make the mistake of putting both actions under the term of laundering.


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.


The 'money laundering' legislation in the United Kingdom under Sections 327 to 340 of the Proceeds of Crime Act 2002 (PoCA), is extremely wide ranging and includes mere possession of criminal or terrorist property as well as its acquisition, transfer, removal, use, conversion, concealment or disguise.
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. Also 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).

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