Money Laundering - A Brief History

What is Money Laundering?

by Billy Steel

 

The term "money laundering" is said to originate from Mafia ownership of Laundromats in the United States.

Gangsters there were earning huge sums in cash from extortion, prostitution, gambling and bootleg liquor. They needed to show a legitimate source for these monies.

One of the ways in which they were able to do this was by purchasing outwardly legitimate businesses and to mix their illicit earnings with the legitimate earnings they received from these businesses. Laundromats were chosen by these gangsters because they were cash businesses and this was an undoubted advantage to people like Al Capone who purchased them.

Al Capone, however, was prosecuted and convicted in October, 1931 for tax evasion. It was this that he was sent to prison for rather than the predicate crimes which generated his illicit income and according to Robinson this tale that the term originated from this time is a myth. He states that:

"Money laundering is called what it is because that perfectly describes what takes place - illegal, or dirty, money is put through a cycle of transactions, or washed, so that it comes out the other end as legal, or clean, money. In other words, the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income".

It would seem, however, that the conviction of Al Capone for tax evasion may have been the trigger for getting the money laundering business off the ground.

Meyer Lansky (affectionately called ‘the Mob’s Accountant’) was particularly affected by the conviction of Capone for something as obvious as tax evasion. Determined that the same fate would not befall him he set about searching for ways to hide money.

Before the year was out he had discovered the benefits of numbered Swiss Bank Accounts. This is where money laundering would seem to have started and according to Lacey Lansky was one of the most influential money launderers ever. The use of the Swiss facilities gave Lansky the means to incorporate one of the first real laundering techniques, the use of the ‘loan-back’ concept, which meant that hitherto illegal money could now be disguised by ‘loans’ provided by compliant foreign banks, which could be declared to the ‘revenue’ if necessary, and a tax-deduction obtained into the bargain.

‘Money laundering’ as an expression is one of fairly recent origin. The original sighting was in newspapers reporting the Watergate scandal in the United States in 1973. The expression first appeared in a judicial or legal context in 1982 in America in the case US v $4,255,625.39 (1982) 551 F Supp.314.

Since then, the term has been widely accepted and is in popular usage throughout the world.



BACKGROUND

Money laundering as a crime only attracted interest in the 1980s, essentially within a drug trafficking context. It was from an increasing awareness of the huge profits generated from this criminal activity and a concern at the massive drug abuse problem in western society which created the impetus for governments to act against the drug dealers by creating legislation that would deprive them of their illicit gains.

Governments also recognised that criminal organisations, through the huge profits they earned from drugs, could contaminate and corrupt the structures of the state at all levels.

Money laundering is a truly global phenomenon, helped by the International financial community which is a 24hrs a day business. When one financial centre closes business for the day, another one is opening or open for business.

As a 1993 UN Report noted: The basic characteristics of the laundering of the proceeds of crime, which to a large extent also mark the operations of organised and transnational crime, are its global nature, the flexibility and adaptability of its operations, the use of the latest technological means and professional assistance, the ingenuity of its operators and the vast resources at their disposal.

In addition, a characteristic that should not be overlooked is the constant pursuit of profits and the expansion into new areas of criminal activity.

The international dimension of money laundering was evident in a study of Canadian money laundering police files. They revealed that over 80 per cent of all laundering schemes had an international dimension. More recently, "Operation Green Ice" (1992) showed the essentially transnational nature of modern money laundering.



What Is Money Laundering?

If you were to conduct a survey in the streets asking the above question, the general response from most people would be that they had no idea. This typical response is one of the problems the Government has in combating this type of crime. It seems to be a victimless crime. It has none of the drama associated with a robbery or any of the fear that violent crime imprints upon people’s psyche and yet, money laundering can only take place after a predicate crime (such as a robbery or housebreaking or drug dealing) has taken place. It is the lack of information about money laundering that is available to the person on the street, which makes it an invisible problem and hence difficult to tackle.

There are various definitions available which describe the phrase ‘Money Laundering’. Article 1 of the draft European Communities (EC) Directive of March 1990 defines it as:

The conversion or transfer of property, knowing that such property is derived from serious crime, for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in committing such an offence or offences to evade the legal consequences of his action, and

The concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property, knowing that such property is derived from serious crime.



Another definition is:

Money laundering is the process by which large amounts of illegally obtained money (from drug trafficking, terrorist activity or other serious crimes) is given the appearance of having originated from a legitimate source.

If done successfully, it allows the criminals to maintain control over their proceeds and ultimately to provide a legitimate cover for their source of income. Money laundering plays a fundamental role in facilitating the ambitions of the drug trafficker, the terrorist, the organised criminal, the insider dealer, the tax evader as well as the many others who need to avoid the kind of attention from the authorities that sudden wealth brings from illegal activities. By engaging in this type of activity it is hoped to place the proceeds beyond the reach of any asset forfeiture laws.



How Big Is The Problem?

Estimates of the size of the money laundering problem totals more than $500 billion annually world - wide. This is a staggering amount and detrimental by any calculation to the financial systems involved.

Clearly the problem is enormous. It is also clear that money laundering extends far beyond hiding drug profits. In the UK this is evidenced in the legislation that has been enacted to counter this crime. For example, confiscation and money laundering provisions are contained in the Drug Trafficking Offences Act 1986 (DTOA), in the Criminal Justice Act 1988 and the Criminal Justice (International Co-operation) Act 1990. These provisions focus particularly on drug trafficking.

However, the Criminal Justice Act 1993 makes the laundering of the proceeds of non-drug trafficking crimes an offence for the first time. It was not until the enactment of the Criminal Justice (Consolidation) (Scotland) Act 1995 and the Proceeds of Crime (Scotland) Act 1995 (both came into effect from 1-4-96) that Scotland came into line with England regarding the extension of money laundering to cover all crime proceeds.



THE MONEY LAUNDERING PROCESS

Money laundering is not a single act but is in fact a process that is accomplished in three basic steps. These steps can be taken at the same time in the course of a single transaction, but they can also appear in well separable forms one by one as well. The steps are:-

a. Placement;

b. Layering; and

c. integration.



There are also common factors regarding the wide range of methods used by money launderers when they attempt to launder their criminal proceeds. Three common factors identified in laundering operations are;

• the need to conceal the origin and true ownership of the proceeds;

• the need to maintain control of the proceeds;

• the need to change the form of the proceeds in order to shrink the huge volumes of cash generated by the initial criminal activity.



Stages Of The Process

i) PLACEMENT

This is the first stage in the washing cycle. Money laundering is a "cash-intensive" business, generating vast amounts of cash from illegal activities (for example, street dealing of drugs where payment takes the form of cash in small denominations). The monies are placed into the financial system or retail economy or are smuggled out of the country. The aims of the launderer are to remove the cash from the location of acquisition so as to avoid detection from the authorities and to then transform it into other asset forms; for example: travellers cheques, postal orders, etc. (more details follow).

ii)LAYERING

In the course of layering, there is the first attempt at concealment or disguise of the source of the ownership of the funds by creating complex layers of financial transactions designed to disguise the audit trail and provide anonymity. The purpose of layering is to disassociate the illegal monies from the source of the crime by purposely creating a complex web of financial transactions aimed at concealing any audit trail as well as the source and ownership of funds.

Typically, layers are created by moving monies in and out of the offshore bank accounts of bearer share shell companies through electronic funds' transfer (EFT). Given that there are over 500,000 wire transfers - representing in excess of $1 trillion - electronically circling the globe daily, most of which is legitimate, there isn’t enough information disclosed on any single wire transfer to know how clean or dirty the money is, therefore providing an excellent way for launderers to move their dirty money. Other forms used by launderers are complex dealings with stock, commodity and futures brokers. Given the sheer volume of daily transactions, and the high degree of anonymity available, the chances of transactions being traced is insignificant.

iii)INTEGRATION

The final stage in the process. It is this stage at which the money is integrated into the legitimate economic and financial system and is assimilated with all other assets in the system. Integration of the "cleaned" money into the economy is accomplished by the launderer making it appear to have been legally earned. By this stage, it is exceedingly difficult to distinguish legal and illegal wealth.

Methods popular to money launderers at this stage of the game are:

a. the establishment of anonymous companies in countries where the right to secrecy is guaranteed. They are then able to grant themselves loans out of the laundered money in the course of a future legal transaction. Furthermore, to increase their profits, they will also claim tax relief on the loan repayments and charge themselves interest on the loan.

b. the sending of false export-import invoices overvaluing goods allows the launderer to move money from one company and country to another with the invoices serving to verify the origin of the monies placed with financial institutions.

c. a simpler method is to transfer the money (via EFT) to a legitimate bank from a bank owned by the launderers, as ‘off the shelf banks’ are easily purchased in many tax havens.



Money Laundering Methods

How the basic steps mentioned in the Stages of The Process are used depends on the available laundering mechanisms and the requirements of the criminal organisations. The table below provides some typical examples.

-  Placement
-  Stage Layering
-  Stage Integration


Stage

-  Cash paid into bank (sometimes with staff complicity or mixed with proceeds of legitimate business). Wire transfers abroad (often using shell companies or funds disguised as proceeds of legitimate business). False loan repayments or forged invoices used as cover for laundered money.
-  Cash exported. Cash deposited in overseas banking system. Complex web of transfers (both domestic and international) makes tracing original source of funds virtually impossible.
-  Cash used to buy high value goods, property or business assets. Resale of goods/assets. Income from property or legitimate business assets appears "clean".


These are a small selection of the ways that people clean their "dirty money". I have littered other examples in some of the other pages but it should be taken into account that the ones I have mentioned are the money laundering schemes which have already been uncovered. However, these schemes are still being used on unsuspecting businesses as even though the authorities know about them, not many people do, or even have access to this type of information.
The primary purpose of organised crime is to make profits. Like any business, the purposes of profit are to enjoy it and re-invest it in future activity. For the organised criminal, however, profit close to the source of the crime represents a particular vulnerability and unless the criminal can effectively distance himself or herself from the crime which is the source of the profit they remain susceptible to detection and prosecution. Hence the need to launder their illicit profits to make them appear legitimate.

The biggest source of illicit profits comes from the drugs' trade and it was drug trafficking that provided the initial catalyst for concerted international efforts against money laundering. The drugs' industry is a highly cash intensive business and "in the case of cocaine and heroin the physical volume of notes received is much larger than the volume of drugs themselves". In order to rid themselves of this large burden it is necessary to use the financial services industry and in particular, deposit-taking institutions.

The Financial Action Task Force (FATF) on Money Laundering has identified certain ‘choke’ points in the money laundering process that the launderer finds difficult to avoid and where he is vulnerable to detection. The initial focus has to be on these areas if the war against the launderer is to proceed successfully.

The choke points identified are:

a. entry of cash into the financial system;

b. transfers to and from the financial system; and

c. cross-border flows of cash.



The entry of cash into the financial system, known as the ‘placement’ stage is where the launderer is most vulnerable to detection. Because of the large amounts of cash involved it is extremely hard to place it into a bank account legitimately.

The UK’s system of reporting suspicious transactions to the authorities along with the procedures adopted by deposit-takers are powerful weapons against money launderers. In particular, the emphasis being placed on the importance of deposit-taking institutions ‘knowing their customer’ has severely curtailed this activity to such an extent that one of the favourite methods for money launderers to ‘place’ their money is to smuggle the money out of the country. There are penalties attached to the various money laundering offences for the deposit-taking institutions and these have provided for a powerful incentive for reporting suspicions to the National Criminal Intelligence Service (NCIS).

However, cross-border flows of cash is one of the areas mentioned above where the launderer is vulnerable to detection. In the UK, legislation provides the police and customs service with the power to seize cash they believe could be the proceeds of drug trafficking. Part III of the Criminal Justice (International Co-operation) Act 1990 (CJICA) introduced the powers for customs and police officers to seize cash being brought into or out of the United Kingdom, where they have reason to believe that such money represents the proceeds of drug trafficking or is intended to be used in drug trafficking. The power operates in respect of consignments of cash of £10,000 or more. Additionally, the courts are empowered to order the confiscation of such cash, where they are satisfied, on the balance of probabilities, of the alleged link with drug trafficking.

These measures overcome the difficulty of custom officers coming across large amounts of cash with no reasonable explanation for their export/import but, at the same time, with no hard evidence of links to drug trafficking it allows the detention of the cash pending an investigation. Due to this, couriers limit the amount they carry out of the country at any one time and the risk is seen as being less than passing the money into a financial institution.

The reporting of suspicious transactions is not limited to cash in the UK. Transfers to and from the financial system are also under the umbrella of ‘reporting of suspicious transactions’ and this can provide useful information on the ‘layering’ stage of the money laundering process. The keeping of comprehensive transaction records (part of the procedures) by financial organisations provides a useful audit trail and gives useful information on people and organisations involved in laundering schemes once discovered.

It is important, therefore, to ensure that complacency does not creep into our financial institutions at this stage, now that the measures are in place to deny money launderers open access to these same institutions.



Effects On Financial Institutions

"London washes whiter".

Financial institutions are at the forefront of the battle against the money launderers. It is not only their institutions that the money launderers target to use in their various nefarious schemes but under current legislation they are responsible for policing the financial dealings and reporting any suspicious transactions and also transactions over a reporting limit of £10,000 (In the UK).

Financial institutions are affected by money laundering;

1. in a legal sense because of the obligations placed on them by legislation;

2. financially because of the need for compliance. The Money Laundering Regulations 1993 (Hereafter called Regulations) require financial institutions to put in place systems to deter money laundering, and to assist the relevant authorities to deter money laundering activities.

i) THE LEGAL POSITION

Employers’ Legal Obligations.



These arise from the Money Laundering Regulations 1993. The Regulations impose a number of statutory obligations on all financial institutions.

• To set up procedures for verifying the identity of clients

• to set up record-keeping procedures for evidence of identity and transactions

• to set up internal reporting procedures for suspicions, including the appointment of a Money Laundering Reporting Officer

• to train relevant employees in their legal obligations

• to train those employees in the procedures for recognising and reporting suspicions of money laundering.



If employers fail to do this, they are committing an offence, which is punishable by a maximum of 2 years’ imprisonment, a fine, or both.

However, the law also imposes an obligation on people personally and they must take this responsibility seriously. If not, and they knowingly help a money launderer, or if a transaction, a client or a colleague causes them to suspect money laundering - and they fail to report their suspicions…. they can go to gaol. For example "tipping off" someone they are under investigation is an offence and upon conviction punishable by up to five years imprisonment.

ii) THE FINANCIAL POSITION

Because of the need to set up and maintain various procedures in order to comply with their legal obligations' businesses face compliance costs. The Regulations affect the financial and professional services sector. Within this sector they apply to:

• all banks, building societies and other credit institutions; • all individuals and firms authorised to conduct investment business under the Financial Services Act 1986;

• all insurance companies covered by the EC Life Directives, including the life business of Lloyd’s of London;

• all other undertakings carrying out any of the range of financial activities in the annex to the Second Banking Supervision Directive. This includes notably bureaux de change and money transmission services.

iii)COMPLIANCE COSTS

The Regulations require that financial institutions put in place systems to deter money laundering, and to assist the relevant authorities to detect money laundering activities. In order to do this, it has meant that financial institutions have had to incur additional costs and these costs are most likely to increase in the areas of administration, training and provision of storage space for records.



Administration

Costs occur here because of the need for businesses to obtain evidence of identity from their customers when doing business of ECU 15,000 or more. ( Regulation 7(5) ) They must also keep records of identification evidence and financial dealings for five years. ( Regulation 12(2) ) Other costs which may occur would be if an institution had to introduce new systems of control - for example, new computer software, which they would not otherwise have introduced. This will not be the case however, for all businesses. For members of self regulatory organisations, who are already required to identify customers, and for other firms which may require identification for professional reasons, the main change is likely to be in the nature of the evidence required and the time for which it must be kept. Firms that already have well-developed procedures in these areas, such as Banks and Building Societies, will find that the costs of compliance will be relatively lower.



Training

All relevant staff of institutions affected are required to have initial and recurrent training in:

a. the reporting and customer identification requirements of the Regulations;

b. the legislative position; and

c. the companies anti-money laundering policies and procedures.

There will be one-off costs in producing new procedures and training manuals.



Provision of Storage Space

The record-keeping requirement (Regulation 12(1) ) will have implications for the amount of storage space needed and the subsequent costs this will incur.

The costs will vary considerably for the different types of business institution affected and it is difficult to produce estimates for ‘typical’ institutions as the Regulations will apply to a wide variety of businesses in terms of staff numbers, volume of transactions, and existing degree of money laundering compliance. A table has been produced by HM Treasury (28 July 1993) derived from figures supplied by a number of individual institutions and trade associations.

In May 1992, HM Treasury issued a consultation paper in order for businesses to give their views on the cost of the proposed Regulations. One thousand copies were issued to a cross section of the affected professional bodies and businesses. Consultees were asked "to identify and quantify any additional direct or indirect costs (recurring and non-recurring)" that would be likely to arise as a result. Very few of the respondents commented on the costs. This suggested that costs arising from compliance were not a major cause for concern.



HM Treasury has produced what it calls ‘very broad brush estimates’ based on illustrative assumptions.

• Substantial revision of computer programmes may well be needed by most medium and large institutions outside the banking and building societies area. This might affect some 500 firms, at a weighted average cost of around £40,000 each. Ongoing maintenance might be ten percent of this total.

• Identification procedures will require new manuals to be produced by all but the smallest firms, at a total cost of perhaps £3 million, and the procedures may increase ongoing staff workload by perhaps 500,000 man-hours.

• Staff training might amount to some 500,000 man-hours annually, with additional total set-up costs of perhaps £5 million.

• Recurring record-keeping costs might be of the same order.



Allowing a margin for other costs, the total might be of the order of £30 million of initial costs and £20 million of recurring costs. This compares with total wage and salary costs alone for the banking, finance and insurance sector in 1992 of £17.2 billion. In concluding, it would seem therefor that compliance costs are relatively unimportant and a relatively small percentage of overall costs to the industry.



Business Areas Prone To Money Laundering

BUSINESS AREAS PRONE TO MONEY LAUNDERING

BANKING.

Banking is covered under the Regulations. (see Money Laundering Regulations 1993)

"If you want to steal, then buy a bank".

"Bertolt Brecht"



The best method of both stealing and laundering money is to own a bank. And though banks are an at risk group in relation to their main functions of deposit taker and opening of accounts, what can be done against this crime if the bank is international and in complicity with vast numbers of its depositors. When the CIA moved money via the BCCI it called it "facilitating the national interest". When the Mafia and the Libyans do it, it is called money laundering.

The BCCI affair was a major scandal involving allegations of corruption, bribery, money laundering, etc.. One investigator quotes in the Kerry Report:

"It had 3,000 criminal customers and every one of those 3,000 criminal customers is a page 1 story. So if you pick up any one of [BCCI’s] accounts you could find financing from nuclear weapons, gun running, narcotics dealing and you will find all manner and means of crime around the world in the records of this bank".

As Powis (1992) said, "money laundering becomes a relatively easy thing to do when a banking institution and a number of its key officials co-operate in the laundering activity".



UNDERGROUND BANKING

Sometimes called ‘parallel’ banking. These systems tend to mirror more conventional bank practices, but are highly efficient and wholly unauthorised methods of transferring money around the world. The best known among them are the Chop, Hundi, and Hawallah banking within various ethnic communities, which enables the avoidance of any conventional paper record of the financial transaction. Such methods do not require the actual movement of money but nonetheless facilitate the payment of funds to another party in another country in local currency, drawn on the reserves of the overseas partner(s) of the Hawallah banker. The system is dependant on considerable trust and considerable simplicity - the money launderer places an amount with the underground bank - the identifying receipt for a transaction being something as innocuous as a playing card or post-card torn in half, half being held by the customer and half being forwarded to the overseas Hawallah banker. The launderer then presents his receipt in the target country to obtain his money, thus avoiding exporting cash out of the country and limiting the risk of detection.



FUTURES

The UK experience showed that the futures market, through Capcom Commodities, a BCCI-related institution was another area that money launderers were taking advantage of for their money laundering schemes. Because of the ‘anonymous’ nature of the trading strategies, all brokers trading as principals and not in their client's name, the true identity of the beneficial owner is not known.

Commodities therefore are a ‘zero sum’ game, which means you can only buy if someone is willing to sell, and vice versa. Launderers can take advantage by a strategy of buying and selling the same commodity, thereby taking a small hit for the commission charged by the broker. They pay the losing contract out of dirty money and receive a cheque that legitimises their profits and creates a paper trail for any one who asks where the money came from.



PROFESSIONAL ADVISORS

Accountants/Solicitors/Stockbrokers

If involved in investment activity, this group is covered in the Regulations. For example, their clients’ account can be used as a bank account by clients and can put him at risk under s93 CJA93. See Michael Relton - Solicitor convicted in relation to money laundering proceeds from Brinks Mat robbery.


FINANCE HOUSES/BUILDING SOCIETIES

As with banks, any suspicious transactions must be reported. Money deposits in these institutions are where the placement stage usually takes place so vigilance is called for by staff. Any unusual change in regular customers depositing habits need to be investigated and lenders also have to be aware that money laundering techniques can also involve paying off a debt faster than income would support. You would already know a customer’s declared income on the loan application.



FINANCIAL TRANSMITTERS

Bureau de change/international money transmitters/travel agents.

All offer a wide range of services that can be used by the money launderer. Airline tickets, foreign currency exchanges in the form of cash and travellers cheques, are recognised as being widely used techniques. Money transmitting services in the form of wire, fax, draft, cheque or by courier exist for people unable to use traditional financial institutions. Customer anonymity is a primary feature of such transmissions which identifies the inherent level of risk. Covered under the Regulations if they offer currency exchange facilities.



CASINOS

Casinos and gambling establishments are particularly attractive to money launderers. Cash can be deposited with a casino in exchange for chips or tokens. After a few turns at the table the player can cash in the remainder for a cashier’s cheque which can be deposited in their account. Another method is to buy winning tickets from people in bookmakers and saying you have won making bookmakers vulnerable to being used.



ANTIQUE DEALERS/JEWELLER’S/DESIGNER GOODS SUPPLIERS

Any area that possesses the characteristics which represent high value goods that possess great portability and in many cases are used to being paid in cash is an attractive area for money launderers. All the above satisfy these criteria and owners and staff have to be aware of their obligations under the legislation if they are to avoid being unwittingly used in a money laundering scheme.

The above is not an exhaustive list of at risk institutions, however, some of the characteristics can be recognised in other groups not mentioned.



LEGISLATION - Part 1

It is, I hope, understood that due to limitations of time and space, I cannot hope to give a comprehensive account of the law relating to the financial crime of MoneyLaundering. For that you will have to refer to the references I will mention.



UK LEGISLATION

The UK has long noticed that third parties may be involved in facilitating the realisation of property which has been obtained unlawfully. Under Section 22(1) of the Theft Act 1968:

A person handles stolen goods if (otherwise in the course of stealing) knowing or believing them to be stolen goods he dishonestly receives the goods, or dishonestly undertakes or assists in their retention, removal, disposal or realisation, by or for the benefit of another person, or if he arranges to do so.

This provision, while being very wide-ranging in its effects, relates solely to goods which are or which represent the proceeds of stolen goods. This section covers a wide range of 'laundering' activities when money or other realisable property is dishonestly handled. Thus Michael Relton could be charged with offences relating to dishonest handling because he was handling the proceeds of the Brinks Mat robbery. This law however, did not cover the drugs issue. This was left to a later piece of legislation, namely, Section 27 (1) of the Misuse of Drugs Act 1971, which permitted the court:

By or before which a person is convicted of an offence under this Act…. To order anything shown to the satisfaction of the court to relate to the offence, to be forfeited and either destroyed or dealt with in such other manner as the court may order.

Thus a court could order the forfeiture of property, whether money, drugs, weapons or vehicles found in the possession of the convicted person and used in the continuance of offences under the Misuse of Drugs Act 1971. However, in 1980, the House of Lords made an historic ruling, which restricted the scope of section 27 of the Misuse of Drugs Act 1971. In the case of R v Cuthbertson an appeal was allowed against the forfeiture of £750,000 and was significant in that it exposed the limitations in the present laws regarding forfeiture. This resulted in the setting up of the Hodgson Committee with the brief of inquiring into ways of filling the vacuum created in the law by this decision.

The Committees findings, along with the deliberations of the Home Affairs Select Committee which followed, led to the passing of the Drug Trafficking Offences Act 1986 (DTOA). This was the first statute to categorise money laundering as a criminal offence and therefore notable in the chronology and evolution of laws to fight the money launderer. Subsequently, this has now been extended to new laws, which cover laundering of the proceeds of all crime while various other related provisions have been added.

Brown (1996) states: UK money laundering legislation can be said to have three themes that run through it:

i. The desire to encourage and in some cases compel the reporting of suspicions, especially in relation to drug trafficking.

This is reflected not only in the substantive offences of failing to report suspicion, but also in the provision of exceptions relating to acquisition and the like of tainted property where a disclosure has been made.



ii. The prohibition of any dealing with suspect funds, at least until a disclosure has been made and the consent of the law enforcement authorities obtained to proceed. This follows from the objective of denying the money launderer access to the market.



iii. The prohibition of doing anything that might alert the launderer to the existence of an investigation or prejudice such an investigation. This is necessary not only to protect the investigation but also to protect the person or institution that has made the disclosure against the possibility of the subject of the disclosure discovering that a disclosure has been made (whether or not s/he is a money launderer).



THE OFFENCES

There are now five basic money-laundering offences:

i. assisting another to retain the benefit of crime;

ii. acquiring, possession and use of criminal proceeds;

iii. concealing or transferring proceeds to avoid prosecution or a confiscation order (also called Own Funds money laundering).

iv. failure to disclose knowledge or suspicion of money laundering;

v. tipping off.



Assisting another to retain the benefit of crime.

Under section 93A (1) of the CJA88 (as inserted by section 29 CJA93); Section 38 (1) of the Criminal Law (Consolidated) (Scotland) Act 1995; Section 11, Prevention of Terrorism (Temporary Provisions) Act 1989; and Section 50, Drug Trafficking Act 1994.

Assistance occurs where a person is involved in an arrangement with another person, and knows or suspects that the other person is, or has been involved in, or has benefited from drug trafficking or criminal conduct if the arrangement helps the other person to retain or control proceeds directly or indirectly or enables the other person to use the proceeds or to invest them for his benefit. The legislation allows ‘disclosure to a constable’ which is normally to the FIU of the NCIS. This covers terrorist related activities as well. The penalty for commission of an offence under this section is imprisonment of up to six months, or a fine not exceeding the statutory maximum, or both, on summary conviction. On conviction on indictment, the penalty is imprisonment of up to 14 years, or a fine, or both.

Acquisition, possession or use of criminal proceeds.

Under section 93B(1) of the CJA88 (as inserted by section 30 CJA93); Section 37 of the Criminal Law (Consolidation) (Scotland) Act 1995; Section 54(3) to (6) of the NIEPA91 (as inserted by section 16 CJA93); and Section 51, Drug Trafficking Act 1994.

Acquisition is the offence of use or possession of property which you know or have reasonable grounds to suspect to be the proceeds of drug trafficking or criminal conduct and have acquired at less than full value. The aim of the offence is to prevent criminal proceeds being passed on by criminals to be enjoyed by third parties. Here, the reference is to ‘property’, rather than to ‘funds or investments’ as in section 93A (‘property’ including money).

The penalty for commission of an offence under this section is the same as for assisting another to retain the benefit of crime.

Concealing or transferring proceeds to avoid prosecution or a confiscation order (also called Own Funds money laundering).



Under section 93C of the CJA88 (as inserted by section 31 CJA93); Section 14(1) and (2) of the Criminal Justice (International Co-operation) Act 1990; Section 54(1) and (2) of the NIEPA91; and Section 49, Drug Trafficking Act 1994

Concealing is disguising, removing or transferring proceeds (directly or indirectly) of drug trafficking or criminal conduct for the purpose of avoiding or helping someone else avoid prosecution. The offence is committed by a person who assisted in the offence if s/he knows or has reasonable grounds to suspect the nature of the property.

Concealing or disguising any property includes concealing or disguising its nature, source, location, disposition, movement or ownership or any rights with respect to it.

The penalty for commission of an offence under this section is exactly the same as for the assisting and acquisition offences.

Failure to disclose knowledge or suspicion of money laundering.

Under section 26B(1) of the DTOA (as inserted by section 18 CJA93); Section 52, Prevention of Terrorism (Temporary Provisions) Act 1989; and Section 39 of the Criminal Law (Consolidated) (Scotland) Act 1995.

This offence only relates to drug trafficking and terrorism and not to proceeds of crime in general. A person is guilty of an offence if, as a result of something he learns in the course of his trade, profession or employment, he does not report a suspicion to a police or customs officer.

There is a question as to whether disclosure is a waiver of professional privilege or a breach of any express or implied duty of confidentiality owed to a customer or client. For example, legal privilege for solicitors. If there is a criminal transaction then disclosure to the police will not constitute a waiver of professional privilege nor will it give actionable grounds for a claim for breach of confidence.

The penalty for commission of an offence under this section is imprisonment of up to six months, or a fine not exceeding the statutory maximum, or both, on summary conviction. On conviction on indictment, the penalty is imprisonment of up to five years, or a fine, or both.

Tipping off.



Under section 93D of the CJA88 (as inserted by section 32 CJA93); and

Section 36(1) and (2) of the Criminal Law (Consolidation) (Scotland) Act 1995; and

Section 17 of the Prevention of Terrorism (Temporary Provisions) Act 1989, (as amended by section 50 CJA93).

The requirement to report suspicions is not much use if the suspected person is tipped off to the fact that s/he is under investigation. In order to preserve the integrity of an investigation, the offence of ‘tipping off’ occurs when information or any other matter which might prejudice the investigation is disclosed to the suspect of the investigation (or anyone else) by someone who knows or suspects (or, in the case of terrorism, has reasonable cause to suspect) that: a police investigation into money laundering has begun or is about to begin, or the police have been informed of suspicious activities, or a disclosure has been made to another employee under internal reporting procedures.

The penalty for tipping off is the same as for the failure to disclose offence.



INTERNATIONAL INITIATIVES - PART 1

The increasing integration of the world’s financial system, as technology has improved and barriers to the free movement of capital have been reduced, has meant that money launderers can make use of this system to hide their ill-gotten gains. They are able to quickly move their criminally derived cash proceeds between national jurisdictions, complicating the task of tracing and confiscating these assets. Because of this, it has been recognised by many governments that close international co-operation was needed to counter money laundering, and a number of agreements have been reached internationally in order to counter this menace.

These agreements have been reached on two fronts - financial and legal.



BASLE STATEMENT OF PRINCIPLES

On the financial front, the Committee on Banking Regulation and supervisory Practices issued the Basle Statement of Principles on the prevention of criminal use of the banking system for the purpose of money laundering in December 1988.

The Statement of Principles does not restrict itself to drug-related money laundering but extends to all aspects of laundering through the banking system, i. e. the deposit, transfer and/or concealment of money derived from illicit activities whether robbery, terrorism, fraud or drugs. It seeks to deny the banking system to those involved in money laundering by the application of the following principles:

a. Know your customer - banks should make reasonable efforts to determine the customer’s true identity, and have effective procedures for verifying the bona fides of new customers (whether on the asset or liability side of the balance sheet)

b. Compliance with laws - bank management should ensure that business is conducted in conformity with high ethical standards, laws and regulations being adhered to and ensuring that a service is not provided where there is good reason to suppose that transactions are associated with laundering activities.

c. Co-operation with law enforcement agencies - within any constraints imposed by rules relating to customer confidentiality, banks should co-operate fully with national law enforcement agencies including, where there are reasonable grounds for suspecting money laundering, taking appropriate measures which are consistent with the law.

d. Adherence to the Statement - The full text of this section of the Statement is worth quoting in full.

"All banks should formally adopt policies consistent with the principles set out in this Statement and should ensure that all members of their staff concerned, wherever located, are informed of the bank’s policy in this regard. Attention should be given to staff training in matters covered by the Statement. To promote adherence to these principles banks should implement specific procedures for customer identification and for retaining internal records of transactions. Arrangements for internal audit may need to be extended in order to establish an effective means of testing for general compliance with the Statement".



THE FUTURE

BANKING

Owning a bank, as mentioned earlier in the text, is a classic means to launder huge sums of money. In Russia and some East European States, banks can be readily purchased for very little money- though few of them have electronic banking access to SWIFT. (SWIFT is the principal international service for wire transfer message traffic that initiates funds transfers. Besides banks, SWIFT provides services to (1) securities brokers and dealers, (2) clearing institutions, and (3) recognised securities exchanges. SWIFT is a co-operative society located in Belgium; it has more than 2,600 member institutions in 65 countries).

This is what the future nightmare envisioned by the authorities will be like - with organised crime in control of banks and able to launder huge sums of money, not only for themselves but for other criminal organisations.

Already, in Russia it is said that criminal groups control over 400 banks and 47 exchanges. This is worrying bank chairmen in Russia as between 1994 to July 1995 there were thirty assassination attempts against top banking officials, sixteen of whom were killed. These killings along with earlier ones, were important indicators of the efforts by criminal organisations to infiltrate the Russian banking system. Infiltration of the banking system offers significant advantages for criminal organisations, not least the opportunity it gives to facilitate money laundering for both Russian and foreign criminal organisations.



CYBERPAYMENTS

The term cyberpayments is just one of many used to describe systems which facilitate the transfer of financial value (i.e., digital currency, e-money). In fact, these developments may alter the means by which all types of financial transactions are conducted and financial payment systems are operated. Such transactions may occur via the Internet or through the use of smart cards which unlike debit or credit cards, actually contain a microchip, which stores value on the card. Some Cyberpayments systems use both.

The common element is that these systems are designed to provide the transacting parties with immediate, convenient, secure and potentially anonymous means by which to transfer financial value. This system will, once implemented, have the potential to facilitate the international movement of illicit funds. The speed, which makes the systems efficient, and the anonymity that makes them secure are positive characteristics from the money launderer's perspective and it is this that makes it attractive to them. However, these same characteristics may actually impede law enforcement from obtaining necessary information to detect illegal activity. Specific concerns appear to be the impact of Cyberpayments on the effectiveness of current regulatory/policy initiatives against financial crime and the impact on traditional investigative techniques and analysis. There are also various international jurisdictional issues to be considered. The FATF say that one of the challenges for the future will be addressing the potential money laundering threats posed by the new payment technologies.



E-CASH

There are several systems of e-money. There are stored value cards such as MONDEX which is a rechargeable card (charged by putting it in a special slot in an ATM), and is both an access device and a self contained store of value. Further to this is Internet-based payment systems that use the Internet’s telecommunications capability to facilitate financial transactions with other users. The personal computer which serves as the user’s interface with the Internet payment system can also store value and is therefore, also an access device and self contained store of value.

Morris-Cotterill (How Not To Be a Money Launderer,1996) describes the Internet as being one of the greatest opportunities for laundering because of the total lack of traceable transactions, the use of encryption software will further make transactions totally secure. With the Internet, being connected to anywhere in the world is no problem and this will allow cross border movements of capital to take place. It remains to be seen whether money laundering managers take advantage of these new technologies to circumvent any legislation on other traditional laundering techniques (smurfing, wire transfers, bank drafts for example). It is however, a worry to the authorities.

With MONDEX, the way it works is that each card will have a pre-set limit. The limits on the cards will be set by issuing banks. Banks will be franchised on a trickle down basis with the big banks sublicencing little banks. With banks so easy to buy, what is to stop them from making a few cards with unlimited spending power? This system is already in operation in Swindon, UK. It transfers money from one card to another by telephone. It leaves a note on the card that a "private" transfer has been made, but no record of who private is. MONDEX can also make card to card transactions. This system is tailor made for money laundering unless some safeguards are put in place.



CONCLUSION

‘Money laundering is the crime of the `90s’.

Money laundering is sleight of hand… a magic trick for wealth creation… the lifeblood of drug dealers, fraudsters, smugglers, arms dealers, terrorists, extortionists and tax-evaders. It is also the world’s third largest business. Though a relatively new and in vogue subject, it [money laundering] has in fact been around for centuries. Criminals throughout history have had to hide the source of newly acquired wealth in order to escape prosecution for the predicate crime. However, the scale of the problem has escalated out of all proportion. Former US Secretary of State George Shultz summed it up when he stated:

"Today’s criminals make the Capone crowd and the old Mafia look like small time crooks".

Money laundering is one of the ongoing problems facing the international economy, and from the evidence studied while researching this work, it can be seen that while the fundamentals of this crime remains largely the same, technology has offered, and will continue to offer a more sophisticated and circuitous means to convert ill-gotten proceeds into legal tender and assets. The largely unchecked growth of the Internet presents what has been described as the "Armageddon scenario of banking on the `Net - criminals could have money transferred without any audit trail". There is a total absence of regulation of the Internet and it has been recognised that authorities need to ensure that legislation keeps abreast of technology in order to understand and pick up on any new techniques that professional money launderers may come up with.

There is also a growing realisation about the extent that money laundering and its relationship with organised crime are interlinked. The huge profits that accrue to these criminals from such areas as drug trafficking, international fraud, advance fee fraud, long firm fraud, arms dealing, trafficking in human organs and tissue, etc., will be used not only to facilitate ongoing operations, but to consolidate the wealth, prestige and respectability of those in control of the criminal business. Drug trafficking remains the largest single generator of illegal proceeds: Robinson (1994) stated that more money is spent world-wide on illicit drugs than on food. However, non-drug related crime is increasingly significant.

The characteristics of organised crime are evident in money laundering:

• it is a group activity, in that it is carried out often by more than one person;
• it is a criminal activity which is long term and continuing;
• it is a criminal activity which is carried out irrespective of national boundaries;
• it is large scale; and
• it generates proceeds which are often made available for licit use.


These characteristics define a very particular kind of serious criminal activity which, at its most developed, is highly sophisticated and complex. The degree of organisation that is displayed in money laundering is therefore of particular concern because of its scale, its capacity to exploit and influence the legitimate business world and its capacity for internationalisation. These concerns have led to concerted international action for a solution to combat this growing menace called Money Laundering. This is particularly evident, not only in the formation of the FATF but also in international agreements and legislation. In fact, a watershed in the fight against money laundering was the publication of the FATF 40 Recommendations in 1990 - recently updated in 1996.



RECOMMENDATIONS

Based on the detailed research I have carried out I now make the following recommendations;

We must continue to work with - and strengthen - our international partnerships, and maintain strong ties with our counterparts in the financial centres of the world. We must urge all countries to ratify the U. N. Convention and to pass more effective money laundering and forfeiture laws. Above all, we must continue to identify the points where the money is most vulnerable and identify what we can do to separate criminals from their ill-gotten gains.

Launderers have a list popularly called a "shopping list" which they use to size up specific opportunities when searching for jurisdictions to use. Knowing what is on this list can give rise to specific measures for countries to adopt to fight money laundering.

These measures are a natural progression for countries who have the political will to combat this insidious crime.



Other Recommendations;

We need:-

a. to strengthen international co-operation on information exchange and law enforcement;

b. proper mechanisms for handling suspicious reports;

c. a compliance culture among financial institutions; and to ensure that they put proper systems and procedures in place;

d. to encourage financial supervisors to apply bank licensing procedures strictly, exchange information, and train practitioners;

e. to increase public awareness of the threat from money laundering;

f. increasing co-ordination between the multiple agencies (national and international) involved and to improve the limited intelligence sharing;

g. to increase the limited human resources involved in the labour intensive and time consuming work of investigating suspected violations;

h. implementation on a world-wide basis of a consistent set of policies. (e.g. FATF 40 Recommendations);

i. to focus on new technologies and increase countermeasures to combat their use for money laundering;

j. to share forfeited proceeds with law enforcement agencies. (a particular police gripe);

k. Introduce measures that make the movement of money more visible.


By implementing the recommendations above, the authorities should further strengthen the fight against the money launderer and show them that there is no place to hide.

However, there will have to be political impetus to crystallise strong co-ordinated overall international action, and to define the best way to associate other countries, including drug-producing countries, to the fight against money laundering.

 More