Business, Legal & Accounting Glossary
Money laundering is the practice of engaging in financial transactions in order to conceal the identity, source, and/or destination of money and is a main operation of the underground economy.
In the past, the term “money laundering” was applied only to financial transactions related to organized crime. Today its definition is often expanded by government regulators (such as the United States Office of the Comptroller of the Currency) to encompass any financial transaction which generates an asset or a value as the result of an illegal act, which may involve actions such as tax evasion or false accounting. As a result, the illegal activity of money laundering is now recognized as potentially practised by individuals, small and large businesses, corrupt officials, members of organized crime (such as drug dealers or the Mafia) or of cults, and even corrupt states, through a complex network of shell companies and trusts based in offshore tax havens.
The increasing complexity of financial crime, the increasing recognized value of so-called “financial intelligence” (FININT) in combating transnational crime and terrorism, and the speculated impact of capital extracted from the legitimate economy has led to an increased prominence of money laundering in political, economic, and legal debate.
Money laundering is often described as occurring in three stages: placement, layering, and integration.
However, The Anti Money Laundering Network recommends the terms
If a person is making thousands of dollars in small change a week from a business (not unusual for a store owner) and wishes to deposit that money in a bank, it cannot be done without possibly drawing suspicion. In the United States, for example, cash transactions and deposits of more than a certain dollar amount are required to be reported as “significant cash transactions” to the Financial Crimes Enforcement Network (FinCEN), along with any other suspicious financial activity which is identified as “suspicious activity reports.” In other jurisdictions, suspicion-based requirements are placed on financial services employees and firms to report suspicious activity to the authorities. Methods to conceal the source are therefore required.
One method of keeping this small change private would be for an individual to give money to an intermediary who is already legitimately taking in large amounts of cash. The intermediary would then deposit that money into an account, take a premium, and write a cheque to the individual. Thus, the individual draws no attention to himself and can deposit his check into a bank account without drawing suspicion. This works well for one-off transactions, but if it occurs on a regular basis then the check deposits themselves will form a paper trail and could raise suspicion.
Another method involves establishing a business whose cash inflow cannot be monitored, and funnelling the small change into this business and paying taxes on it. All bank employees, however, are trained to be constantly on the lookout for any transactions which appear to be an attempt to get around the currency reporting requirements. Such shell companies should deal directly with the public, perform some service-related activity as opposed to providing physical goods, and reasonably accept cash as a matter of business. Dealing directly with the public ensures plausible anonymity of source. An example of a legitimate business displaying plausible anonymity of source would be a hairstylist. Since it would be unreasonable for them to keep track of the identity of their customers, a record of their transaction amounts must be ostensibly accepted as prima facie evidence of actual financial activity. Service-related businesses have the advantage of anonymity of resources. A business that sells computers has to account for where it actually got the computers, whereas a plumbing company merely has to account for labour, which can be falsified. Reasonably accepting cash means the business must regularly perform services that total less than $500 on average, since above that amount most people pay with a check, credit card, or another traceable payment method. The company should actually function on a legitimate level. In the plumbing company example, it is perfectly reasonable for a lot of the business to involve only labour (no parts), and for some business to be paid for in cash, but it is unreasonable for all of their business to involve no parts and only cash payment. Therefore the legitimate business will generate a legitimate level of parts usage, as well as enough traceable transactions to mask the illegitimate ones.
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.
Many jurisdictions adopt a list of specific predicate crimes for money laundering prosecutions as a “self launderer” (the UK has an “all-crimes” regime). In addition, AML/CFT laws typically have other offences such as “tipping off,” “willful blindness,” not reporting suspicious activity, and conscious facilitation of a money launderer/terrorist financier to move his/her monies.
The “money laundering” legislation in the United Kingdom, under Sections 327 to 340 of the Proceeds of Crime Act 2002 (PoCA), and all of the Money Laundering Regulations 2003 & 2007, is wide-ranging and encompasses 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. 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 (SARs) – in 2005 just under 200,000 SARs were received. The number of SARs 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).
The Bank Secrecy Act of 1970 requires banks to report cash transactions of $10,000.01 or more. The Money Laundering Control Act of 1986 further defined money laundering as a federal crime. The USA PATRIOT Act of 2001 expanded the scope of prior laws to more types of financial institutions, added a focus on terrorist financing, and specified that financial institutions take specific actions to “know your customer” (KYC).
In the United States, Federal law provides (in part): “Whoever . . . knowing[ly] . . . conducts or attempts to conduct . . . a financial transaction which in fact involves the proceeds of specified unlawful activity . . . with the intent to promote the carrying on of specified unlawful activity . . . shall be sentenced to a fine of not more than $500,000 or twice the value of the property involved in the transaction, whichever is greater, or imprisonment for not more than twenty years, or both.”
While money laundering typically involves the flow of “dirty money” (criminal proceeds) into a “clean” bank account or negotiable instrument, terrorist financing frequently involves the reverse flow: apparently clean funds converted to “dirty” purposes. A hawala may launder drug proceeds and help fund a terrorist, netting the incoming and outgoing funds with only occasional small net settlement transactions.
The prime method of anti-money laundering is the requirement on financial intermediaries to know their customers – usually termed KYC (know your customer) requirements. With good knowledge of their customers, financial intermediaries will often be able to identify unusual or suspicious behaviour, including false identities, unusual transactions, changing behaviour, or other indicators that laundering may be occurring. But for institutions with millions of customers and thousands of customer-contact employees, traditional ways of knowing their customers must be supplemented by technology.
Information technology can never be a replacement for a well-trained investigator, but as money laundering techniques become more sophisticated, so too is the technology used to fight it. Early anti-money laundering programs flagged cash transactions exceeding a certain amount ($10,000.01 in the U.S. would trigger the need for a Currency Transaction Report). This proved to be ineffective because money launderers soon adjusted their schemes to avoid detection.
Current Anti-money laundering software packages include capabilities of name analysis, rules-based systems, statistical and profiling engines, neural networks, link analysis, peer group analysis, and time sequence matching. In addition, there are specific KYC solutions that offer case-based account documentation acceptance and rectification, as well as automatic risk scoring of the customer (taking account of country, business, entity, product, transaction risks) that can be reviewed intelligently. Other elements of AML technology include portals to share knowledge and e-learning for training and awareness.
Financial Crimes Enforcement Network (FinCEN), is an organization created by the United States Department of the Treasury. FinCEN receives Suspicious Activity Reports from financial institutions, analyses them, and shares their data with U.S. law enforcement agencies and equivalent Financial Intelligence Units (FIUs) of other countries. One of its strategic goals is to improve information-sharing through eGovernment. It offers training and advice to organizations of foreign governments to help improve the efficacy of their anti-money laundering programs.
After September 11, 2001, money laundering became a major concern of the United States’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 International, a central securities depository and clearing house or “bank of banks” which practices “financial clearing,” centralizing debit, and credit operations for hundreds of banks, was 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’s CEO, to resign on December 31 2001; several judicial investigations were opened; and the European Commission was interpellated by Members of the European Parliament (MEPs) Harlem Désir, Glyn Ford, and Francis Wurtz, who asked the Commission to investigate the accusations and to ensure that the June 10, 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 coordinated 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 September 11, 2001, with another added 22 October 2004, to form what is now known as the “40 + 9” principles of anti-money laundering and combatting the financing of terrorism (AML/CFT). Compliance with, or a movement towards compliance with, these principles are now seen as a requirement of an internationally active bank or other financial service entity.
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This glossary post was last updated: 5th May, 2020 | 0 Views.