Money Laundering

MONEY AUNDERING.

Table of Contents.

1. Objectives 3

2. Methods Of data collection 4

3. Limitations 4

4. Executive Summary 5

5. Background 7

6. What is money laundering 8

7. How big is the problem 9

8. What is electronic money 11

9. Scope of electronic money 13

10.Process of money laundering 19

11.Methods of money laundering 24

12.Estimates of money laundering flows around the world 28

13. Swiss Banking 32

14. Numbered accounts 34

15. How can we prevent it? 36

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16. FATF 39

17. Business areas prone to money laundering 45

18. Money laundering offences 49

19. International Initiatives 52

20. Future 56

21. Recommendations 59

22. Conclusion 63

23. Appendixes 68

TABLE OF FIGURES Figure 1: Volume of Money Laundering activity 9

Figure 2: Stages in the Money Laundering Process 19

Figure 3: Movement of illegal money 21

Figure 4: Method of cleaning dirty money 24

Figure 5: Estimates of money laundering flow around the world 28

Figure 6: Top 20 origins of laundered money 29

Figure 7: Top 20 flows of laundered money 30

Figure 8: Top 20 destinations of laundered money 31

Figure 9: Suspicious Transaction Reports table 54

Figure 10: Suspicious Transaction Reports by business category 55

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OBJECTIVE

1) To understand the operations of money laundering universally,

2) To identify the characteristics of money laundering

3) How to overcome the existing market of money laundering

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METHODS OF DATA COLLECTIONThe only source of information for this project is secondary data.

LIMITATIONS

As all the information in this project has been based on secondary information, views and

figures may vary. There by not making most of the amounts or methods 100% accurate.

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EXECUTIVE SUMMARY

"Money Laundering is the world’s third largest industry by value".

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.  

"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". 

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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 according to Lacey Lansky, 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.

The effects this money laundering has on the economy cannot be assessed accurately.

However economic models area capable of tracing the multiplier effects of money taken

from one sector of the economy and spent in another sector, but there is little systematic

data on how laundered money is spent. When illicitly gained money is spent on lavish

real estate there is probably a net loss to the economy, but where it is turned into

legitimate businesses the net effects can be quite positive to the economy. The unfair

competition that such money introduces to an industry is, however, potentially disastrous

to legitimate operators in the industry. When money is brought into a country from

overseas for laundering, one might conclude that from a purely economic view the effect

on the country’s economy is an entirely positive one, however it also competes unfairly

with legitimate operators, and has the potential to encourage corruption of public officials

and business structures in a country

‘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

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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.

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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.

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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.

HOW BIG IS THE PROBLEM?

Estimates of the size of the money laundering problem totals more than $500 billion

annually world – wide (2004) . This is a staggering amount and detrimental by any

calculation to the financial systems involved.  

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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.

ELECTRONIC MONEY

Financial systems are emerging in which economic value is represented by electronic

patterns. This 'electronic cash' or 'e-money' can be exchanged through the use of 'smart

cards' or over the Internet. E-money is expected to work just like paper money, but

without the risks, inconvenience and costs involved in handling, administering and

safeguarding actual physical currency.

The explosion of e-money technology raises a number of policy issues, one of which is

money laundering. Any crime that generates significant profits - extortion, drug

trafficking, arms smuggling and some kinds of white-collar crime - may involve attempts

at money laundering.

E-money may prove to be attractive to money launderers for two main reasons:

Electronic transactions may become untraceable and are incredibly mobile. E-money

transactions can easily be anonymous and may not leave a traditional audit trail. E-money

systems also offer instantaneous transfer of funds with effectively no jurisdictional

restrictions.

Given these challenges, new legislative and regulatory action, investigative and

enforcement techniques, and most important, enhanced international cooperation may be

needed to prevent, detect and apprehend e-money launderers. These may need to cover

many areas:

domestic measures, to give law enforcement agencies more effective tools;

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training, both for law enforcement agencies and in the financial sector, including

financial regulators;

information sharing and retention, in Canada and internationally; and

Secrecy laws, to hinder money laundering without hindering legitimate

transactions.

WHAT IS ELECTRONIC MONEY?

By its decentralized, distributive nature, electronic money has the same potential for

transforming economic structure as personal computers did for overhauling management

and communications structure.( Birch and McEvoy, 1996)

Financial systems are emerging which allow economic value to be represented digitally

by electronic patterns. This 'electronic money', or e-money, can be exchanged through the

use of 'smart cards' or over the Internet.

Unlike stored value cards, e-money can pass immediately between the two transacting

on-line parties, without the need for an intermediary (e.g., e-cash by DigiCash Inc.).

E-money is ultimately expected to work just like paper money, without the risk,

inconvenience and cost associated with handling, administering and safeguarding

traditional currency.

A bewildering variety of electronic payment systems is currently being developed around

the world. Given the constant changes to these systems, it would not be practical to

launch into a technical discussion on how they work.

As technology has progressed, so too have payment systems. E-money is being

introduced as the latest method of exchanging value. But governments have to be ready

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to react to the novel opportunities as well as the threats posed by this new form of

currency.

The electronic exchange of money is by no means a brand new invention. Banks and

other financial institutions have been using computers to deal with one another for quite

some time.

In the United States, in terms of the volume of dollars exchanged, the computer-based

Fedwire and Clearing House Interbank Payments System (or CHIPS) together account

for 90% of all transactions. These systems are used mainly by large financial institutions.

On the other hand, if we're counting by the number of individual transactions, 90% are

still made by cash or cheque. These are small-scale transactions involving individuals.

These US patterns also apply to Canada.

Advances in three technological areas have made the widespread use of electronic cash

economically viable, spurring interest in e-money. These advances are:

reliable, quick networked communications with a low cost per transaction;

better computer technology, allowing for the mass production of computer chip

cards; and

powerful public domain cryptography, to help ensure privacy and prevent fraud.

What is revolutionary about the electronic cash systems currently being developed is that

they are designed to mimic physical cash. This means they are strategically positioned to

claim a large part of the small transaction market that accounts for the bulk of

transactions. Electronic cash will affect society more than past electronic commerce

advances because it will affect, and be affected by, the lives of ordinary people. (See

Appendix III for a comparison of current payment systems.)

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The Scope of Electronic Money

The actual level of commerce on the Internet is still modest by any standards. Unofficial

estimates suggest there is only about $100 million to $200 million in annual transactions

on the Internet at this time (US Department of the Treasury Conference, 1996). However,

some people expect the value of Internet transactions alone (not smart cards) to skyrocket

to roughly $10 billion by the year 2000.

Although commerce on the Internet is still fairly weak, e-money technology may be

poised to take off. An industry trade magazine, Smart Cards, says "it is estimated that by

2001, over 100 billion transactions will be consummated using a smart card" (Cherneff et

al., 1996).

The hardware that will permit deep market penetration of the home-based e-money

market is well on its way. Microsoft, Hewlett-Packard and Gemplus, for example, are

already producing personal computer keyboards that will be able to read smart cards.

AT&T plans to convert its public phones to operate by smart card. Mondex and Digi-

Cash are testing smart card pilot projects around the world. Even the US government is

moving toward implementing e-money systems; it is examining the feasibility of

introducing 'paperless' benefit payments by 1999, using Electronic Benefit Transfer

(EBT).

Ultimately, consumer and business acceptance of e-money will determine the extent to

which it is used. Some of the possible benefits of e-money to consumers include:

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faster, more efficient transactions;

less need to carry pocket money;

loyalty and frequent user plans;

automatic personal financial record-keeping;

possible financial anonymity;

possible security from theft;

access to electronic commerce; and

more personalized banking services and instruments.

The potential benefits of e-money to business are extensive. They include:

instant transactions;

substantial cost savings because of the reduction in the physical handling of

currency;

easier collection of marketing information on customers; and

promotion of 'free banking'.

Traditionally, the two most important constraints on trade were time and distance. E-

money systems effectively erase both. They will almost certainly help to globalize trade.

However, a number of barriers may halt or slow the widespread acceptance of e-money if

they are not overcome. These include:

competing e-money systems will have to be compatible and integrated with

current methods of payment;

the cost of using the system will have to be kept lower than the cost of using

current payment systems;

the risk of losing cards and their charged value could intimidate some consumers;

because security is a major concern, full convertibility, receipted transactions and

high levels of security may all become features of e-money systems; and

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privacy of personal information will also be an important issue.

Solutions will probably be found to all these problems. All things considered, it seems

likely that e-money will be an important part of everyday life in the very near future.

THE POTENTIAL FOR E-MONEY LAUNDERING

E-money laundering is thought to be negligible, for now. However, to date, G-10

countries have not seen evidence of this activity in connection with electronic money

products; if such products come to be used on a large scale, it is conceivable that

criminals may seek to explore their potential for transferring illicit funds. (Group of Ten,

1997).

Indeed, criminals are always looking for "a new type of detergent which allows for

cleaner laundry" (Bortner, 1996). They have been quick to exploit each new method of

financial transfer. In the 1980s and 1990s wire transfers became a popular method for

moving money in both the legal and illegal sectors. By 2000 we may see the same

situation with e-money.

The abuse of e-money by money launderers may become a significant problem in the

future because e-money systems will be attractive to money launderers for two reasons:

transactions may become untraceable

transactions are incredibly mobile.

UNTRACEABILITY

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The use of e-money systems will mean fewer face-to-face financial transactions. The

anonymity of e-money will make "knowing your customer" much more difficult.

E-money systems also allow the parties to the transaction to deal with each other directly,

without the assistance of a regulated financial institution. Thus, there may not be a

traditional audit trail.

MOBILITY

Hypothetically, e-money could come from anywhere in the world, and be sent anywhere

in the world. Thus, e-money systems may offer instantaneous transfer of funds over a

network that, in effect, is not subject to any jurisdictional restrictions.

The problem may be illustrated by separating the process of money laundering into three

basic steps - placement, layering and integration - and then comparing traditional money

laundering systems with cyber-systems.

The first step in money laundering is the physical disposal of cash. Traditionally,

placement might be accomplished by depositing the cash in domestic banks or other

kinds of financial institutions. Or the cash might be smuggled across borders for deposit

in foreign accounts, or used to buy high-value goods, such as artwork, airplanes, or

precious metals and gems, that can then be resold with payment by cheque or bank

transfer.

With e-money laundering, cash may be deposited into an unregulated financial

institution. Placement may be easily achieved using a smart card or personal computer to

buy foreign currency, goods, etc. Powerful encryption may be used to guarantee the

anonymity of e-money transactions.

The second step, layering, involves working through complex layers of financial

transactions to distance the illicit proceeds from their source and disguise the audit trail.

This phase traditionally involves such transactions as the wire transfer of deposited cash,

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the conversion of deposited cash into monetary instruments (e.g., bonds, stocks, travelers'

cheques), the resale of high-value goods and monetary instruments, and investment in

real estate and legitimate businesses, particularly in the leisure and tourism industries.

Shell companies, typically registered in offshore havens, are a popular device in the

traditional layering phase. These companies, whose directors are often local attorneys

acting as nominees, protect the identity of the real owners. These owners also benefit

from restrictive bank secrecy laws and attorney-client privilege

In an electronic-money system, layering can be done through a personal computer. There

is usually no audit trail. In addition, e-money systems allow for instantaneous transfer of

funds over a system that, in effect, has no borders.

The last step is to make the wealth derived from crime appear legitimate. Traditionally,

integration might involve any number of techniques, including using front companies to

"lend" the money back to the owner or using funds on deposit in foreign financial

institutions as security for domestic loans. Another common technique is over-invoicing,

or producing false invoices for goods sold - or supposedly sold - across borders.

In e-money laundering the criminal may be able to achieve integration by using a

personal computer to pay for investments or to buy an asset, without having to call on the

services of an intermediary financial institution.

In short, the temptation of electronic forms of money for the criminal may be the

potential for untraceable, mobile wealth.

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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.

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STAGES IN THE MONEY LAUNDERING PROCESS

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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".

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1. 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: travelers cheques, postal orders, etc. (more details follow).

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2. 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.

 

3. 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:

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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.

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METHODS OF MONEY LAUNDERING.

STRUCTURING ("SMURFING")

Smurfing is possibly the most commonly used money laundering method. It involves

many individuals who deposit cash or buy bank drafts in amounts under $10,000. This

method is common to both Canada and the United State

BANK COMPLICITY

A criminally co-opted bank employee may facilitate money laundering. Given the

Canadian Bankers Association's policy, procedures and training, it is becoming

increasingly difficult for criminals to employ this method.

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CURRENCY EXCHANGES

Currency exchanges provide a service that permits individuals to buy foreign currency

that can then be transported out of the country. Money can also be wired to offshore bank

accounts anywhere in the world by these exchanges.

SECURITIES' BROKERS

A stock broker may take in large quantities of cash and issue securities in exchange.

ASSET PURCHASES WITH BULK CASH

Money launderers purchase big ticket items such as cars, boats, planes, or real estate. In

many cases, launderers may use the asset but will distance themselves by having assets

registered in a friend's name.

TELEGRAPHIC TRANSFER OF FUNDS

Wiring money from one city or country to another without actually carrying the money.

POSTAL MONEY ORDERS

Exchange cash for money orders, then shipping them out of the country for deposit.

TRAVEL AGENCIES

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Exchanging cash for travel tickets. This is a common method of moving money from one

country to another.

CREDIT CARDS

Overpaying credit cards and keeping a high credit balance that can be turned over to cash

at any time and place.

GAMBLING IN CASINOS

Cash may be taken to a casino to purchase chips. After gaming and placing normal bets,

chips are redeemed at the cashiers cage where a casino cheque is issued.

REFINING

Individuals change small bills into large. This is easily done by visiting a number of

banks so as not to arouse suspicion. The purpose of refining is to decrease the bulk of

larger cash quantities.

LEGITIMATE BUSINESS / COMMINGLING OF FUNDS -

Criminals take over and/or invest in businesses that customarily handle a high cash-

transaction volume mixing the illicit proceeds with that of the legitimate business.

Criminals will, from time to time, purchase businesses that generate gross receipts from

cash sales such as restaurants, bars, night clubs, hotels, currency exchange shops, vending

machine companies, car washes and other retail sales for this purpose.

REVERSE FLIP

A money launderer may find a cooperative property seller who agrees to a reported

purchase price well below the actual value and then accepts the difference "under the

table". This way, the launderer can purchase a $2 million dollar property for $1 million,

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secretly passing the balance to the cooperative seller. After holding the property for a

period of time, the launderer sells it for its true value of $2 million.

LOANBACK

A criminal provides an associate with a specific amount of illegitimate money. The

associate then provides a "loan or mortgage" back to the trafficker for the same amount

with all the necessary "loan and/or mortgage" documentation. This creates an illusion that

the trafficker's funds are legitimate. The scheme is re-enforced through "legitimately"

scheduled payments made on the loan by the traffickers.

Figure 1. Estimates of the Major Money Laundering Flows around the World.

($USbillion/year) 

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The model actually produces estimates at the level of individual countries. It is very

important to reiterate that these figures represent only an interim set of results and not the

author's best and final estimates of money laundering around the world. They are

included to show the types of output that would be derived from a fully developed model,

and cannot yet be regarded as serious measures of money laundering flows.

Readers may note, for example, that some of the figures of money laundering currently

derived by the model amount to rather more than the entire recorded GNP of some

countries, and while this may in fact not be impossible, it indicates that, as discussed

earlier, the model probably needs to pay more attention to constraints involving actual

economic and financial transaction data.

More work is definitely required before the output of this model may be considered to be

an adequate response to the question of quantifying global money laundering, but the

approach appears to be feasible and capable of further refining.

Table 3 shows the top twenty countries of origin for laundered money, as estimated by

the model. Note that most are developed countries.

Top 20 Origins of Laundered Money

Rank  Origin  Amount ($Usmill/yr)  % of Total 

1  United States  1320228  46.3% 

2  Italy  150054  5.3% 

3  Russia  147187  5.2% 

4  China  131360  4.6% 

5  Germany  128266  4.5% 

6  France  124748  4.4% 

7  Romania  115585  4.1% 

8  Canada  82374  2.9% 

9  United Kingdom  68740  2.4% 

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10  Hong Kong  62856  2.2% 

11  Spain  56287  2.0% 

12  Thailand  32834  1.2% 

13  South Korea  21240  0.7% 

14  Mexico  21119  0.7% 

15  Austria  20231  0.7% 

16  Poland  19714  0.7% 

17  Philippines  18867  0.7% 

18  Netherlands  18362  0.6% 

19  Japan  16975  0.6% 

20  Brazil  16786  0.76 

Total  All Countries  2850470  100.0% 

The model then tries to estimate where these amounts of hot money will go for

laundering, using the assumptions described above. Estimates of the top twenty flows are

presented in Table 4, including flows of funds within the generating countries

themselves.

. Top 20 Flows of Laundered Money

Rank  Origin  Destination  Amount ($Usmill/yr)  % of Total 

1  United States  United States  528091  18.5% 

2  United States  Cayman Islands  129755  4.6% 

3  Russia  Russia  118927  4.2% 

4  Italy  Italy  94834  3.3% 

5  China  China  94579  3.3% 

6  Romania  Romania  87845  3.1% 

7  United States  Canada  63087  2.2% 

8  United States  Bahamas  61378  2.2% 

9  France  France  57883  2.0% 

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10  Italy  Vatican City  55056  1.9% 

11  Germany  Germany  47202  1.7% 

12  United States  Bermuda  46745  1.6% 

13  Spain  Spain  28819  1.0% 

14  Thailand  Thailand  24953  0.9% 

15  Hong Kong  Hong Kong  23634  0.8% 

16  Canada  Canada  21747  0.8% 

17  United Kingdom  United Kingdom  20897  0.7% 

18  United States  Luxembourg  19514  0.7% 

19  Germany  Luxembourg  18804  0.7% 

20  Hong Kong Taiwan  18796  0.7% 

Total  All Countries  All Countries  2850470  100.0% 

 

Table 5. Top 20 Destinations of Laundered Money

Rank  Destination  Amount ($USmill/yr)  % of Total 

1  United States  538145  18.9% 

2  Cayman Islands  138329  4.9% 

3  Russia  120493  4.2% 

4  Italy  105688  3.7% 

5  China  94726  3.3% 

6  Romania  89595  3.1% 

7  Canada  85444  3.0% 

8  Vatican City  80596  2.8% 

9  Luxembourg  78468  2.8% 

10  France  68471  2.4% 

11  Bahamas  66398  2.3% 

12  Germany  61315  2.2% 

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Money Laundering

13  Switzerland  58993  2.1% 

14  Bermuda  52887  1.9% 

15  Netherlands  49591  1.7% 

16  Liechtenstein  48949  1.7% 

17  Austria  48376  1.7% 

18  Hong Kong  44519  1.6% 

19  United Kingdom  44478  1.6% 

20  Spain  35461  1.2% 

SWISS BANKINGSwiss banks have earned a reputation around the world for providing sophisticated and

discreet banking services. There are about 400 banks in Switzerland, ranging from the

"Two Big Banks" down to small banks serving the needs of a single community or a few

special clients. The Two Big Banks, namely Credit Suisse and UBS, have extensive

branch networks both throughout Switzerland and in many international centers. Banks

are licensed by the Swiss Federal Government through its Banking Commission, and may

operate throughout the country. A number also have offices or other representation in

foreign countries. Among the approximately 400 licensed banks in Switzerland are the

Swiss branches of banks which have their headquarters elsewhere.

What services do Swiss Banks provide?

Some banks specialize in only a few banking services, whereas others provide a wide

range. As in most of continental Europe, individuals usually buy and sell stocks and

bonds through their banks. The Swiss banks have a long reputation for managing

investment portfolios for their clients, and providing other services such as estate

planning, wealth management, trust companies, etc., for individual customers.

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Money Laundering

What are the "Private Banks?"

Private banks are those which are not incorporated, and hence the entirety of their

partners' assets are available to meet the liabilities of the bank. These banks have a very

long tradition in Switzerland, dating back to at least the revocation of the Edict of Nantes

(1685). They are primarily associated with portfolio management for private clients.

Most have become incorporated companies, so the term is rarely strictly true anymore.

The term "private banking" is used more loosely to encompass all the banking services

provided to clients in the area of portfolio and other wealth management services. These

services are directed primarily at "high net-worth individuals", and there are a number of

"private banks" who refuse any account of less than $ 1 million (or equivalent).

What is special about Swiss bank secrecy?

Banks in most countries are prohibited from divulging information about their clients,

and the provisions of the Swiss law follow the same lines. Swiss law is especially strict

on any breech of confidentiality, whether in banking or in other commerce. The banking

act adds a special section (introduced in 1934, in order to protect accounts of Germans,

especially German Jews, from Nazi confiscation) which makes it a criminal offense, with

the possibility of an individual going to jail, for the bank or its employee or agent to

improperly divulge any confidential information. These portions of the banking law have

been interpreted, both in practice and by the courts, to make it a serious offense to

divulge any information about a bank customer to a third party, including official

requests of foreign governments, except in some very special and clearly defined

situations. Swiss bank secrecy is reinforced by a constant awareness of the seriousness of

the bank's obligation to maintain confidentiality, starting with bank employees having to

sign the secrecy portion of the banking act as a condition of employment. Both

individuals and the banks are prosecuted if a lapse is discovered; this keeps awareness of

bank secrecy high and and lapses rare. While this culture of absolute discrection is

integral to the Swiss banks, the branch offices outside of Switzerland must operate

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Money Laundering

according to the law of the particular jurisdiction, which may not provide so much

protection.

WHAT ARE NUMBERED ACCOUNTS?

Numbered accounts (or pseudonym accounts) are not very different from normal bank

accounts. The usual account records omit reference to the customer's name or other

identifying information, replacing it with a code number or the pseudonym. The

relationship between the code number or pseudonym and the actual customer is known

only to a few senior managers and their secretaries within the bank. It is important to

emphasize that a Swiss bank has an obligation to know the true identity of both the

account holder and its beneficial owner, and that there is no such thing as an anonymous

account. Because of the constant awareness and strict enforcement of bank secrecy, there

is actually little need for numbered accounts, and it should be noted that they incur

additional overheads for the bank (it is more difficult to validate transactions to and from

such accounts). For all these reasons, the stories one reads about anonymous, numbered

accounts are legend.

Some banks offer Numbered Accounts as an alternative to the Named Account. The

purpose of the Numbered Account is to reduce to a bare minimum the bank employees

who have access to the name of the account holder.

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Money Laundering

The classic Numbered Account is legendary in the popular culture, as expressed in

countless movies and books. Every self-respecting spy, mercenary, or other financially

astute international criminal always demands a substantial advance deposit in his

Numbered Account before performing the requested services. The Numbered Account is

like home base. It represents the ultimate in safety and security. Funds tucked away in the

Numbered Account are home free.

In this case the reality is fairly close to the popular conception. Numbered Accounts do

offer increased privacy. In the usual case, the customer’s name and address will be

provided on the account opening agreement together with the customer’s signature. The

difference with the Named Account is that the information, other than the account

number, will not be entered in the general bank system which most employees can

access. Instead, the account will be assigned for personal handling to an individual

account manager. The file with the customer’s name is maintained separately from the

Named Accounts, with access available only to key personnel. Normally, the investment

of the funds and any withdrawals or deposits are based upon some agreed form of

communication between the account manager and the customer. When the

communication is not face to face, such as by telephone or written instruction, a secret

code will be applied in addition to the account number.

Unlike the Named Account, the true Numbered Account requires a higher degree of

special handling which not all banks are equipped to supply. And since every bank is

justifiably averse to providing special services without compensation, the Numbered

Account will be more expensive to maintain and may only be available to those with

substantial sums to deposit.

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Money Laundering

HOW CAN WE PREVENT MONEY LAUNDERING

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.

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Money Laundering

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

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Money Laundering

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.

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FATF (Financial Action Task Force)

What is the FATF?

The Financial Action Task Force (FATF) is an inter-governmental body whose purpose is

the development and promotion of policies, both at national and international levels, to

combat money laundering and terrorist financing. The Task Force is therefore a "policy-

making body" which works to generate the necessary political will to bring about national

legislative and regulatory reforms in these areas.

The FATF monitors members' progress in implementing necessary measures, reviews

money laundering and terrorist financing techniques and counter-measures, and promotes

the adoption and implementation of appropriate measures globally. In performing these

activities, the FATF collaborates with other international bodies involved in combating

money laundering and the financing of terrorism.

The FATF does not have a tightly defined constitution or an unlimited life span. The

Task Force reviews its mission every five years. The FATF has been in existence since

1989, and it has been agreed that its current mandate extends through the end of 2004. It

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Money Laundering

will only continue to exist and to perform its function after this date provided the member

governments agree that this is necessary.

History of the FATF

In response to mounting concern over money laundering, the Financial Action Task

Force on Money Laundering (FATF) was established by the G-7 Summit that was held in

Paris in 1989. Recognising the threat posed to the banking system and to financial

institutions, the G-7 Heads of State or Government and President of the European

Commission convened the Task Force from the G-7 member States, the European

Commission, and eight other countries.

The Task Force was given the responsibility of examining money laundering techniques

and trends, reviewing the action which had already been taken at a national or

international level, and setting out the measures that still needed to be taken to combat

money laundering. In April 1990, less than one year after its creation, the FATF issued a

report containing a set of Forty Recommendations, which provide a comprehensive plan

of action needed to fight against money laundering.

During 1991 and 1992, the FATF expanded its membership from the original 16 to 28

members. Since then FATF has continued to examine the methods used to launder

criminal proceeds and has completed two rounds of mutual evaluations of its member

countries and jurisdictions. It has also updated the Forty Recommendations to reflect the

changes which have occurred in money laundering and has sought to encourage other

countries around the world to adopt anti-money laundering measures.

In 2001, the development of standards in the fight against terrorist financing was added to

the mission of the FATF.  For more information on the FATF’s role in this area, please

see “The Eight Special Recommendations” below.

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Money Laundering

THE FATF FORTY RECOMMENDATIONS.

The Forty Recommendations set out the framework for anti-money laundering efforts and

are designed for universal application. They provide a complete set of counter-measures

against money laundering covering the criminal justice system and law enforcement, the

financial system and its regulation, and international co-operation.

The Forty Recommendations have been recognised, endorsed, or adopted by many

international bodies. The Recommendations are neither complex nor difficult, nor do they

compromise the freedom to engage in legitimate transactions or threaten economic

development. They set out the principles for action and allow countries a measure of

flexibility in implementing these principles according to their particular circumstances

and constitutional frameworks. Though not a binding international convention, many

countries in the world have made a political commitment to combat money laundering by

implementing the Forty Recommendations.

Initially developed in 1990, the Recommendations were revised for the first time in 1996

to take into account changes in money laundering trends and to anticipate potential future

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Money Laundering

threats. More recently, the FATF has completed a thorough review and update of the

Forty Recommendations (2003).  The FATF has also elaborated various Interpretative

Notes which are designed to clarify the application of specific Recommendations and to

provide additional guidance.

The Eight Special Recommendations on Terrorist Financing

After the tragic events that took place in the United States on 11 September 2001,

governments world-wide called for an immediate and co-ordinated effort to detect and

prevent the misuse of the international financial system by terrorists.  The European

Union Finance and Economics Ministers and the G-7 Finance Ministers suggested, for

example, that such an initiative be pursued in the framework of measures already taken

by the international community to combat money laundering. 

At an extraordinary plenary meeting on the financing of terrorism held in Washington,

DC, in October 2001, the FATF thus expanded its mission beyond money laundering to

focus its energy and expertise on a world-wide effort to combat terrorist financing.  The

FATF issued new international standards for combating terrorist financing – the Eight

Special Recommendations – and called on all countries to adopt and implement them. 

Implementing these Special Recommendations will deny access for terrorists and their

supporters to the international financial system.  For more information on the decisions of

the extraordinary Plenary and the Special Recommendations, see the page on terrorist

financing.

Monitoring the Implementation of the Forty Recommendations

FATF member countries are strongly committed to the discipline of multilateral

monitoring and peer review. The self-assessment exercise and the mutual evaluation

procedure are the primary instruments by which the FATF monitors progress made by

member governments in implementing the FATF Recommendations.

In the self-assessment exercise, every member country provides information on the status

of its implementation of the Forty Recommendations and Eight Special

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Money Laundering

Recommendations by responding each year to a standard questionnaire. This information

is then compiled and analysed, and provides the basis for assessing the extent to which

the Recommendations have been implemented by both individual countries and the group

as a whole.

The second element for monitoring the implementation of the Forty Recommendations is

the mutual evaluation process. Each member country is examined in turn by the FATF on

the basis of an on-site visit conducted by a team of three or four selected experts in the

legal, financial and law enforcement fields from other member governments. The purpose

of the visit is to draw up a report assessing the extent to which the evaluated country has

moved forward in implementing an effective system to counter money laundering and to

highlight areas in which further progress may still be required.

The mutual evaluation process is enhanced by the FATF's policy for dealing with

members not in compliance with the Forty Recommendations. The measures contained in

this policy represent a graduated approach aimed at reinforcing peer pressure on member

governments to take action to tighten their anti-money laundering systems. The policy

starts by requiring the country to deliver a progress report at plenary meetings. Further

steps include a letter from by the FATF President or sending a high-level mission to the

non-complying member country. The FATF can also apply Recommendation 21, which

results in issuing a statement calling on financial institutions to give special attention to

business relations and transactions with persons, companies and financial institutions

domiciled in the non-complying country. Then, as a final measure, the FATF

membership of the country in question can be suspended.

Summaries of each mutual evaluation are contained the FATF Annual Report for the year

in which the evaluation took place. You may access these summaries through the FATF

Documents page or through individual pages of FATF member jurisdictions.

The FATF Mission and Objectives

According to the current mandate of the FATF, which began in July 1998, the Task

Force  focuses on the following major tasks:

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Money Laundering

(a)  Spreading the anti-money laundering message to all continents and regions of the

globe.

FATF fosters the establishment of a world-wide anti-money laundering network based on

appropriate expansion of its membership, the development of regional anti-money

laundering bodies in the various parts of the world, and close co-operation with relevant

international organisations.

(b)  Monitoring the implementation of the Forty Recommendations in FATF members.

All member countries have their implementation of the Forty Recommendations

monitored through a two-pronged approach: an annual self-assessment exercise and the

more detailed mutual evaluation procedure.

(c)  Reviewing money laundering trends and countermeasures ("typologies" exercise).

Money laundering is an evolving activity, the trends of which will continue to be

monitored. FATF members gather information on and knowledge of money laundering

trends (e.g. the use by criminals of sophisticated and complex ways to legitimise illegal

assets, the professionalism of the process, the use of various sectors of the financial

system and of the economy, and the recourse to new geographical routes) so as ensure

that the Forty Recommendations remain up to date and effective.

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Money Laundering

BUSINESS AREAS PRONE TO MONEY

LAUNDERING

1. BANKING.

"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".

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Money Laundering

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

Underground Banking is 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.

2.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

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Money Laundering

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.

 

3. 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.

4. 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.

5. FINANCIAL TRANSMITTERS

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Money Laundering

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.

 

6. 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.

7. 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.

 

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Money Laundering

MONEY LAUNDERING 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.

 

I. Assisting another to retain the benefit of crime.

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

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Money Laundering

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.

 

II. Acquisition, possession or use of criminal proceeds.

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.

III. Concealing or transferring proceeds to avoid prosecution or a

confiscation order (also called Own Funds money laundering).

 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.

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Money Laundering

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.

 

IV. Failure to disclose knowledge or suspicion of money laundering.

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.

V. Tipping off.

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Money Laundering

 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

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.

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Money Laundering

 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.

 

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"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".

Number of Suspicious Transaction Reports (STRs)

Year 1997 1998 1999 2000 2001 2002 2003 2004

Number of STRs 9 13 1,059 7,242 12,372 18,768 43,768 95,315

Number ofdisseminated STRs

-- -- -- 5,329 6,752 12,417 30,090 64,675

Since Feb. 2000, suspicious transaction reporting has been required under the Anti-Organized Crime Law (Until Jan. 2000 the reporting was required under the Anti-Drug Special Law which limited its predicate offences to drug-related crimes.).

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Number of Suspicions Transaction Reports (STRs) by business category

 2002 2003 2004

Number of STRs % Number of STRs ％ Number of STRs %

Banks 16,654 88.74 38,745 88.53 82,325 86.37

Shinkin banks, credit cooperatives 615 3.28 3,302 7.54 8,119 8.52

Insurance companies 10 0.05 20 0.05 16 0.02

Securities brokers 82 0.44 124 0.28 339 0.36

Agricultural and fisheryfinancial institutions

48 0.26 86 0.2 40 0.04

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Labour banks 3 0.02 25 0.06 109 0.11

Money lenders 125 0.67 120 0.27 1,152 1.21

Post Services Agency 814 4.34 1,099 2.51 3,159 3.31

Other 417 2.2 247 0.56 56 0.06

TOTAL 18,768 100 43,768 100 95,315 100

 

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,

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(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.

 

CYBER PAYMENTS 

The term cyber payments 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

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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 Cyber payments 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

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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 sub licensing 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

RECOMMENDATIONS

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.

Recommendations;

We need:-

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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.

 I. Ratification and implementation of UN instruments

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Each country should take immediate steps to ratify and to implement fully the 1999

United Nations International Convention for the Suppression of the Financing of

Terrorism.

Countries should also immediately implement the United Nations resolutions relating to

the prevention and suppression of the financing of terrorist acts, particularly United

Nations Security Council Resolution 1373.

 

II. Criminalising the financing of terrorism and associated money

laundering

Each country should criminalise the financing of terrorism, terrorist acts and terrorist

organisations. Countries should ensure that such offences are designated as money

laundering predicate offences.

 

III. Freezing and confiscating terrorist assets

Each country should implement measures to freeze without delay funds or other assets of

terrorists, those who finance terrorism and terrorist organisations in accordance with the

United Nations resolutions relating to the prevention and suppression of the financing of

terrorist acts.

Each country should also adopt and implement measures, including legislative ones,

which would enable the competent authorities to seize and confiscate property that is the

proceeds of, or used in, or intended or allocated for use in, the financing of terrorism,

terrorist acts or terrorist organisations. 

 

IV. Reporting suspicious transactions related to terrorism

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If financial institutions, or other businesses or entities subject to anti-money laundering

obligations, suspect or have reasonable grounds to suspect that funds are linked or related

to, or are to be used for terrorism, terrorist acts or by terrorist organisations, they should

be required to report promptly their suspicions to the competent authorities.

 

V. International co-operation

Each country should afford another country, on the basis of a treaty, arrangement or other

mechanism for mutual legal assistance or information exchange, the greatest possible

measure of assistance in connection with criminal, civil enforcement, and administrative

investigations, inquiries and proceedings relating to the financing of terrorism, terrorist

acts and terrorist organisations.

Countries should also take all possible measures to ensure that they do not provide safe

havens for individuals charged with the financing of terrorism, terrorist acts or terrorist

organisations, and should have procedures in place to extradite, where possible, such

individuals.

 

VI. Alternative remittance

Each country should take measures to ensure that persons or legal entities, including

agents, that provide a service for the transmission of money or value, including

transmission through an informal money or value transfer system or network, should be

licensed or registered and subject to all the FATF Recommendations that apply to banks

and non-bank financial institutions. Each country should ensure that persons or legal

entities that carry out this service illegally are subject to administrative, civil or criminal

sanctions.

 

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VII. Wire transfers

Countries should take measures to require financial institutions, including money

remitters, to include accurate and meaningful originator information (name, address and

account number) on funds transfers and related messages that are sent, and the

information should remain with the transfer or related message through the payment

chain.

Countries should take measures to ensure that financial institutions, including money

remitters, conduct enhanced scrutiny of and monitor for suspicious activity funds

transfers which do not contain complete originator information (name, address and

account number).

 

VIII. Non-profit organisations

Countries should review the adequacy of laws and regulations that relate to entities that

can be abused for the financing of terrorism. Non-profit organisations are particularly

vulnerable, and countries should ensure that they cannot be misused:

i. by terrorist organisations posing as legitimate entities;

ii. to exploit legitimate entities as conduits for terrorist financing, including

for the purpose of escaping asset freezing measures; and

iii. to conceal or obscure the clandestine diversion of funds intended for

legitimate purposes to terrorist organisations.

IX. Cash couriers

Countries should have measures in place to detect the physical cross-border

transportation of currency and bearer negotiable instruments, including a declaration

system or other disclosure obligation.

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Countries should ensure that their competent authorities have the legal authority to stop

or restrain currency or bearer negotiable instruments that are suspected to be related to

terrorist financing or money laundering, or that are falsely declared or disclosed.

Countries should ensure that effective, proportionate and dissuasive sanctions are

available to deal with persons who make false declaration(s) or disclosure(s).  In cases

where the currency or bearer negotiable instruments are related to terrorist financing or

money laundering, countries should also adopt measures, including legislative ones

consistent with Recommendation 3 and Special Recommendation III, which would

enable the confiscation of such currency or instruments.

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

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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 evident in money laundering are: 

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

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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.

A general observation, given the global nature of money laundering, is that geographic

borders have become increasingly irrelevant. Launderers tend to move their activity to

jurisdictions where there are few or weak anti-money laundering countermeasures.

Moving money electronically to these locations is instantaneous and gives rise to a

particular concern for the authorities. That is, the number of electronic payment

instructions that fail to include the names and addresses of both senders and beneficiaries

when these are not financial institutions.

Other fears identified have been the dissolution of the Warsaw Pact and the disintegration

of the Soviet Union. This has led to a significant increase in crime in these countries, with

the resultant emergence of powerful organised crime groups who are exploiting their

national economies, infiltrating their banking industry and forging links with organised

criminals in other countries. These crime groups are regarded as transnational as their

activities (trafficking in drugs, arms, industrial metals and nuclear material, extortion,

prostitution, car theft, bank fraud and kidnapping) are not confined within their own

borders. It does not take a giant leap of the imagination to realise that these crime groups

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have also added money laundering to their repertoire, a fact recognised by the FATF,

which has discussed ways to assist the authorities there.

Reasons to fight money laundering are increasing, as the threats posed by this activity are

significant. The FATF has identified four major threats represented by money laundering

activity. Firstly, that failure to prevent laundering makes it easier for criminals to profit

from their illicit activities. Secondly, that such a failure permits criminal organisations to

finance further illicit activities. Thirdly, that the ready use of the financial system by

launderers risks undermining individual financial institutions and the entire system.

Finally, that the accumulation of power and wealth by criminals and crime groups which

is facilitated by laundering can eventually pose a threat to national economies and

democratic systems.

 

Money laundering represents a serious threat then, not just to sound economic and

financial development but to the political integrity and stability of our nation. The

Bahamas are a prime example of corrupt investment leading to disaster. In the 1980s,

money laundering and drug trafficking resulted in the government being labelled corrupt:

the financial services companies took flight, and the tourism industry went from upscale

to downmarket. Developing nations are a particular area of concern - they crave

investment in their nations and are more willing to accept suspicious transactions. As a

result, the guidelines for combating the laundering process need to be put in place now.

As is the case with all crime, money is the motivating factor. For enforcement to be

effective, we must attack the money of these multibillion-dollar criminal enterprises. E.A.

Nadelmann made a strong point when he said;

 "confiscation provides a neat way to make law enforcement pay for itself".

Money laundering is carried out primarily through financial institutions and it is therefore

only right that they are at the forefront of the battle against money launderers. (This is

fully illustrated in the FATF 40 Recommendations (points 8-29)). However,

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investigations have uncovered members of an emerging criminal class - professional

money launderers. They are accountants, solicitors, money brokers and members of other

legitimate professions. They are attracted by greed, as for them, money laundering is an

easy route to almost limitless wealth. This has attracted notice from the authorities and

legislation has been enacted so that now no financial institution or professional advisor

will be immune from the provisions contained in this legislation.

 

Money laundering law is concerned primarily with denying the criminal access to the

financial system. Confiscation is concerned with depriving him of the proceeds of crime.

For these both to be effective: We must place increased emphasis on identifying the

proceeds of crime and to deterring criminals from using the financial system. Only by

these deterrents being effective will money laundering become a more risky activity and

ultimately one seen to be not worth the risk. Gilmore (1993) states: "the ultimate prize,

that of being in a position, for the first time, to take co-ordinated and effective world-

wide action to undermine the financial power of drug trafficking networks and other

criminal organisations, is now in sight if not, as yet, fully within our reach".

ANNEXURES

APPENDIX I:

HOW E-MONEY WORKS

(applies to most current e-money systems)

E-money is a generic name given to the concept of currency which is digitally signed by

an issuing institution through a private encryption key and is transmitted to an individual.

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It can then be negotiated, electronically, with others as payment for goods and services

anywhere in the world.

Via the Internet, a home PC user requests e-money by logging onto his/her bank

and authenticating ownership of his/her account.

Once ownership is confirmed, the user submits a request along with a random

encryption key in a secure digital envelope.

The bank the signs the envelope with its signature (thus authenticating the E-

money for potential recipients) and it is returned to the user.

The user can now download the digital money onto a smart card through an

ATM-like peripheral or he/she can transfer/spend the money over the Internet

with the same reach as an e-mail message.

Recipients simply copy the E-money and have their computer add their own

account ID to it. It can either be stored on a smart card or transferred to their

bank.

Other Electronic Money Technology

E-money is on-line currency that can be exchanged between two parties without the need

for a third party to complete the transaction. Stored value cards are a different technology

that, in comparison to e-money, are only stored pre-paid money.

Stored value cards are described as:

"A prepaid smart card contains stored value which the person holding it can spend at

retailers. After accepting stored value from cards, retailers are periodically reimbursed

with actual money by system providers. A system provider receives money in advance

from people and stores corresponding value onto their cards. During each of these three

kinds of transactions, secured data representing value is exchanged for actual money or

for goods and services" (Chaum, 1994).

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Examples of simple stored value cards that are currently being used include: phone cards;

university cash cards; and ski resort payment systems. During the Atlantic Olympics a

more advanced version of this type of card was distributed to over 300,00 individuals.

There are four basic types of technology:

1.Memory cards: these cards are for storage only (they cannot compute). They have

some software for PIN numbers.

2. Shared-key cards: keys in a computer chip within the card let the card communicate

with any other device with the same keys (Chaum, 1994).

3. Signature-transporting cards: these cards are similar to shared-key cards, but have

slightly different software. Each card stores a digital signature. Each time the card is

used, the system provider fills in the digital signature, like filling in a blank cheque.

4. Signature-creating cards: these cards are the same as signature-transporting cards;

however, the computer chip within each card is capable of making digital signatures.

Therefore, the signature is made on each card, not by the system provider.

 

APPENDIX II:

CRYPTOGRAPHY AND ELECTRONIC COMMERCE

Cryptography (encryption) is particularly important to the growth of electronic commerce

because it provides the means to ensure the authenticity, integrity and privacy of

transactions and communications, providing the necessary security for the digital world.

It is the process of substituting numbers and letters for other numbers and letters, making

the message or communications unreadable. These substitution codes are hidden in keys

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which can then be used to encrypt messages and communications and decrypt them once

they are encrypted.

Criminals and terrorists can use cryptography with relative ease to thwart the legally

mandated information-gathering abilities of law enforcement and security agencies. For

example, evidence that has been encrypted is unreadable unless it can be decrypted. The

inability to decrypt could well have a severe impact on the prevention, detection,

investigation, and prosecution of crime, as well on Canada's ability to monitor security

threats to Canadians. It is for these reasons that arguments are made in favour of

reasonable limits on the production, export, import and use of cryptography.

ACKNOWLEDGEMENTS

I would like to thank the people who have constantly helped and guided me through this

project.

Firstly I would like to thank my guide, Mr. Ashok Mahadik. His insights on certain topics

in this project have been very valuable. Also, he has constantly reviewed my progress,

suggested methods of improvement and has also helped me in understanding the topic

from the financial perspective.

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I thank the Mumbai University for giving us the opportunity to make such a detailed

project on a topic.

Also, I would like to thank Prof. Gangal who has helped and guided me through this

project.

BIBLIOGRAPHY.

Books Referred:

Paul Samuelson's Economics (13th edition)

Regulatory Frameworks for Hawala and Other Remittance Systems by Stefan Ingves

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Financing Terrorism: Mark Pieth

WEB SITES VISITED

www.laundryman.u-net.com

www.federalcrimes.com

www.moneylaundering.com

www.coutermoneylaundering.com

www.fatf-gafi.com

 

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