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MONEY LAUNDERING
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Money laundering, the metaphorical "cleaning of money" with regards to appearances in law, is the practice of engaging in specific financial transactions in order to conceal the identity, source and/or destination of money and is a main operation of underground economy.
In the past, the term "money laundering" was applied only to financial transactions related to organized crime. Today its definition is often expanded by government regulators (such as the United States Office of the Comptroller of the Currency), to encompass any financial transaction which generates an asset or a value as the result of an illegal act, which may involve actions such as tax evasion or false accounting. As a result, the illegal activity of money laundering is now recognized as potentially practiced by individuals, small and large business, corrupt officials, members of organized crime (such as drug dealers or the Mafia) or of cults, and even corrupt states or intelligence agencies, through a complex network of shell companies based in offshore tax havens.
The increasing complexity of financial crime, the increasing recognised value of so-called "financial intelligence" (FININT) in combating transnational crime and terrorism, and the speculated impact of capital extracted from the legitimate economy has led to an increased prominence of money laundering in political, economic and legal debate. In many jurisdictions, money laundering is seen as an "activity based" offense.
A brief history of money launderingAl Capone's 1931 conviction for tax evasion leads to the modern practice of money laundering
The term "money laundering" is said to have evolved from the Prohibition era in the United States. Many methods were devised to disguise the origins of money generated by the sale of then-illegal alcoholic beverages. Following Al Capone's 1931 conviction for tax evasion, mobster Meyer Lansky transferred funds from New Orleans slot machines to accounts overseas. After the 1934 Swiss Banking Act which created the principle of bank secrecy, Meyer Lansky bought a Swiss bank where he would transfer his illegal funds through a complex system of shell companies, holding companies and offshore accounts.
ADDED NOTE: Actually, the Capone reference to money laundering, and the often repeated story that the term derives from his use of laundromats (see below) to hide ill-gotten gains, is mere myth. Capone, in fact, did not "wash" his money in an attempt to hide it from anyone, and consequently wound up running foul of the IRS. They nabbed him for tax evasion. Lansky, on the other hand, perfected money laundering's older brother, "capital flight." His theory was that if the IRS couldn't find it, they couldn't tax it, so he simply moved the mob's money offshore. The first reference to the term "money laundering" actually appears during the Watergate scandal. Richard Nixon's "Committee to Re-Elect The President" moved illegal campaign contributions to Mexico, then brought the money back through a company in Miami. It was Britain's Guardian newspaper that coined the term, referring to the process as "laundering." (See Jeffrey Robinson's three books on money laundering, The Laundrymen, The Merger and The Sink.)
September 11, 2001 and the international response to the underground economy
After September 11, 2001, money laundering become a major concern of the US Bush administration's war on terror, although critics argue that it has become less and less an important matter for the White House. Based in Luxembourg, Clearstream, "a bank of banks" which practice "financial clearing", centralizing debit and credit operations for hundreds of banks, has been accused of being a major operator of the underground economy via a system of un-published accounts; Bahrain International Bank, owned by Osama bin Laden, would have profited from these transfer facilities. The scandal prompted André Lussi, Clearstream CEO, to resign on December 31, 2001; several judicial investigations were opened; and the European Commission was interpelled by Members of the European Parliament (MEPs) Harlem Désir, Glyn Ford and Francis Wurtz, who asked the Commission to investigate the accusations and to ensure that the 10 June 1990 directive (91/308 CE) on control of financial establishment was applied in all member states, including Luxembourg, in an effective way.
The international response to the underground economy has been co-ordinated by the Financial Action Task Force on Money Laundering ("FATF", also known by its French acronym of "GAFI"), whose original 40 principles form the basis of most international responses to money laundering activity. A further 8 principles, designed to counteract funding to terrorist organisations, were added on June 30, 2003 in response to the September 11, 2001, with another added 22 October 2004, to form what are now known as the "40 + 9" principles of anti-money laundering and counter-terrorism funding (AML/CTF). Compliance with, or a movement towards compliance with, these principles is now seen as a requirement of an internationally active bank or other financial service entity.
Several FATF-style regional bodies exist, such as the Asia/Pacific Group on Money Laundering.
Process
Money laundering is often described as occurring in three stages: placement, layering, and integration.
Examples
If a person is making thousands of dollars in small change a week from his business (not unusual for a store owner), and he wishes to deposit that money in a bank, he cannot do so without possibly drawing suspicion. In the United States, for example, cash transactions and deposits of more than $10,000 are required to be reported as "significant cash transactions" to the Financial Crimes Enforcement Network (FinCEN), along with any other suspicious financial activity as "suspicious activity reports". In other jurisdictions suspicion based requirements are placed on financial services employees and firms to report suspicious activity to the authorities.
One method of keeping this small change private would be for an individual to give his money to an intermediary who is already legitimately taking in large amounts of cash. The intermediary would then deposit that money into his account, take a premium, and write a check to the individual. Thus, the individual draws no attention to himself, and can deposit his check into a bank account without drawing suspicion. This works fine for one-off transactions, but if it occurs on a regular basis then the check deposits themselves can form a paper trail and raise suspicion.
Another method involves establishing a business whose cash inflow cannot be monitored, and funneling the small change into this business and paying taxes on it. All bank employees however are trained to be constantly on the lookout for any transactions which appear to be an attempt to get around the currency reporting requirements. Such shell companies should deal directly with the public, perform some service related activity as opposed to providing physical goods, and reasonably accept cash as a matter of business. Dealing directly with the public ensures plausable anonymity of source. An example of a legitimate business displaying plausable anonymity of source would be a gas station. Since it would be unreasonable for them to keep track of the identity of their customers, a record of their transaction amounts must be ostensibly accepted as primae facia evidence of actual financial activity. Service related business's have the advantage of anonymity of resources.
A business that sells computers has to account for where it actually got the computers, whereas a plumbing company merely has to account for fictitious labor. Reasonably accepting cash means the business must regularly perform services that total less than $500 on average, since above that amount most people pay with a check, credit card, or other traceable payment method. The company should actually function on a legitimate level. In the plumbing company example, it is perfectly reasonable for a lot of the business to involve only labor (no parts), and for some business to be paid for in cash, but it is unreasonable for all of their business to involve no parts and only cash payment. Therefore the legitimate business will generate a legitimate level of parts usage, as well as enough traceable transactions to mask the illegitimate ones. It should be noted that each of the above examples is flawed in one or more ways and serve only to illustrate the specific feature being discussed. Gas stations are flawed because they would have to account for the actual gas they sold, plumbers usually provide warranties on their work, which necessarily includes the names and addresses of the customers.
Corrupt politicians and lobbyists also launder money by setting up personal non-profits to move money between trusted organizations so that donations from inappropriate sources may be illegally used for personal gain.
The 'money laundering' legislation in the United Kingdom under Sections 327 to 340 of the Proceeds of Crime Act 2002 (PoCA), is extremely wide ranging and includes mere possession of criminal or terrorist property as well as its acquisition, transfer, removal, use, conversion, concealment or disguise. In the UK 'money laundering' need not involve money (it relates to assets of any kind, both tangible and intangible, and to the avoidance of a liability) and need not involve laundering either (a thief's possession of the assets he himself stole is included). There is no lower limit to what has to be reported - a suspicious transaction involving a single £5 note may be required to be reported. Also all persons (not just financial services employees and firms) are technically required to report, and obtain consent for, their own involvement in crime or suspicious activities involving money or assets of any kind. So in the UK a thief who steals a vest from a clothes store commits a 'money laundering' offence because he has possession of an asset derived from crime. He is technically required to seek consent from law enforcement for his continued possession of the vest if he is to avoid risk of prosecution for 'money laundering'.
The UK legislation also creates a money laundering offence where a person enters into, or becomes concerned in, an arrangement which facilitates (by whatever means) the acquisition, retention, use or control of criminal property by another person. This has impacted upon lawyers and other professional advisers in the UK who act for a client whom they suspect may possess criminal property of any kind.
Because the UK legislation is wide ranging the UK FIU authority, the Serious Organised Crime Agency, receives a large volume of suspicious activity reports (SAR s) - in 2005 just under 200,000 SAR s were received. The number of SAR s received appears to be growing by almost 50% each year.
The UK legislation was relaxed slightly in 2005 to allow banks and financial institutions to proceed with low value transactions involving suspected criminal property without requiring specific consent for every transaction (but the reporting of all transactions is still required).
REFERENCES and LINKS:
KYC "Bad Guy Databases"
E-Newsletters
FATF and Regional Bodies
Industry Bodies
Articles
Offshore Banking
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