Why does a Manual
on Corporate Practices for businesses devote a chapter to “Money
Laundering”?
Other
chapters of this Manual deal with extortion and bribery and how
to curtail corruption in public-private and private-private transactions.
This chapter addresses how the ill-gotten monies therefrom are
disposed of, if not spent promptly. It is called "money laundering".
By common usage and statutory definition, money laundering is
a crime. Perforce, an examination of money laundering extends
beyond extortion and bribery into the realms of narcotics trafficking,
frauds, tax evasion and other serious crimes, domestic and transnational.
Should
the reader care? Yes. For openers, any business, whether a financial
institution, professional service, industrial enterprise, charitable
NGO or otherwise, caught in the web of money laundering could
have its reputation irreparably damaged. Its directors, management
and staff could be the subjects of private and public investigations
out of which indictments and prosecutions could arise. At best,
it would be a public relations nightmare. It only takes one unethical
person who has the discretion to make decisions to jeopardize
an entire organization. A reputation for integrity takes many
years to build, and only a few moments to damage, debase, decimate
or destroy.
Virtually
all businesses would be wise to be alert to money laundering methods
and tactics. For their own protection and preservation, businesses
must build and implement defenses and countermeasures, and install
various other forms of protection.
While
anti-money laundering laws have been or are being adopted in over
100 countries around the world, no country yet requires its financial
institutions to detect money laundering. Pragmatically, the most
they can do is to require that “suspicious transactions”
(hard to define) be reported, subject to a plethora of regulations
and policies. Despite the pressing need, which is slowly being
recognized by nation states, the effectiveness of anti-money laundering
laws has been mixed, i.e. better than no laws at all, but falling
far short of the ideal of strict, fair and universal enforcement
with well-knit international cooperation within and between governments,
regulatory and supervisory authorities, law enforcement agencies,
the judiciary and ever the private sector. As usual, vigorous
enforcement is limited to too few countries.
What exactly is
money laundering?
The
phrase is descriptive. In its simplest non-legal terms, money
laundering is “the processing of criminal proceeds (profits
or other benefits) in order to disguise their illegal origin”
(FATF). Another definition is “the process of transforming
the proceeds of illegal activities into legitimate capital”
(Mr. Byung-Ki Lee—Korea Institute of Criminology). Note that
the act of money laundering occurs only after a predicate criminal
offense has been committed to generate the criminal proceeds which
in turn need to be laundered to convert them into “legitimate
capital”. This transition process has become a thriving business,
albeit quite illegal in some, but not yet all, countries.
Note
that if the money being moved did not come from an illegal activity,
then its handling and processing are not considered money laundering.
Thus, preparatory measures are not necessarily illegal within
the money laundering context, e.g. pre-positioning funds to be
used for, say, bribing a foreign government official.
Money
laundering has three aspects. The first is physical disposal of
the cash, i.e., its placement. The second is
to disguise an audit trail to make the money, in effect, disappear.
The technique is called layering, i.e., moving
the money around, through and to multiple institutions in different
jurisdictions. The adoption of the Euro as a common currency in
Europe simplifies the flow of funds obviating the complications
of shifting between multiple currencies. The final step is to
bring the money back into the mainstream of commerce and investment
as legitimate funds--it is called integration.
How
pervasive is money laundering?
Money
laundering is said to be the world’s third largest business
by value! And it is growing. How big is it? No one knows with
any degree of certainty. Both experts and competent authorities
avoid estimating the scope. That sidestepping does not help the
reader. Let us say evidence points to an answer of hundreds of
billions of US dollars per annum. In early 1995, the OECD, headquartered
in Paris, estimated the scale of laundering of drug money
alone, excluding proceeds of other crimes and tax evasion,
to exceed US$ 1,100 billion annually. The Financial Times of London
estimated this trade value at only US$ 500 billion annually, which
sum, nevertheless, amounts to 2% of global GDP!
In
the FT Fraud Report of October 1997, it was reported that "The
Black Economy in the UK is generally estimated by informed sources
to amount to approximately 7% of GDP. In the USA, it is estimated
at approximately 9% of GDP; in Germany, the figure approximates
to 10%, while Italy, Greece and Spain are believed to have black
economies amounting to approximately 25% of their GDPs. In Russia
and Central and Eastern Europe, it is anticipated that the black
economy could amount to as much as 50% of GDP." Asia, Africa,
the Middle East and Latin America have their own substantial black
economies.
Fraud
often generates money laundering. Businesses are subject to fraud
through simple and complex deceptions by both insiders--employees,
agents--and by outsiders. Being a fraud victim is embarrassing
and expensive and recoveries are limited. On a more widespread
scale, of the information age, fraud can occur through credit
cards, smart cards, stored value cards, e-money, e-commerce, etc.
Technology helps both the good and the evil.
Incidentally,
illustrative of how pervasive narcotics have become in our society,
it is said that 90% of the currency bills in circulation in the
USA are contaminated with narcotics. In the UK, the amount is
considered as being 40%.
These
estimates dwarf the US$ 11.7 billion anticipated to be gained
in the global trade of counterfeit computer software (BSA and
SPA) in 1998. The ICC-Paris in 1996 estimated that 5-8% of total
world trade, say US$ 250 billion, is in counterfeit products of
all types. Much of the monetary proceeds thereof pass through
money laundering schemes.
From what crimes
does money laundering arise—i.e. sources of illegal proceeds?
The
term money laundering is of relatively recent origin. In their
modern context, anti-money laundering precepts and laws were originally
only aimed at the disposing of the proceeds of the trade in narcotics,
inclusive of psychotropic substances. Though hiding money has
been around probably since currency was invented, the US, in 1986,
was the first country in the world to criminalize money laundering
but only as it related to the illegal drug trade. It was soon
realized by the US and other countries that the ill-gotten proceeds
of extortion, bribery and fraud also needed international cooperation
legislation to inhibit money laundering, to track and recover
the illegal money, and to prosecute offenders. With the onset
of globalization, instantaneous electronic money transfers, the
growth in the last decade of organized crime and the public disclosure
of scandals, public-private and private-private corruption, and
other serious crimes involving money laundering practices, unfortunately,
have been blossoming.
Besides
narcotics production and trafficking, and depending upon the selection
by each country of which serious crimes to include in their own
national anti-money laundering enactments, there is a vast array
of nefarious activities which generate questionable profits and
which are or could be addressed in anti-money laundering legislation.
Examples are extortion, bribes, protection rackets, terrorism,
smuggling of goods (favorites are alcohol, cigarettes, computer
chips and raw materials), smuggling of weapons, nuclear material,
precious metals and precious gems (primary diamonds) to avoid
customs; illegal immigration and smuggling of people to avoid
immigration, white slavery and trafficking in women for prostitution,
pedophile activities; intellectual property (trademarks, copyrights,
patents, trade secrets and know-how); theft and resale of commodities,
metals, oil, gas, art, antiques and historical artifacts; counterfeiting
(currency and documents); crimes of violence (contract killing,
arson and bombing); illegal logging (particularly tropical forests),
trade in endangered species of animals and plants, and even in
human body parts; environmental crimes (solid, toxic and hazardous
waste disposal; air, water, noise pollution; unsustainable development);
usury; investment and VAT fraud, false invoicing and financial
fraud (bank fraud, credit card fraud, investment fraud, advance
fee fraud, bankruptcy fraud, embezzlement, misappropriation, insurance
fraud, passports, visas and documentation); motor car thefts,
tax fraud, tax evasion; illegal gambling; maritime crimes (piracy,
charter party frauds, cargo deviations, phantom ships, marine
theft, marine pollution); technology crimes; theft over the Internet,
Internet crime generally. While lengthy, this list is neither
exhaustive nor all-inclusive.
Though
the above list is extensive, it bears repeating that each individual
country specifies in statutes those serious crimes which are to
be subject to its money laundering laws. They may be few, or they
may be many. The more crimes covered, the more difficult money
laundering should become. Check the laws of those jurisdictions
in which you do business and banking.
Have
there been international endeavors to promote anti-money laundering
acceptance?
Anti-money
laundering laws, policies and practices are only recently gaining
broad acceptance among nation states and regional and international
organizations. In 1989, the G-7 countries created the Financial
Action Task Force (“FATF”), an independent intergovernmental
agency comprising 26 countries including the principal major economies,
and two regional organizations. The purpose of this organization
is to examine and report on measures to combat money laundering,
to monitor implementations of counter money laundering measures,
to track and review money laundering activities, and to promote
FATF activities and advise members and non-member countries. Its
headquarters are located within the OECD in Paris, France.
In
1990, the FATF issued its Forty Recommendations which “provide
a comprehensive blueprint for action against money laundering,
covering the criminal justice system and law enforcement, the
financial system and its regulation; and international cooperation”
(FATF). Amended in 1996 to reflect changes in money laundering
trends and potential future threats, the Forty Recommendations
are the most comprehensive set of anti-money laundering directives
yet created for governments, legislatures, law enforcement, financial
institutions and businesses in general.
Other
international and regional bodies have issued or adopted similar
guidelines, in whole or in part, namely, the United Nations and
several of its specialized agencies, the International Organization
of Securities Commissions, the European Union (EU), the Council
of Europe, Gulf Cooperation Council, Organization of American
States (OAS), Caribbean Financial Action Task Force (CFATF), South
Pacific Forum, Asia/Pacific Group on Money Laundering, Council
for Security Cooperation in the Asia-Pacific (CSCAP), INTERPOL,
ASEANPOL, World Customs Organization (WCO), Southern and Eastern
Africa Financial Action Task Force (SEAFATF), Bank for International
Settlements (BIS), Basel Committee on Banking Supervision, International
Banking Security Association, Banking Federation of the European
Union, Organization for Economic Cooperation and Development (OECD),
among others. In other words, with the concepts of good governance,
transparency and accountability being adopted into the work-a-day
realms of the public and private sectors, as demanded by civil
society, anti-money laundering policies and practices are finally
gaining the attention of governments and international organizations
throughout the world.
The
bribery of foreign public officials to obtain or maintain business
was criminalized first in 1997 in the US embodied in the now famous
"Foreign Corrupt Practices Act". Twenty years later,
the OECD issued its "Convention on Combating Bribery of Foreign
Public Officials in International Business Transactions".
In late 1998, this Convention came into force, having been ratified
by the required number of signing countries. Article 7 thereof
criminalizes the money laundering aspect of the predicate offense
of bribery. Article 7, therefore, if enforced, is a key hope in
stemming this type of corruption.
What are some of the techniques used
by money launderers?
The
FAFT annual reports and reports on money laundering typologies
are some of the best sources of information on the subject. (See
the FAFT website at “www.oecd.org/faft/reports.html”.)
The aforementioned Forty Recommendations can also be downloaded
from this site. Another source of current information on money
laundering is “Money Laundering Alerts” by Alert Global
Media, a subscription service, which is available at “www.moneylaundering.com”.
Alert Global Media’s list of “Suspicious Activities”
examples is instructive and illuminating.
The
techniques of money laundering can be broken down into three principal
categories: (A) banking, (B) non-bank institutions, and (C) non-financial
businesses. In bullet point form for brevity, the methods are
summarized as:
A. Banking
-
large
deposits and transfers
-
false
name accounts
-
accounts
of friends, relatives and cronies
-
smurfing
(electronic structured transactions of electronic cash)
-
shell
and front companies, usually offshore, for layering transactions
-
lawyers,
accountants, consultants, trustees, fiduciaries
-
“collection
accounts”
-
acquiring
compliant banks
-
“payable
through accounts”
-
“loan
back arrangements”
-
telegraphic
transfer
-
bank
drafts, money orders, cashier’s cheques
-
cash—deposits
and withdrawals, business transactions, smuggling across borders
-
travelers
cheques
-
Internet—banking
and electronic purse accounts
B. Non-Bank Financial
Institutions
-
bureaux
de change, exchange offices, casa de cambio
-
money
remittance services (giro houses)
-
underground
banking—“hawala”, “hundi”, chit and
chop shops which handle illegal foreign exchange transactions
in India and East Asia
-
single
premium insurance products
-
postal
services—money orders, packages (for smuggling cash)
C. Non-Financial Businesses
or Professions
-
professional
facilitators, e.g. lawyers, accountants, financial advisors,
notaries, secretarial companies, trustees and other fiduciaries
-
systems
based on trust and loyalty
-
real
businesses—false invoicing, co-mingling of legal and
illegal money, loan back arrangements, layering of transactions
through offshore shell companies, false import/export declarations
-
commercial
trade transactions through Free Trade Zones
-
casinos,
bookmaking, Internet casinos
-
real
estate companies
-
purchase
and cross border delivery of precious metals
-
use
of warrants in the metals market
For
more detailed descriptions of the techniques and how they have
worked, actual case studies can be found in the “Money Laundering
Guide” published in mid-1998 by the Commercial Crime Bureau
of the ICC located in Barking, England, UK. (See their website
at: “www.iccwbo.org/icccbhp.htm”. See
also Billy's Money Laundering Information website at "www.laundryman.u-net.com".
Another interesting site is the Financial Crimes Enforcement Network
at "http://www.ustreas.gov/fincen.")
Anti-Money Laundering Institutions -
Deterrence and Countermeasures
There
are several concepts of deterrence which have recently garnered
broad support. Businesses should consider working them into their
own normal accounting and financial control systems. Money laundering
can occur innocently as well as deliberately.
The
first step is to access your own risk profile and vulnerability
to being used for money laundering—check your internal control
systems, policies and operations. Establish internal anti-money
laundering policies and procedures and put senior people in charge
of compliance and staff training.
The
fundamental theme common to most of the countermeasure initiatives
is the old maxim of “Know
Your Customer”
and “Know
the Counter Partners” — identify
and verify them through third party due diligence. And maintain
files on them. Know who you are dealing with at both ends of a
transaction.
“Know
Your Business”
is another vital concept. Protect your integrity
and reputation. Know how, when and where to recognize unusual
transactions.
“Know
your Administration” — accurate
and complete record-keeping and reporting compliance is crucial
to keep your own business and the anti-money laundering system
functioning. Create audit trails. Audit to test and track your
own anti-money laundering compliance systems.
Recognize
suspicious transactions
and transaction sizes and report them to
internal compliance officers and the competent authorities in
accordance with anti-money laundering regulations, laws and policies.
Check the suspicious indicators lists for guidelines.
Educate,
train
and periodically
test
employees to create and maintain their awareness.
Be
forewarned that it is not just corporate reputations which are
at risk for allowing money laundering to occur, but officers,
directors and other individuals involved can face prison terms,
substantial fines, and unusual confiscations. One unscrupulous
renegade in an organization can taint all the honest people in
that organization. The costs of reputation repair and recovery
are enormous, far outweighing the costs of precaution.
Conclusions
Money
laundering is BIG business. Should your business inadvertently,
directly or even indirectly, become a victim of or a participant
in any serious crime, the chances are high that your money will
disappear through one or more money laundering ploys. Finding
your money and recovering it will be time consuming and expensive,
and for some, most embarrassing. Probably less than 10% of the
victims, corporate and individual, take the effort to even attempt
recovery of lost funds.
Protect
yourself and your integrity with the “Know
Your…”
concepts. Anti-money laundering laws have yet to prove their effectiveness,
and international cooperation between governments with respect
to money laundering is only now being established. Such laws,
practices and cooperation have to work if legitimate business
is to survive and prosper.
Finally,
for readers who want to learn more about money laundering, please
refer to lists of Internet links on the Web at: “http://macau.ctm.net/jgod/m/html”
and “http://www.ex.ac.uk/RDavies/arian/scandals/launder/html”.
Also periodically check the website of Transparency International,
the coalition against corruption in international business at
"http://www.transparency.de".
©1999
Tilleke & Gibbins, Bangkok, Thailand
