BANKING REGULATIONS:
WHAT CAN BE DONE ABOUT MONEY
LAUNDERING?
Chapter 1
Money Laundering
Money Laundering is the practice of processing criminal proceeds to
disguise their illegal origin. (FATF, 2002) The term derives from the fact that
certain organized crime rings in the 1920's commingled the proceeds of their
illicit operations with the practically untraceable proceeds from coin
laundries operated by the ring, thereby making the funds appear to be
legitimately derived. (Schroth, 1996) Though the term "money laundering"
may have originated in the twentieth century, the practice of disguising
ill-gotten gains pre-dates recent history and indeed traces its roots back to
the dawn of banking itself. (
Stages of Money Laundering
In its simplest form, money laundering involves three stages; placement;
layering, and integration. (Schroth, 1996) The placement stage is the process
during which criminally derived funds are used to purchase an asset or are
deposited into a financial institution. (p. 290) Next, launderers engage in one
or a series of transactions to distance the funds from their original source. (p
290) This is the layering stage, which may include such transactions as
multiple funds transfers between accounts and across state and international
borders, complex loan arrangements, and purchases and resale of assets. (Bauer
and Ullman, 2001) Finally, there is the integration stage. This is the point at
which the illicitly derived proceeds are reintegrated with the legal financial
system and made available for use without suspicion. (Schroth, 1996) As with
any criminal enterprise, the variations on these three steps are myriad and
have evolved apace both with the sophistication of the financial systems upon
which they depend and the law enforcement tactics which threaten their existence.
Techniques used by Money Launderers
This part of the chapter shall discuss the methods employed by money
launderers to stash their financial assets without the government noticing
their crime. One such technique is called smurfing.
In this technique, an individual who wants his finances undetected will open
several bank accounts on different banks under different names. It is also
possible for them to purchase bank drafts from several financial institutions
to outwit ceilings for transaction reporting.
Another technique is by shipping huge amounts of money overseas and
consequently orchestrates means of getting it back locally. On other accounts,
less cumbersome substances such as diamonds, gold or anything that is
extraordinarily valuable are purchased domestically. However, the value of
their items being directly related to their bulk is a prerequisite, thus
allowing an uncomplicated in terms of shipping them overseas and ensures the
solvency of the items even if it is outside the borders of the country of
origin. Generally, the American dollar is used as the currency of choice in the
context of illegal transactions. The reason is that the US dollar considerably
more widely circulated outside
Another technique is through electronic wire transfers. Scrupulous
individuals are currently taking extensive utility of the payment on their
transactions through electronic means and message systems for wire transfers.
Recent innovations for financial systems authorize iniquitous individuals to
transfer monetary remunerations amounting to millions though private desktop
computers and satellite dishes. The swift passage of funds between financial
records in various jurisdictions increases the intensity and complexity of scrutinizing
and discovering the source of funds especially when non-customers and
non-correspondent banks transmit to, by
the same token, unheard of third parties.
On the
other hand, each and every individual affianced in the business of dealing in
securities must look after appropriate customer data and records. Unusual
activity includes wishes by clients for investment management services, either
foreign exchange or securities, where the origin of the funds is not in
agreement with the customer's perceptible eminence, large or strange
settlements of securities in cash arrangement and purchasing and acquiring a
security with no noticeable objective. These should be taken into account
because money launderers are also using investment related transactions in
placing their stashed cash.
Alternatively, a
noticeable conspiracy with the personnel of the financial institution as well
as its agents would also be a means of laundering money without the head of the
financial institution knowing. Doubtful
indications include modification in employee characteristics such as lavish
life styles or performance, remarkable or unexpected increase in business
volume of selling products for cash; consistently high levels of single premium
insurance business far in excess of any average company expectation. Similarly,
a growing trend of money launderers moving away from the banking sector to the
non-bank financial institution sector where the use of currency exchange houses
and wire transfer companies to dispose of criminal proceeds remain among the
most often cited threats.
Any modestly classy
currency launderer will institute a bank account in a financial sanctuary as a company
rather than as an individual with a numbered account. In order to augment the manifestation
of legality it is preferable that such a company already have an account of tangible
activity. Once the business is set up, a bank deposit is consequently completed
in the haven state in the appellation of that offshore corporation. The inducement
for businesses to be enlisted in offshore havens is to break away from the stern
tax and registration policy on local companies. They can concentrate not
inconsiderable quantity of financial assets to and from offshore countries devoid
of the requirement to announce the dealings to domestic economic authorities.
On the stipulation that it does no commerce where it is set up, having an
international business (IBC) or "offshore" company facilitates its
owners to operate with absolute anonymity and not disburse financial
remuneration on taxes. In many fields it is not even necessary to shelve
corporate books or records and thus is just the thing for concealing the derivation
and destination of merchandise in international commerce. Similarly, companies
could be capitalized with holder stocks such that while there is no owner on documentation
anywhere, the individual who actually possesses the share certificates owns the
corporation.
In many areas,
trusts and IBCs are controlled by unfettered trust companies. Loads of decontaminating
schemes then develop an additional stratum of cover where management of the
company is conveyed to the offshore trust. Consequently, the trustees basically
hand over the proprietor immediate admission and control over the assets while trouncing
true ownership. The unregulated trust companies can help conceal assets by
moving the shares of a corporation from one account to another, by changing
corporate names, by merging corporations and by changing trust documents on the
instruction of the account holder. They have also been known to manufacture
false paper trails and false documentation to assist money launderers and they
have routinely provided invoices, receipts and other documents to help fool the
customs and tax authorities of other countries.
Furthermore, the path
of the dirty money could be further complicated if the launderer acquires their
own bank among several jurisdictions that propose such services. Consequently,
the individual makes sure that his bank is one of those through which his cash
passes so he can either shut down the bank or obliterate the records to elude
authorities. Moreover, money launderers recurrently bring into play various legal
representatives the length of the route so that they will also be sheltered by
the discretion of the lawyer-client affiliation. There is also a mounting dependence
in offshore centres on agents and representatives to engender a solid clientele,
to function as mediators in instituting accounts, and trusts. Similarly, they
are also employed to act as an added tier of insulation and
confidentiality.
Proficient
launderers include accountants, lawyers and private bankers who, at the same
time as offering money-laundering assistance to an extensive range of felons,
are adroit at not asking queries that would compel them to rebuff business or
even to give an account of their clients or potential clients to the
authorities. They are conscious that those who are unsuccessful to meet the
terms with professional standards possibly will be predisposed under the want
of probity principle.
Moreover, some
offshore financial institutions will spawn false invoices, bills of lading,
end-user certificates and other forms of documents to give the facade of legality
to an assortment of dishonest transactions. Over-invoicing using phony
documents can be an exceptional protection for moving the proceeds of drug
trafficking and other crimes. On the other hand, fake invoices, bills and
receipts can be utilized for an assortment of tax frauds.
Statement of
the Problem
As stated earlier in the chapter, money laundering is implied as the
venerable method of concealing the unlawful source and iniquitous character of
finances which is normally acquired in unscrupulous undertakings such as arms
sales, smuggling, human trafficking, organized crime, drug trafficking,
prostitution rings, embezzlement, insider trading, bribery, and computer fraud.
These funds are concealed by repositioning them indiscernibly and investing
them in lawful commerce, securities, or bank deposits. Nevertheless, the plain
description of the alleged crime disguises its more significant offence. Hiding
a bulk of money and laundering it to specific places is an act of tax evasion,
avoidance of tax, and blatant practice of fraud. Tax-related laundering nets
between 10-20 billion US dollars annually from
Illegal as well as tax evaded finances are immobile and inefficient.
Nevertheless, the incorporation of these funds to the financial system of an
economy allows them to engage in commercial activity as a valuable not to
mention inexpensive source of investment. The problem with this kind of laundered
money is that it is shrouded by secrecy and eventually does away with
transparency, especially those in powerful positions. It is thus a source of
corruption among government officials. It also figuratively taints the legal segments
of the economy. Being financial remuneration from unscrupulous origin, it
displaces the availability of legitimate as well as the resources coming from
other areas. Similarly, a huge amount of laundered money creates an erratic and
irrepressible money supply while encouraging cross-border financial movements.
This phenomenon enhances the precariousness of exchange rates
A joint, corresponding, endeavour is therefore mandatory to contradict
the global proportions of money laundering. A lot of states chooses to engage
in these actions for the reason that money laundering has as well develop into
a local political and economic affair. The United Nations, the Bank for
International Settlements, the Financial Action Task Force, the EU, the Council
of Europe, and the Organisation of American States, all circulated their
respective anti-money laundering principles.
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