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. (Campbell, 1992) For instance, when the Roman Catholic Church in medieval times condemned usury, or lending money at interest, financiers devised methods to circumvent this restriction that are still in practice today. (O’Meara, 2000)
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 America compared to other leading currencies in the world.
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 France and Russia alone. The convergence of criminal and tax reluctant funds in money laundering complex function to obfuscate its mutual sources.
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.
Chapter 2
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