'Money laundering', the metaphorical "cleaning of money" with regard 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 businesses, corrupt officials, members of
organized crime (such as
drug dealers or the
Mafia) or of
cults, and even corrupt
states, through a complex
network of
shell companies and trusts 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.
History
Modern development
The act of "money laundering" was not invented during the
Prohibition era in the United States, but many techniques were developed and refined then. 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 Florida "carpet joints" (small casinos) to accounts overseas. After the
1934 Swiss Banking Act, which created the principle of
bank secrecy, Meyer Lansky bought a
Swiss bank to which he would transfer his illegal funds through a complex system of
shell companies,
holding companies, and
offshore accounts.
[1]
The term "money laundering" does not derive, as is often said, from the Al Capone having used laundromats to hide ill-gotten gains. It was Meyer Lansky who perfected money laundering's older brother, "
capital flight", transferring his funds to Switzerland and other offshore places. The first reference to the term "money laundering" itself actually appears during the
Watergate scandal. US President
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."
[2]
Process
Money laundering is often described as occurring in three stages: placement, layering, and integration.
[3]
# 'Placement:' refers to the initial point of entry for funds derived from criminal activities.
# 'Layering:' refers to the creation of complex networks of transactions which attempt to obscure the link between the initial entry point, and the end of the laundering cycle.
# 'Integration:' refers to the return of funds to the legitimate economy for later extraction.
However,
The Anti Money Laundering Network recommends the terms
# 'Hide:' to reflect the fact that cash is often introduced to the economy via commercial concerns which may knowingly or not knowingly be part of the laundering scheme, and it is these which ultimately prove to be the interface between the criminal and the financial sector
# 'Move:' clearly explains that the money launderer uses transfers, sales and purchase of assets, and changes the shape and size of the lump of money so as to obfuscate the trail between money and crime or money and criminal.
# 'Invest:' the criminal spends the money: he may invest it in assets, or in his lifestyle.
Examples
If a person is making thousands of dollars in small change a week from a business (not unusual for a store owner) and wishes to deposit that money in a
bank, it cannot be done without possibly drawing suspicion. In the
United States, for example, cash transactions and deposits of more than a certain dollar amount are required to be reported as "significant cash transactions" to the
Financial Crimes Enforcement Network (FinCEN), along with any other suspicious financial activity which is identified 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. Methods to conceal the source are therefore required.
Irregular funding
One method of keeping this small change private would be for an individual to give money to an intermediary who is already legitimately taking in large amounts of cash. The intermediary would then deposit that money into an account, take a premium, and write a cheque to the individual. Thus, the individual draws no attention to himself, and can deposit his cheque into a bank account without drawing suspicion. This works well for ''one-off'' transactions, but if it occurs on a regular basis then the cheque deposits themselves will form a
paper trail and could raise suspicion.
Captive business
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 plausible anonymity of source. An example of a legitimate business displaying plausible anonymity of source would be a hairstylist. 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 ''prima facie'' evidence of actual financial activity. Service-related businesses 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 labour (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.
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.
Legal considerations
Many jurisdictions adopt a list of specific predicate crimes for money laundering prosecutions as a "self launderer" (the UK has an "all-crimes" regime). In addition, AML/CFT laws typically have other offences such as "tipping off," "willful blindness," not reporting suspicious activity, and conscious facilitation of a money launderer/terrorist financier to move his/her monies.
UK legislation
The 'money laundering' legislation in the
United Kingdom, under Sections 327 to 340 of the
Proceeds of Crime Act 2002 (PoCA), is wide-ranging and encompasses mere possession of criminal or terrorist property as well as its acquisition, transfer, removal, use, conversion, concealment, or disguise.
[4] 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. 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 (SARs) - in
2005 just under 200,000 SARs were received. The number of SARs 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).
WikiCrimeLine Money Laundering regulations: England and Wales
American legislation
The
Bank Secrecy Act of 1970 requires banks to report cash transactions of $10,000 or more. The
Money Laundering Control Act of 1986 further defined money laundering as a federal crime. The
USA PATRIOT Act of 2001 expanded the scope of prior laws to more types of financial institutions, added a focus on terrorist financing, and specified that financial institutions take specific actions to "
know your customer" (KYC).
In the United States, Federal law provides (in part): "Whoever . . . knowing[ly] . . . conducts or attempts to conduct . . . a financial transaction which in fact involves the proceeds of specified unlawful activity . . . with the intent to promote the carrying on of specified unlawful activity . . . shall be sentenced to a fine of not more than $500,000 or twice the value of the property involved in the transaction, whichever is greater, or imprisonment for not more than twenty years, or both."
[5]
While money laundering typically involves the flow of "dirty money" (criminal proceeds) into a "clean" bank account or negotiable instrument, terrorist financing frequently involves the reverse flow: apparently clean funds converted to "dirty" purposes. A
hawala may launder drug proceeds and help fund a terrorist, netting the incomming and outgoing funds with only occasional small net settlement transactions.
Fighting money laundering
The prime method of anti-money laundering is the requirement on financial intermediaries to know their customers - usually termed KYC (
know your customer) requirements. With good knowledge of their customers, financial intermediaries will often be able to identify unusual or suspicious behavior, including false identities, unusual transactions, changing behaviour, or other indicators that laundering may be occurring. But for institutions with millions of customers and thousands of customer-contact employees, traditional ways of knowing their customers must be suplemented by technology.
Using information technology
Information technology can never be a replacement for a well-trained investigator, but as money laundering techniques become more sophisticated, so too is the technology used to fight it. Early anti-money laundering programs flagged cash transactions exceeding a certain amount ($10,000 in the U.S. would trigger the need for a Currency Transaction Report). This proved to be ineffective because money launderers soon adjusted their schemes to avoid detection.
Current anti-money laundering transaction monitoring software packages include capabilities of name analysis, rules-based systems, statistical and profiling engines, neural networks, link analysis, peer group analysis, and time sequence matching. In addition, there are specific
KYC solutions that offer case-based account documentation acceptance and rectification, as well as automatic risk scoring of the customer (taking account of country, business, entity, product, transaction risks) that can be reviewed intelligently. Other elements of AML technology include portals to share knowledge and e-learning for training and awareness.
Financial Crimes Enforcement Network (FinCEN), is an organization created by the
United States Department of the Treasury. FinCEN receives
Suspicious Activity Reports from financial institutions, analyses them, and shares their data with U.S. law enforcement agencies and equivalent Financial Intelligence Units (FIUs) of other countries. One of its strategic goals is to improve information-sharing through
eGovernment. It offers training and advice to organizations of foreign governments to help improve the efficacy of their
anti-money laundering programs.
WWW.MONEYLAUNDERINGNEWS.TV, For the latest news updates regarding money laundering issues.
September 11, 2001 and the international response to the underground economy
After
September 11, 2001, money laundering became 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 International, a central securities depository and
clearing house or "bank of banks" which practices "
financial clearing", centralizing debit, and credit operations for hundreds of banks, was 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's 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
June 10 1990 directive (91/308 CE) on control of financial establishment was applied in all member states, including Luxembourg, in an effective way.
[6]
The international response to the underground economy has been coordinated 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 combatting the financing of terrorism (AML/CFT). 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 [http://www.apgml.org/ Asia/Pacific Group on Money Laundering).
In popular culture
★ Money laundering is seen as the subject of several episodes of the popular
HBO series, ''
The Sopranos'', employed by
Tony Soprano.
★ In ''
The Shield'', Vic and his Strike Team steal millions of dollars from a money laundering operation run by the Armenian mob.
★ An episode of ''
The Simpsons'' featured a money laundering gag. The gang leader
Fat Tony was hosting a dinner for the criminal fraternity and informed his guests that if they needed any money laundered, they could leave it outside their door overnight and it would be ready for the morning.
★ In the
1983 film ''
Scarface'', drug kingpin Tony Montana launders money through a series of shell businesses.
★ In the
1999 film ''
Office Space'', the main characters discuss the possibility of laundering money they've stolen from their company, but the plan fails when they (comically) realize they know nothing about the practice.
★ One of the purest examples of layering comes at the end of the 2004
Danny Boyle film ''
Millions'', in which an ordinary family exchanges stolen British pounds for euro in many small, apparently untraceable transactions at banks all over the city.
★ Hiphop recording label
Murder Inc (run by brothers Irv “Gotti” and Chris Lorenzo) was suspected of laundering money for drug kingpin
Kenneth "Supreme" McGriff in 2004. The brothers were acquitted of all charges on
December 2,
2005, after a jury found them not guilty.
★ A literal interpretation of money laundering is shown in the 1984 film ''
To Live and Die in L.A.''. A counterfeiter sets up shop in a rented warehouse, equipped with engraving equipment, a printing press, and a new clothes washer and dryer. After he prints a batch of new bills, the counterfeiter bundles them into the washer and washes them with hot water and detergent; then he dries them on high heat. By doing so, he turns his crisp, new bills into rumpled, faded, used-looking bills.
★ The 2001 film ''
Donnie Darko'' featured a clip of
George H.W. Bush on television denying purported money laundering activities of
Manuel Noriega.
See also
★ List of
Non-Cooperative Countries or Territories (FATF Blacklist)
★
Clearstream scandal
★
Smurfing (crime)
★
List of organizations & people involved in money-laundering
★
Money Laundering - Controls and Prevention, , , Rohan Bedi, ISI Publications, 2004, ISBN 962-7762-87-3
★
World Money Laundering Report, , , The Anti Money Laundering Network, Vortex Centrum Limited, 1997- date, ISSN 1473-3439
★
Terrorist financing
★
Confiscation
★
Anti-money laundering software
★
Swiss Banks
External links
★
Notes
1. Tracking Terrorist Money - 'Too Hot for US to handle?'
2. (See Jeffrey Robinson's three books on money laundering, The Laundrymen, The Merger and The Sink.)
3. See for example, "2. Stages of the Money Laundering Process", A report in accordance with § 356(c) of the USA PATRIOT Act
4. UK Proceeds of Crime Act 2002
5. See .
6. Official March 2000 French Parliamentary Report on the obstacles on the control and repression of financial criminal activity and of money-laundering in Europe by French MPs Vincent Peillon and Arnaud Montebourg, third section on "Luxembourg's political dependency toward the financial sector: the Clearstream affair" (pp.83-111 on PDF version)
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