Knowing about money laundering - I

From my perspective, money laundering is the epitome of fraud methodology. It involves the concealed transfer of assets by masking them in the mundane of financial transactions. In short, the methodology of money laundering exists in every fraud scheme.
The Patriot Act,1 had pushed AML compliance in the same direction with its emphasis on identifying terror financing. The challenge in money laundering cases is that the methodologies appeal to a wide range of people, from criminals, such as drug dealers and embezzlers, to political individuals, like terrorists and tax protesters, to ordinary people confronted by greed. Understanding who these people are, what motivates them to cross the line, and how many ways they can become involved gives the interested investigators, regulators, and AML professionals needed the insight.
The range of available money movement mechanisms is extensive. They do not lend themselves to simple or straightforward controls. And once an individual has successfully moved money through the system, greed can become a powerful force for further and further involvement.
Part of the challenge in investigating money laundering is the international component because all money laundering is an attempt to avoid government rules, regulations, and, very often, taxes. The use of various kinds of entities around the globe provides both protection from discovery and barriers to seizure of the laundered funds. But distance alone is not the driving factor. Differences in government policies and implementation leave gaps, gaps that in some cases are intentionally created because some governments benefit from illicit funds passing through or remaining within their borders. Just as individuals have their motivations, so do governments. While global AML agreements are strengthening, their impact on reducing the actual level of money laundering appears negligible. Thus, despite the growing international consensus that money laundering is a widespread and harmful criminal activity that affects all nations, certain countries continue to see practices and policies that not only allow money laundering, but they actually encourage and enable it.
Indeed, money laundering, once virtually limited to the use of cash, has adapted along the way and has increased exponentially as the financial world went from checks to credit cards to electronic transfers - which has nearly eliminated the use of cash in general commerce. (Illicit goods are the last bastion of criminal cash transactions.)
The real pressure to make progress against money laundering came after September 11, 2001, when the connection between terror financing and money laundering methodologies was clearly demonstrated to the world. Prior to that, the link was known but not popularly understood. This shift in focus motivated many countries to increase their regulatory framework and enhance the co-operation in tracing illicit payments. Terror financing, while it uses money laundering methods, has a significant difference from white collar crimes and the like - the amounts involved can be much smaller. Where prior AML attention was focused on very large money movements, the emphasis on terror financing requires tools, techniques, and approaches that identify substantially smaller money flows.
Understanding that nothing can eliminate the risk, there will always be a need to investigate allegations of improper money movements. Traditionally, this has been a government role, but this responsibility, too, as with the risk policies, has shifted to the private sector steadily over the past 40 years. Any professional who deals with financial transactions must now be aware of - and be ready to become involved in - money laundering investigations.
The process ends with the reporting and recovery aspects. Efforts to control money laundering involve a tremendous volume of data aggregation. Where discovered, identified, or even suspected, financial institutions and related entities are required to document and report these activities.
The number of programs that have been established include those sponsored by international organisations such as the United Nations2 or the Bank for International Settlements,3 and at least 80 such agreements were made in the late twentieth century. Following the Financial Action Task Force, created in 1989,4 various governmental and co-operative entities (eg, the European Union, the European Commission,5 and the Organisation of American States6) created regional working groups to establish AML measures based on the legal and regulatory requirement of their members. The Caribbean,7 Asia, Europe, and South Africa have also created regional AMI task force-like organisations. Countries in West Africa and Latin America have also done the same.
Since 1996, the International Monetary Fund (IMF) has seen a continuing increase in the flow of illicit funds coming from drugs and related money laundering, corruption, and tax evasion as compared to global economic growth. Given the pace of technological change and the ever-increasing ease of complex financial movements, it is likely that an even higher share of the world's financial transactions will be used to mask the flow of illicit funds.
Technology did not create money laundering, but it did bring about a new dimension in remote destinations such as Vanuatu, Nauru, and the Marshall Islands, which might be hard to reach in person but are only a click away online.
Technology has also had an impact on the prosecution aspect. Where transactions used to be relatively slow and documentation took time to process, the pace of investigation and prosecution seemed appropriate. But the pace of transactions has increased dramatically. Today, it is possible that a defendant will learn he is a target and have time to electronically transfer funds around the globe before the legal mechanisms can be used to stop him. Further, most legal systems require sufficient proof before acting, and getting this level of proof requires the co-operation of the source country.
Simply put, what is today called money laundering was once simply called "banking." The secure handling and movement of fund is banking and, for most of history, banks were not concerned with their customers' source of funds. As regulatory environments have modernised, more and more activities' have been proscribed. But this places financial institutions in a difficult place. When regulations are used to prohibit natural and profitable behaviour, the temptation to bend and break the regulations increases. The globalisation of the banking sector also means that where one bank is prohibited but another is not, the competitive pressure can also influence the choices. Offshore banks have jumped into the service environment, as affluent individuals demand confidentiality and are willing to pay for specialised services. By the end of 1997 international financial institutions held more than half of all global cross-border assets.
Thus, while there are more regulations and more interest in terror financing and narcotics smuggling, there have been proportionally fewer financial crime arrests, indicating the relative safety of money laundering activities in these countries. More and more of these transactions occur in offshore banking centers, such as Grand Cayman, the Isle of Man, Malta, Cyprus, and other jurisdictions.
Money laundering is also aided by the historical strength of the U.S. dollar. Because of the devaluation of so many other currencies, there has been a strong demand for the dollar as well as other strong currencies across the globe and sometimes a correspondingly lesser inclination by countries seeking the security of stronger currencies to question the source. Money launderers, seeking to conduct business with strong currencies, have found willing takers in developed and developing governments, who have also become willing service providers in the movement and cleaning of illicit funds for mutual benefit.
OECD has sponsored to reduce global tolerance and to limit and restrict foreign places to hide money and the efforts have not yet led to any significant reduction in the volume of funds being laundered.
Money laundering is a growing concern in a number of Latin American countries of the MERCOSUR (Mercado Comun del Sur, or Southern Common Market) and is generating increasing challenges for regulators and law enforcement, despite improved AMI tools and technology.8 This is partly related to the drug lords in Colombia and Mexico who need to clean their own money and larger facilities to enable them to administer the flow of funds in their own countries and regionally. In addition, it is due to foreign banks in Latin America and the Caribbean. The most visible manifestation of the money has been funnelled into construction projects in tourist destinations, such as Cancun. The resulting hotel business is used to launder money. This is not limited to Mexico, as similar models have been found in other tourist areas and in luxury developments in Argentina. Stronger notification and regulations are being instituted across the Southern Common Market, focusing on potential money laundering through products, companies, and currency exchange brokers.
South America, funds from white collar crime, narcotics, and weapons smuggling are routinely laundered. Taking advantage of both regional rivalries and political differences, Brazil has become a popular banking centre.
By promoting policies that ensure secrecy, countries attract illicit funds. Estimates are that 20 percent of the drug-related money laundering is in Paraguay.
These huge money flows masked the rise and impact of organised crime in these countries, allowing them the ability to launder money through the most important economic centers and offshore locations. The new focus on corruption and its impact on the money laundering process is an attempt to reverse this trend.
Financial Action Task Force (FATF)
By creating co-ordinated processes and definitions, even with some differentiation, the objective of the FATF is to enhance the effectiveness and efficiency of global AML efforts. This includes the confiscation identified illicit funds, the identity of account holders, the retention of records, and the creation of reporting procedures, all tools for tracking financial transactions through the global financial community.
FATF issues annual reports on compliance; effectiveness, and recommended enhancement. Over time, these reports have helped encourage countries to adopt many the FATF guidelines. As of late, there were only two counties listed as not being in compliance - Iran and North Korea.
AML efforts such as FATF require the co-ordination of all financial institutions and regulators across national borders to identify the origin and recipients of financial transactions. As their efforts improve, the perpetrators work to add layers, making compliance ever more difficult to achieve. Between economic priorities and technology, the race to keep up can outpace the capabilities of many countries willing to combat money laundering.
As commerce moves away from traditional paper currency and coin cash-based exchanges to the various forms of digital currency, money laundering is poised to become a highly viable and increasingly profitable business. Its expansion across the banking, finance, and corporate networks of today is hampered by cash-based controls. Even despite the challenges of moving large amounts of cash, money launderers have found ever more creative ways of evading detection. As technology transitions people from cash to digital currencies, these cash-based controls and protections will fade from viability, increasing the potential profits from these schemes. (To be continued)