Modern AML controls are overwhelmingly focused on the cash conversion process, seeking to identify and highlight the movement of large amounts of cash. These controls intend to identify and isolate potentially irregular activity for further review, thereby detecting money laundering.
But just as file sharing and person-to-person technologies overwhelmed the music industry, peer-to-peer payment methodologies are making the most common AML controls appear more and more like the Maginot Line - theoretically impressive, but inadequate to the task. Persons convicted of money laundering have many motivations, most common among them is the illegal narcotics trade, followed by tax evasion, creditor evasion, other criminal acts, and even terror financing.
Where do illicit funds come from? Here's a list:
-- Diversion of legitimate proceeds
-- Embezzlement from employer
-- Schemes to defraud others
-- Tax evasion
-- Personal asset protection
-- Undocumented income
-- Illegal acts
Hiding these funds creates a market - and attracts the service providers who facilitate money laundering. The laundering is mainly accomplished by corrupt banks, many of which presented themselves to the world as wholly respectable, using their criminal activities as an extra wealth generator.
Money laundering is notoriously hard to measure and a metric that can put a figure on the undetected transactions is elusive. But the figure most often cited is 2 to 5 percent of the global domestic product ($882,889,000,000 to $2,207,223,000,000 in 2006). This represents a significant motivation for both individuals and service providers.
Legally obtained funds may be subject to tax, so hiding funds to reduce tax exposure can motivate people. Illegally obtained funds are also subject to tax, but they are also proof of wrongdoing and a much greater motivation for people to engage in money laundering. Money laundering is therefore popular with people who have both legal and illegal sources of income and, when combined with the perception of low risk, results in corresponding low barriers to individual involvement. Lately, these same mechanisms have been seen in terror financing, divorce, fraud matters, and other litigation, indicating an expansion of the areas where people believe that they can keep or use these funds without government oversight.
Such money comes from illicit acts, tax evasion, fraud, and corruption. But it also includes the myriad individuals who are seeking to launder smaller sums. From the drug kingpin to the low-level embezzler, the underlying objective is the same: Protect their ill gotten gains from the sight and reach of government authorities.
For companies with a US presence, there are two specific pieces of relevant legislation. The first is the federal Corporate Sentencing Guidelines, spelling out the range of criminal sanctions for business that violate federal law. The second is the Foreign Corrupt Practices Act, 1967,9 which can place severe penalties on companies found to have been involved in corruption or bribery of foreign public officials.
Advertisements for "owning your own private bank," "offshore credit cards," and "tax-free income" all appeal to the greed factor.
Merrill Lynch's10 observed that one-third of the world's high net worth individuals kept as much as $11 trillion in offshore accounts. By 2004, Merrill Lynch has revised this figure up to $28.8 trillion, but it no longer projected how much was sheltered offshore.
Money laundering is seen as a security risk by OSCE,11 and it has reiterated its firm commitment to fighting the problem.
Working with other multinational groups, including the United Nations Office on Drugs and Crime (UNODC), the World Bank, International Monetary Fund, the International Bank for Rural Development, the European Development Bank, and other partners, OSCE-EEA has developed a variety of operations to help combat money laundering and the financing of terrorism from this security risk perspective.
The success of these initiatives has been seen in the rapid movement of countries, including Albania, Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Kyrgyzstan, Montenegro, Romania, Tajikistan, Turkmenistan, and Uzbekistan, into the Financial Action Task Force (FATF) and their movement upward through the assessments as they enact more effective AML regimes.
The most common of the "gatekeepers" are lawyers. Because of their role and access to the legal processes, lawyers are in a unique position to advice clients as to specific steps they can take to mitigate their exposure. Lawyers were identified as susceptible to complex money laundering activities.12 Because many lawyers provide legal, business, and financial advice, and client communication is highly protected, these professionals are often used by people seeking to set up and conceal money laundering activities.
To address these risks, specific responsibilities have been assigned to lawyers. In Europe, lawyers are generally required to include AML aspects of transactions that could involve these activities.
The US Patriot Act, as well as the Basel II Accord and the Wolfsburg Principles, a set of industry-based AML guidelines created by 11 of the world's leading banks.
For example, the regulatory decisions of the Financial Action Task Force (FATF), 13 Wolfsburg Group, and Basel Committee have aimed at standardising financial institution requirements for compliance with the relevant law enforcement duties. As these measure push forward, trying to reduce the exposure to criminal proceeds, other counter-pressures exist.
In other words, aside from the limited needs of its population, the laws in Grand Cayman were set up to encourage the creation and expatriation of funds from countries around the world.
Thus these countries have developed a profitable business model, not unlike the money laundering process itself, wherein they provide a legal framework and low administrative costs, and the funds from around the "globe pour in. One indicator of the perceived risk is that in many of these countries local residents are not allowed to do business with these entities. In many cases, the Implementation of these legally structured entities provides a high level of financial security, making investigation and prosecution of investors and customers very difficult - meanwhile, the countries that host such banks, and profit from protecting foreign investors, continue to allow these self serving structures.
While it would seem that there is a strong incentive to regulate financial activity and to prevent money laundering, there can also be a distinct and significant financial incentive to use regulations that actually encourage the importation of foreign funds. The degree that a country is comfortable with this type of financial permissiveness seems to correlate with its exposure to the underlying crime.
Money laundering is well placed for the development of value-added services providers (brokers) to assist individuals or organisations and through which the money is placed. These service entities issue invoices and clear payments, creating the necessary paper trail to legitimise the funds transactions, and by moving the money through entities in various countries, the original source of funds is completely concealed. Since forensic auditors would take months, if not years, to retrace every step, requiring great expense, the likelihood of discovery is perceived to be low.
One purpose of these enhanced regulations is to increase the cost of conversion by reducing the profitability of criminal activity. While this has proven effective to varying degrees with many crimes, money laundering seems inversely impacted. These regulations are in direct conflict with the individual financial motive of the money. This inverse relationship has been the focus of considerable analysis. Entities such as the Bank for International Settlements (BIS), Organisation for Economic Co-operation and Development (OECD), the Group of Eight, the Group of Twenty, Bank (WB), the International Monetary Fund International (IMF), and the Financial Stability Forum (FSF) are working to reduce money-laundering. Global economic realities are the logical reason.
This transparency is not present in many other countries, including, for example, Mexico. Since drugs come into the United States from Mexico and most of the drug proceeds are smuggled back to Mexico, money launderers capitalise on the differences between the two counties' laws, regulations, and relative transparency.
Most funds from narcotics are smuggled across the border in bulk cash form, through individual transfers via money service businesses or even disguised in commercial transactions which are, shipping legal goods for later sale in Mexico or in countries in Central and South America. Mexico is facing high levels of official corruption and violence from the narcotics trade, limiting the country's effectiveness in mitigating the flow of funds.
The core challenge to enforcement is how simple it is to begin a money laundering operation. From the most simple to the most complex scheme, the ability to create legitimate-looking entities, books, records, and the like, either locally or around the globe, can be set up quickly. Once the company is set up, deposits can be made in the company's name into a bank anywhere in the world. And depending on the jurisdiction, there may be little in the way of required financial reporting for companies that only operate internationally. There is little difficulty in setting up various business entities that give the holder anonymity, disguise the status and even nature of its management and its operating locations, and yet generates low levels of required tax.
In many jurisdictions, trusts and foreign entities are unregulated, freeing them from many financial disclosure requirements. By using designated professionals or formal trustees, the actual owners of the funds can act in full control while completely concealing their identity and ownership. The use of unregulated companies also helps to hide accounts from regulatory, legal, and Taw enforcement agencies. Company names can be changed, or new companies created, to further dilute attention if desired. They also lead to the creation of the volumes of paperwork that mask the fictitious nature of the fund transfers. By creating false invoices, loan documents, employment contracts, and having the records and personnel to confirm these non-existent transactions, the use of these front companies enable the money launderer to deceive the various authorities and avoid detection.
Preservation of funds is the primary objective of all money laundering activities. Were the authorities to find them, these funds would be confiscated, taxed, and otherwise lost. Thus foreign business entities and legal trusts can be set up with instructions for the movement of money to new jurisdictions if the location is discovered or identified in a legal process.
Should the agent be notified that official interest has arisen in the account, he can close it, transferring the funds to other entities in other jurisdictions, using as many steps as may be required to ensure safety and confidentiality once more. In some circles, these highly mobile accounts are sometimes called "walking accounts," in that they move quickly and rapidly, making legal action and seizure very difficult. Where walking accounts and the like are used, a distinct structure is followed. The first account is the main repository for deposits and many sources of funds flow through it. This account functions as an early warning tool, so that when any interest from a perceived threat is noted, the controller will have time to protect the funds in the subsidiary accounts.
By using a private bank, will its sole customer being the money launderer, any indication of official interest could lead not just to the movement of the subsidiary accounts but to the closure of the "bank" and loss of all records. The obvious connection to money laundering has greatly restricted these types of easily opened private banks, but they still exist.
Money launderers use professionals to legitimise their activities. They will hire accountants and management firms to keep the books and records of their entities, who file the appropriate paperwork in each jurisdiction. Money launderers hire lawyers, using the attorney-client confidentiality as well as legal advice to guide them and protect their money laundering or operations and funds. There are also various bankers, brokers, and other institutions that are used to set up companies, trusts, and similar agencies, to further insulate the funds and promote confidentiality.
Well before the mega-frauds at Enron, Tyco, WorldCom, and Adelphia made headlines, the schemes behind them were hatched during the late 1990s. It was a time of economic growth and prosperity that followed on the heels of a recession.
Because money laundering, like fraud schemes, are not tied to a specific place in the economic cycle, difficult economic times can create conditions of reduced vigilance and thus increased risk of the schemes success. Most of these schemes operate for months and even years before discovery, meaning that if you have not found existing schemes, they are likely hovering below the radar or still germinating.
Association of Certified Fraud Examiners (ACFE) and others, indicates that companies are most concerned with catastrophic events, that is, incidents that would raise public attention or affect the confidence of customers, supplier, stockholders, and like stakeholders. Management is often comfortable pricing in the regular and "unavoidable" incidents, thus opening the door for money laundering and other fraud events to occur over time. Convincing senior managers of the viability of the threat and the reasonableness of the proposed response is especially tricky when dealing with the risks from the most sensitive of constituencies: the company's employees. This is further complicated by the clear correlation between the rank and seniority of the employee and the relative threat from money laundering. Since few executives are interested in closely examining themselves (or their peer group), they tend to concentrate on physical solutions and accounting controls that predominately affect lower-level employees. Coupled with this tendency to organisation inertia, companies have historically tended to be interested only in what they are required to do.
(Concluded)
(The writer is an advocate and is currently working as an associate with Azim-ud-Din Law Associates)
1. USA Patriot Act of 2001, § 301, 302, 303.
2. The United Nations departments, programmes, funds and agencies have been taking actions in a number of areas in line with the strategy both in their individual capacity and through joint efforts in the framework of the Counter-Terrorism Implementation Task Force (CTITF):
The World Bank has conducted 32 assessments - 11 jointly with the IMF - on Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) compliance since 2001. Throughout this period, approximately 275 technical assistance missions were performed on a bilateral or regional basis to strengthen all components of an AML/CFT regime. In addition, the World Bank has undertaken 14 bilateral remittance corridor analyses that offer sending and receiving countries new information on the characteristics of remittance flows. This information provides the basis for policy reviews to promote increased flows at lower costs, while enabling better compliance with AML/CFT standards. The World Bank is also in the process of conducting a study on the AML/CFT risks of mobile phone technology for financial services. This study will include recommendations to governments and stakeholders on how best to regulate this new industry to simultaneously promote business and mitigate the risks.
3. The Bank has issued an International framework for banks (Basel III):
"Basel III" is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector.
These measures aim to:
-- improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source
-- improve risk management and governance
-- strengthen banks' transparency and disclosures.
The reforms target:
-- bank-level, or micro-prudential, regulation, which will help raise the resilience of individual banking institutions to periods of stress.
-- macroprudential, system-wide risks that can build up across the banking sector as well as the procyclical amplification of these risks over time.
These two approaches to supervision are complementary as greater resilience at the individual bank level reduces the risk of system-wide shocks.
4. The Financial Action Task Force (FATF) is an inter-governmental body whose purpose is the development and promotion of national and international policies to combat money laundering and terrorist financing. The FATF is therefore a 'policy-making body' that works to generate the necessary political will to bring about legislative and regulatory reforms in these areas. The FATF has published 40 + recommendations in order to meet this objective.
5. Commission Activities in the Fight against Terrorism since 2004 include:
Green Paper on detection and associated technologies in the work of law enforcement, customs and other security authorities (September 2006)
-- Communication on ensuring greater security of explosives, detonators, bomb-making equipment and fire-arms (July 2005)
-- Communication on improving Community Civil Protection Mechanism (Apr 2005)
-- Communication on prevention, preparedness and response to terrorist attacks (October 2004)
-- Communication on Critical Infrastructure Protection in the fight against terrorism (October 2004)
-- Communication on preparedness and consequence management in the fight against terrorism (October 2004)
-- Communication and a possible proposal for a legal instrument on supply chain security
-- Communication addressing violent radicalisation and recruitment of terrorists.
6. The OAS/CICTE Ministers made an important political commitment at the 2008 Ministerial conference to implement and enforce FATF SR IX, and announced that in the process of funding was follow-on regional training to OAS member states in 2009 onwards to help enhance the capability of participating countries to effectively enforce and investigate violations of their local cash declaration laws and regulations. The universal implementation of FATF SR IX is essential to ensure that terrorist and other criminal organisations cannot finance their activities or launder the proceeds of their crimes through the physical cross-border transportation of currency and bearer-negotiable instruments.
The goal of such regional training is to increase the number of currency seizures at ports of entry and departure. We also hope to increase information sharing, dismantle complex criminal organisations and terrorist networks that utilise cash couriers to facilitate their illicit activities.
OAS region is already making important progress. For instance the FATF regional style body of South America - GAFISUD - is conducting joint monitoring exercises to address illicit cash smuggling, and we hope this regional training will help provide the needed capacity building and raise awareness of this growing trend.
7. The Caribbean Financial Action Task Force (CFATF) is an organisation of twenty-nine states of the Caribbean Basin, which have agreed to implement common countermeasures to address the problem of criminal money laundering. It was established as the result of meetings convened in Aruba in May 1990 and Jamaica in November 1992.
8. Why Money Laundering is a problem issue in South America, see Frederic Forsyth, COBRA: (2010), A Signet Book.
9. The purpose of the FCPA is to crackdown on the bribery of foreign officials - official statistics show that 400 American firms have collectively paid $300 million in bribes and other questionable payments to foreign governments, political parties and also directly to the accounts of government officials.
Any breach of the FCPA is taken as a serious offence. The penalties for breaking the Act extend to being barred from tendering for US government contracts, large fines in some cases criminal convictions for prosecuted company executives. Some of these convictions have resulted in jail time for the guilty.
The Act is not merely restricted to the United States, although their signatory clearly adds weight. USA is a joint signatory along with 33 other OECD member governments in the application of FCPA. Substantial fines for the lack of effective controls to prevent the bribing of overseas officials have been levied in several signatory countries including the UK.
The Foreign Corrupt Practices Act complements other legislation in this area such as the USA Sarbanes Oxley Act which also requires firms to operate effective systems of control and come clean about instances of fraud. For the Risk Management and Compliance functions of financial firms there is no getting away from these pieces of legislation indeed compliance with one assists the other.
10. Merrill Lynch; World Wealth Report 1999.
11. The OSCE is the world's largest regional security organisation. It offers a forum for political negotiations and decision-making in the fields of early warning, conflict prevention, crisis management and post-conflict rehabilitation, and puts the political will of its participating States into practice through its unique network of field missions.
The OSCE has a comprehensive approach to security that encompasses politico-military, economic and environmental, and human aspects. It therefore addresses a wide-range of security-related concerns, including arms control, confidence- and security-building measures, human rights, national minorities, democratisation, policing strategies, counter-terrorism and economic and environmental activities.
All 56 participating States enjoy equal status, and decisions are taken by consensus on a politically, but not legally binding basis.
12. Julio Luz, a lawyer by Profession is the man charge of laundering money for Columbia's Drug Cartel headed by Diego Esteban.
13. 2001 FATF Money Laundering Typologies Report.