Money laundering is the practice of engaging in 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 business, corrupt officials, members of organized crime (such as drug dealers or the Mafia) or of cults, and even corrupt states or intelligence agencies, through a complex network of shell companies 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. In many jurisdictions, money laundering is seen as an "activity based" offense.
A brief history of money laundering
Al Capone's 1931 conviction for tax evasion leads to the modern practice of money laundering
The term "money laundering" is said to have evolved from the Prohibition era in the United States. 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 New Orleans slot machines to accounts overseas. After the 1934 Swiss Banking Act which created the principle of bank secrecy, Meyer Lansky bought a Swiss bank where he would transfer his illegal funds through a complex system of shell companies, holding companies and offshore accounts.
Gambling and "laundries"
One laundering method was legal gambling via slot machines: this could efficiently transform giant volumes of coins into easily movable currency. Another business so employed was laundries, and from this particular aspect of the trade, the term "laundering" emerged. The reason that laundromats were favoured for use in this activity was that all money which went into the business was in the form of coins deposited into the machines. Seeing as there was never any tally of the money kept at the time of deposit, the operators of the business could add extra money, gained from illegal activities, on top of the days books, making it seem as if the money were gained through the legitimate operation of the business. Not to mention the fact that the term "to launder" means to make clean, and when one launders money, they are turning what was illegally gained money, into money which would be thought of as legal and lawfully acquired.
September 11, 2001 and the international response to the underground economy
After September 11, 2001, money laundering become a major concern of the US Bush administration's war on terror, although critics argue that it has became less and less an important matter for the White House. Based in Luxembourg, Clearstream, "a bank of banks" which practice "financial clearing", centralizing debit and credit operations for hundreds of banks, has been 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 CEO, to resign on December 31, 2001; several juridical investigations were opened; and the European Commission was interpelled by European Members of Parliament (MPs) Harlem Désir, Glyn Ford and Francis Wurtz, who asked the Commission to investigate the accusations and to ensure that the 10 June 1990 directive (91/308 CE) on control of financial establishment was applied in all member states, including Luxembourg, in an effective way.
The international response to the underground economy has been co-ordinated 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 counter-terrorism funding (AML/CTF). 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 Asia/Pacific Group on Money Laundering.
Process
Money laundering is often described as occurring in three stages: placement, layering, and integration.
- 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.
Examples
If a person is making thousands of dollars in small change a week from his business (not unusual for a store owner), and he wishes to deposit that money in a bank, he cannot do so without possibly drawing suspicion. In the United States, for example, cash transactions and deposits of more than $10,000 are required to be reported as "significant cash transactions" to the Financial Crimes Enforcement Network (FinCEN), along with any other suspicious financial activity 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. In the United Kingdom, for example, until the introduction of the Serious and Organised Crime and Police Act (SOCPA), there was no lower limit to what had to be reported - a £50 note could have been enough.
One method of keeping this small change private would be for an individual to give his money to an intermediary who is already legitimately taking in large amounts of cash. The intermediary would then deposit that money into his account, take a premium, and write a check to the individual. Thus, the individual draws no attention to himself, and can deposit his check into a bank account without drawing suspicion.
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.
By the strictest definition of the term, anyone who assists in concealing the proceeds from his transactions is considered a money launderer. An individual therefore may be unwittingly employed by money launderers, and may still be criminally liable in many jurisdictions. It should be noted, however, that the act of concealing money is different than that of laundering it, though many make the mistake of putting both actions under the term of laundering.
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.
See also
External links
Free Resources
KYC "Bad Guy Databases"
E-Newsletters
FATF and Regional Bodies
Industry Bodies
Articles
