Money Laundering Overview and Stages

Money Laundering Overview

• Money laundering is disguising illegal funds' origin to use them legally or illegally.
• Criminals hide the funds' source, change their form, or move them to a less-noticed location.
• Predicate crimes include illegal arms sales, drug trafficking, and organized crime.
• Money laundering isn't limited to cash; it uses various financial mediums.

Three Stages of Money Laundering

• Placement: Initial transfer of funds into a financial system.
• Layering: Transactions are disguised and broken down to obscure origins.
• Integration: Funds are reintroduced into the system, appearing legitimate.

Economic and Social Consequences

• Money laundering harms economic stability, leading to higher taxes.
• It hinders privatization efforts, risks corruption, and serves as a vehicle for fund laundering.
• A country's reputation as a money-laundering haven hurts its development and economic growth by damaging its reputation.

Electronic Funds Transfers (EFTs)

• EFTs are initiated electronically (e.g., internet, ACH, ATMs, mobile phones).
• Trillions of dollars are transferred electronically daily, making illicit transfers harder to detect.
• Money launderers use EFTs to layer funds in multiple accounts across jurisdictions.

Correspondent Banking

• Correspondent banking involves one bank (respondent) using another (correspondent) to handle customer transactions.
• Correspondent banks may have limited information about respondent bank's controls.
• Respondent banking "nesting" shields correspondent banks from knowing parties involved.
• Inadequate AML/CFT controls in correspondent banking can lead to substantial penalties (e.g., Deutsche Bank penalty).
• Deutsche Bank experienced significant compliance issues with correspondent banks (Danske Bank Estonia, FBME Bank), and related to Jeffrey Epstein.

Payable-Through Accounts (PTAs)

• PTAs allow respondent bank customers to transact through respondent's correspondent account without the respondent bank's oversight.

Key Takeaways

• Senior management support is crucial for effective AML compliance.
• Ignoring red flags can have adverse consequences.
• Nested accounts present high risk for correspondent banks.
• Correspondent banks should assess respondent banks' AML/CFT controls.
• AML/CFT policies and procedures for respondent banks must be sufficient.

FATF (Financial Action Task Force)

• FATF sets international standards against money laundering and terrorist financing.
• FATF expanded the understanding of money laundering beyond just cash transactions.

International AML (Anti-Money Laundering) Standards

• International bodies such as FATF create guidelines relevant globally.