Money Laundering: Processes and Risks

What Are the Money Laundering and Terrorist Financing Risks?

• Money laundering disguises the illegal origins and ownership of criminal property to make it appear legitimate.
• Criminals launder funds to use and enjoy the proceeds of their crimes without attracting law enforcement attention.
• Criminally derived property can be laundered through numerous methods and financial services.
• Money laundering also involves real estate, luxury goods, investments, and digital currencies.

The Three-Stage Model

• Placement puts crime-generated funds into the financial system directly or indirectly.

• Layering separates illicit proceeds from their source using complex financial layers to disguise audit trails and provide anonymity.

• Integration provides wealth derived criminally with apparent legitimacy, placing laundered proceeds into the economy to appear legitimately earned.

• Some criminals deposit the proceeds directly into their bank account and fund living expenses; this is still money laundering.

• The objects of laundering are to hide the ownership and origin of criminal property.

• Money launderers may not always be easy to spot, and successful criminals will look like successful entrepreneurs.

• Financial institutions or practitioners entering relationships with criminally-derived property are engaged in laundering activity.

Predicate Offence

• For laundering, a predicate offense is any crime that generates monetary proceeds.
• Money Laundering Offense requires countries to apply crime-preventing measures to serious offenses for a wide number of predicate offences.
• Predicate offences can include every crime, or hit monetary thresholds or result in prison sentences, or be a list of crimes decided by each country.
• Countries should include a range of offenses within designated categories of offenses.
• The UK and Germany have each adopted an 'all crimes' approach; the US has 250 SUAs on its list.

Corruption and Anti Money Laundering

• Corruption is "The abuse of entrusted power for private gain".
• Corruption and money laundering are linked, as corruption enables effective laundering, and corruption leads to financial benefit.
• Anti-corruption often focuses on those holding government offices, yet occurs broadly, including private sectors and little actual power.
• Political costs of the corrupt, in newly emerging democracies is an obstacle to democracy and the rule of law as legitimacy is lost when offices are misused.
• Economically, corruption depletes national wealth, diverting public resources to line pockets rather than benefit communities.
• Socially, corruption erodes the social fabric, undermining public trust in institutions and leadership.
• Environmentally, corruption leads to a lack or non-enforcement of environmental regulations, carelessly exploiting natural resources
• Measures taken that will combat money laundering and terrorist financing will be useful in the fight against corruption.

International/National Level Efforts Against Corruption

• The UNCAC (United Nations Convention against Corruption) is the only legally binding international anti-corruption instrument and urges recovery of corruption proceeds.
• Two leading pieces of anti-corruption legislation that led to France, South Korea improving their own efforts are the US Foreign Corrupt Practices Act and the UK Bribery Act.
• Payments of bribes to foreign officials is prohibited via the FCPA (US Foreign Corrupt Practices Act), used to obtain or retain business for publicly traded companies.
• In the United Kindom there are active and passive measures to combat domestic and foreign bribery as well as failure to prevent bribery.

Money Laundering and Tax Evasion

• Tax evasion is the illegal non- or under-payment of taxes, and tax evasion schemes generally involve deliberate misrepresentation of earnings.
• All crimes money laundering legislation includes foreign tax evasion, particularly in financial centers.
• Offshore tax evasion is using non-UK jurisdictions to evade UK tax and avoid payments.
• The OECD has been instrumental in criminalisng tax evasion via AML leislation, requiring nations to designate tax crimes as a predicate offense for money laundering.

Why is Preventing ML Important?

• Money laundering, terrorist financing, and proliferation financing can destabilize countries, weaken governance or regulatory power, and reduce foreign investment.
• Countries with ineffective controls are attractive to criminals, who conceal activities to exploit the global financial system.

Terrorist Financing

• Terrorist financing is providing or collecting funds as support to terrorists, terrorist organizations or committing acts of terrorism.
• Global action to combat terrorism and terrorist financing is on an equal footing with preventing money laundering through International Conventions.
• Sources and destinations of money to support terrorism is disguised same as the source for laundered funds.
• Common tactics: assistance from the financial sector, links with criminal organizations, disguise destination of funds, etc.
• Terrorists can employ complicated ways to move funds, manage their finances by drawing on services of bankers, lawyers, accountants, and use of payment channels.

Sources of Terrorist Funding

• Illegitimate/Criminal sources: extortion of populations, smuggling of goods for profit, trafficking, fraudulent activity, and sale of manufactures.
• Legitimate sources: charities and fund raisers, community donations, self-funding via employment and traditional loans.
• Three main methods by which funds or terrorist fundings are moves: cross-border cash couriers, hawala and related remittance systems, use of the traditional financial systems.

Proliferation Financing

• Proliferation Financing is providing funds or financial services for nuclear, biological weapons, or related materials, and related technologies.
• Guidance from the FATF outlines ways that financial institutions and businesses need to put in place so as to identify, assess, and mitigate financial risks.

Designated Categories of Offences

• Dual use can have military outcomes for the proliferation of WMD.
• In support networks, use international financial systems deal in illicit intermediaries.
• The number of customers or transactions will be limited

Sanctions

• Sanctions are measures implemented by countries, jurisdictions, and organizations to change country behavior, or restrict funding of criminals/terrorists.
• Financial sector institutions act as a front-line of defense against Money Laudering, terrorist, or proliferation financing.
• Organizations are required to understand services offered to identify sanctioned countries - if they are met, implement requirements and test requirements.

Regional Sanction Frameworks

• As a key component of international law, all UN member states can place injunctions to freeze assets and economic resources of persons named in these UN-listed sanctions.
• The European Union promotes economic cooperation, human rights and democracy within the framework of international security.
• The Arab League is an intergovernmental organization that can impose its own sanctions on member states and entities.

National Sanction Frameworks

• Sanctions and Anti Money Laundering Act outlines the legal basis for the UK to impose sanctions.
• The requirements of these frameworks are to be in effect on UK bodies including the implementation of international financial sanctions, and licensing as financial sanctions are emitted.
• In the US, the Office of Foreign Assets Control is in line with the national security and goals are administered to apply extraterritorial reach to those who operate against US foreign policies.