Money Laundering Overview PDF

**Money Laundering** involves taking criminal charges and disguising their illegal sources in order to use the funds to perform legal or illegal activities. It is the process of making dirty money appear clean. The goal is to use the funds of illegal activities that are very profitable without drawi...

**Money Laundering** involves taking criminal charges and disguising their illegal sources in order to use the funds to perform legal or illegal activities. It is the process of making dirty money appear clean. The goal is to use the funds of illegal activities that are very profitable without drawing attention to the underlying activity or persons generating such profits. Criminals achieve the goal by disguising the source of the funds, changing the form of the currency, or moving the money to a place where it is less likely to attract attention. **Predicate crimes** -- criminal activity that lead to money laundering can include illegal arms sales, narcotics trafficking, contraband smuggling, embezzlement (The unlawful act of taking or misappropriating funds entrusted by an employer or organization for one\'s own use), insider trading (Insider trading is** buying or selling a public company\'s stock with non-public, material information),** bribery, computer fraud schemes. **FATF Financial Action Task Force 1989** intergovernmental body created by the group of seven industrialized nations. They demystified that money laundering is done solemnly by cash transactions. **Palermo Convention 2000 united nations convention against transnational organized crime, defines money laundering as**: Conversion or transference of property, knowing it is derived from a criminal offense, for the purpose of concealing or disguising its illicit origin or of assisting any person who is involved in the commission of the crime to evade legal consequences of his or hers action. The concealment or disguise of the true nature, source, location, disposition, movement, or rights with respect to or ownership of property, knowing it is derived from a criminal offense. The acquisition, possession, or use of property, knowing at the time of its receipt that it was derived from a criminal offense or from participation on a crime. Financial Action Task Force FAFT's 40 recommendations on money laundering and terrorism financing and the sixth European union directive on the prevention of the use of financial system for the purpose of money laundering and terrorism financing state that the "intent and knowledge required to prove the offense of money laundering includes the concept that such a mental state may be inferred from objective factual circumstances". In several jurisdictions, they use the term **willful blindness -- deliberate avoidance of knowledge of the facts or purposeful indifference** and courts argue that it is equivalent to the actual knowledge of the illegal source of funds. FATF extended their action to financing of terrorism after the events of 2001/11/09. Both money launderers and terrorist use the same methods to move their money in ways to avoid detection, such as structuring payments to avoid reporting, use of underground banking, money transfer service or value transfer systems, eg hawala, hundi, fei ch'ien (Financial service that accepts cash, checks and other monetary instruments that can store value in one location and pay a corresponding sum in cash or other form to a beneficiary in another location by means of a communication, message, transfer or through a clearing network to which the money/ value transfer service belongs. Transactions performed by such services can involve one or more intermediaries and a third-party final payment. A money or value transfer service may be provided by persons (natural or legal) formally through the regulated financial system (for example, bank accounts), informally through non-bank financial institutions and business entities or outside of the regulated system. In some jurisdictions, informal systems are referred to as alternative remittance services or underground (or parallel) banking systems.) The funds can be from legitimate source in the case of terrorism and in money laundering they are from illegal sources. For terrorism, the objective is to hide the purpose for which the funds are used and as for money laundering the purpose is to hide the source of the funds. Terrorist funds could be to pay for transportation and food as well as paying for the terrorism materials. February 2012, FATF published 40 recommendations with a new one on preventing, suppressing and disrupting the proliferation of weapons of mass destruction. **3 stages of money laundering cycle** **Placement** the physical disposal of cash or other assets derived from criminal activity. Introducing the illicit proceeds into the financial system. - They place the funds into circulation through formal financial institutions, casinos and other legitimate businesses, both domestically and international. Examples of placement transactions: Blending of funds -- commingling illegitimate funds with legitimate funds such as placing the funds of narcotics illegal sales into a cash extensive locally owned restaurant. Purchasing foreign exchange with illegal funding or purchasing store value cards with money. Dividing cash into numerous bank accounts through deposits in an attempt to avoid reporting requirement. Currency smuggling cross border, repaying loans using illegitimate cash. **Layering** The separation of illicit proceeds from their source by layers of financial transactions intended to conceal the origin of the proceeds. Electronically moving funds from one country to another and dividing them into advanced financial options and/or markets Moving funds from one financial institution to another or within accounts at the same institution Converting the cash placed into monetary instruments Reselling high-value goods and prepaid access or stored value products Investing in real estate and other legitimate businesses Placing money in stocks, bonds, or life insurance products Using shell companies to obscure the ultimate beneficial owner and assets **Integration** ---Supplying apparent legitimacy to illicit wealth through the reentry of the funds into the economy in what appears to be normal business or personal transactions. Invest the funds in real estate, financial ventures, or luxury assets. Integration is generally difficult to identify unless there are great disparities between a person's or company's legitimate employment, business, or investment ventures and a person's wealth or a company's income or assets. Purchasing luxury assets, such as property, artwork, jewelry, and high-end automobiles Entering into financial arrangements and other ventures in which investments can be made in business enterprises. **The Economic and Social Consequences of Money Laundering** Money laundering has significant negative economic and social consequences, especially for developing countries and emerging markets. The potential macroeconomic consequences of unchecked money laundering include: **Increased exposure to organized crime and corruption** (when a country is seen as a haven for money laundering, it can attract people who commit crimes. Typically, havens for money laundering and terrorist financing have: Limited numbers of predicate crimes for money laundering (i.e., criminal offenses that would permit a jurisdiction to bring a money laundering charge) Limited types of organizations and persons covered by money laundering laws and regulations Little to no enforcement of the laws and weak penalties or provisions that make it difficult to confiscate and freeze assets related to money laundering Limited regulatory capacity to effectively monitor and supervise compliance with money laundering and terrorist financing laws and regulations Criminals might try to bribe government officials, lawyers, and employees of financial and nonfinancial organizations so they can continue to run their criminal businesses. In countries with weaker laws and enforcement, it is often corruption that triggers money laundering. It also leads to increases in the use of bribery in financial organizations, among lawyers and accountants, in the legislature, in enforcement agencies, with police and supervisory authorities, and even with courts and prosecutors. A comprehensive AML/CFT framework, on the other hand, helps curb criminal activities, eliminates profits from such activities, and discourages criminals from operating in a country, especially where law is fully enforced and the proceeds from crime are confiscated.) **Undermining the legitimate private sector** Money launderers are known to use front companies, that is, businesses that appear legitimate and engage in legitimate business, but are in fact controlled by criminals who commingle the proceeds of illicit activity with legitimate funds to hide the unlawful gains. These front companies have a competitive advantage over legitimate firms because they have access to substantial illicit funds, allowing them to subsidize products (to help with money so that the product is more competitive) and services sold at below-market rates. This makes it difficult for legitimate businesses to compete against front companies. Clearly, the management principles of these criminal enterprises are not consistent with traditional free market principles, which results in further negative macroeconomic effects. By using front companies, particularly multiple front companies, and other investments in legitimate companies, money laundering proceeds can be used to control whole industries and sectors of the economy of certain countries. This increases the potential for monetary and economic instability due to the misallocation of resources from artificial distortions in asset and commodity prices. It also provides a vehicle for evading taxes, thus depriving the country of revenue. **Weakening financial organizations** (affecting stability of security firms, banks and insurance companies, it can close down banks as it has happened in the past to European Union Bank, the first internet bank due to lack of robust AML policies and Riggs Bank - due to sanctions and lack of trust in the bank leading to clients withdrawing their funds due to reputational damage, this bank was connected to 9/11 terrorism funding and money laundering scandals with dictator Pinochet) ** Dampening effect on foreign investments** (if a countries' commercial and financial sectors are perceived as compromised and subject to organized crime, there is a dampening effect on foreign direct investment and it contributes to non-development of economy) **Loss of control of, or mistakes in, decisions regarding economic policy** (due to significant amount of money from illicit proceedings, it might dwarf government economic budgets resulting in the loss of control of economic policy by governors or policy mistakes due to measurement errors in macroeconomic statistics). High cost of compliance might lead to higher interest rates (juros) because it leads to higher operational costs to the bank. If there is more ML, the regulations will tighten and the costs will be higher. If the interest rates are low, it is easier to obtain loans, so the economic activity is higher and it is easier to disguise funds from ML. **Economic distortion and instability** (the funds are investment in activities where they can hide the origin of the funds and not in activities that would benefit the country and so economic growth can suffer) **Loss of tax revenue** (money laundering affects tax revenue for the government affecting honest taxpayers since this translates into higher tax rates. International Monetary Fund and Organization for Economic Cooperation and Development work on improving tax collection capabilities and tax transparency) ** Risks to privatization efforts (**there is a risk of privatization of state owned properties being used not for fostering the economy but for money laundering by hiding the funds) ** Reputation risk for the country** (being a ML haven harms the reputation of the country and foreign financial institutions find the scrutiny of dealing with such countries to be to difficult and of higher costs, so they do not engage and this causes harm to the economic development and growth of this countries and legitimate businesses suffer due to lack of access to the markets and the countermeasures taken by international organizations and countries can reduce government assistance programs) ** Risk of international sanctions** (the United States, European Union, United Nations can apply sanctions on individuals, enterprises, countries, terrorist or terrorist groups, drug traffickers and other security threats -- OFAC Office for foreign assets control USA and US Department of the Treasury. **Comprehension sanctions** prohibit transactions with a specific country and **targeted sanctions** prohibit transactions with specific individuals, entities or industries SDN Special Designated Nationals and Blocked Persons. Failure to comply can result in civil and criminal penalties. FATF Financial Action Task Force maintains a list of countries that do not meet international standards for compliance controls and as a result the members must apply Enhanced Due Diligence to business relationships and transactions with these jurisdictions to try and persuade them to have better controls) ** Social costs** (increased costs for government to treat drug addicts in health centers and for law enforcement to combat the augmentation of crime and for financial institutions the costs can be being excluded from the international financial market, loss of profitable business, difficulties with gathering legitimate clients, investigation costs and fines, asset seizure, reduced stock value, loan losses, termination of correspondent banking facilities, liquidity problems through withdrawal of funds) ** Reputational risk** (adverse publicity regarding the business will cause a loss of confidence of the public in this business regardless of whether it is accurate or not. Borrowers, depositors and investors can stop the business relationship. Depositors might withdrawal the funds resulting in liquidity problems) ** Operational risk** (increased borrowing or funding costs are a component of operational risk since the bank can lose the costumers and have to implement higher costs, compliance controls are high cost as well as reputation damage and there are fines and sanctions) ** Legal risk** (potential for lawsuits, adverse judgement, unenforceable contracts, fines and penalties that generate losses, increased expenses and potentially the closing down of the institution. Clients can sue the organization due to having lost money and becoming victim of the crime. The investigations by law enforcement authorities and regulators can translate into expenses. Due to fraud on the part of the criminal customer, certain contracts can be unenforceable.) ** Concentration risk** (potential loss deriving from too much loan exposure or credit for a group of borrowers or borrower. It is important to know the customer and who interacts and controls the customer as well as the source of the payment funds. For these reasons, international bodies have issued statements, such as the Basel Committee on Banking Supervision's guidelines on the Sound Management of Risks Related to Money Laundering and Financing of Terrorism and FATF's International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation)