Money Laundering & Combating the Financing of Terrorism

 – Money Laundering – 

Money laundering is the illicit technique of making massive amounts of money obtained via criminal activities. Activities like drug trafficking or terrorist financing, appear to have originated from a legitimate source.

This is seen as a serious financial crime, so, this article will explain everything you should know about money laundering. Also, financing terrorism, and the laws put in place to combat these issues. Read on to find out more about it.  

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What is Money Laundering?

The goal of most criminal acts is to generate a profit for the individual or group that carries out the act. Money laundering is the processing of these criminal proceeds to disguise their illegal origin.

This process is of critical importance, as it enables the criminal to enjoy these profits without jeopardizing their source.

Illegal arms sales, smuggling, and the activities of organized crime can generate huge amounts of proceeds.

Also, embezzlement, bribery, and computer fraud can produce large profits and create the incentive to “legitimize” gains through money laundering.

How do Criminals Launder Money? 

When a criminal activity generates substantial profits, they find ways to control the funds without attracting attention to the underlying activity.

So they disguise the source, change the form, or move funds to places where they won’t attract attention.

However, In response, FATF was established by the G-7 Summit in Paris in 1989 to develop a coordinated international response.

The first task of FATF was to develop (40) Recommendations, which explains measures NGs should take to implement effective anti-money-laundering programs.

How Money Laundering Works

Money laundering is essential for criminal organizations that wish to use illegally obtained money effectively. Dealing with large amounts of illegal cash is inefficient and dangerous.

Also, criminals need a way to deposit the money in legitimate financial institutions, yet they can only do so if it appears to come from legitimate sources.

However, the process of laundering money typically involves three steps: placement, layering, and integration.

1. Placement surreptitiously injects the “dirty money” into the legitimate financial system.
2. Layering conceals the source of the money through a series of transactions and bookkeeping tricks.
3. The now-laundered money is withdrawn from the legitimate account, & used for whatever purposes the criminals want.

Possible Real-Life Differences? 

Note that in real-life situations, this template may differ. Also, money laundering may not involve all three stages, or some stages could be combined or repeated several times.

There are many ways to launder money, from the simple to the very complex. One of the most common techniques is to use a legitimate, cash-based business owned by a criminal organization.

After that, the funds can be withdrawn as needed. Also, these types of businesses are often referred to as “fronts.”

Money Laundering Process

A common method of “washing” money is funneling it through restaurants or businesses that have a lot of cash transactions.

The money laundering process usually goes something like the following:

1. Initial placement

A criminal or criminal organization owns a legitimate restaurant business. Money got from illegal activities is gradually deposited into a bank through the restaurant.

The restaurant reports daily cash sales much higher than what it actually takes in.

Say, for example, that the restaurant takes in $2,000 in cash in one day.

An additional $2,000–which is money coming from illegal activities–will be added to that amount. Now, the restaurant will falsely report that it took in $4,000 in cash sales for the day.

The money is now deposited in the restaurant’s legitimate bank account and appears as ordinary deposits of restaurant business proceeds.

2. Layering the money

To deal with tax issues and further disguise the criminal source of the extra deposited funds, guess what? The restaurant may invest the money in another legitimate business, such as real estate.

Things are further obscured from the authorities by using shell companies or holding companies that control several business enterprises that the laundered money may be funneled through. The “layering” often involves passing the money through multiple transactions, accounts, and companies.

It may pass through a casino to be disguised as gambling winnings,.

Go through one or more foreign currency exchanges, be invested in the financial markets, and ultimately be transferred to accounts in offshore tax havens where banking transactions are subject to much less scrutiny and regulation.

The multiple pass-throughs from one account, or one enterprise, to another make it increasingly difficult for the money to be tracked and tied back to its original illegal source.

3. Final integration

In the final phase of money laundering–integration–the money is placed into legitimate business or personal investments. It may be used to purchase high-end luxury goods, such as jewelry or automobiles.

It may even be used to create yet another business entity through which future amounts of illegal cash will be laundered.

At this stage, the money has, ideally, been sufficiently laundered so that the criminal or criminal enterprise can use it freely without resorting to any criminal tactics.

The money is typically then either legitimately invested or exchanged for expensive assets such as property.

Variants of Money Laundering

One common form of money laundering is called smurfing (also known as “structuring”). This is where the criminal breaks up large chunks of cash into multiple small deposits, often spreading them over many different accounts, to avoid detection.

Money laundering can also be accomplished through the use of currency exchanges, wire transfers, and “mules”—cash smugglers, who sneak large amounts of cash across borders and deposit them in foreign accounts, where money-laundering enforcement is less strict.

Other money-laundering methods include:

• Investing in commodities such as gems and gold that can be moved easily to other jurisdictions;
• Discreetly investing in and selling valuable assets such as real estate, cars, and boats;
• Gambling and laundering money at casinos;
• Counterfeiting; and
• Using shell companies (inactive companies or corporations that essentially exist on paper only).

Different Methods of Money Laundering

Money laundering can take several forms, although most methodologies can be categorized into one of a few types. These include “bank methods, smurfing [also known as structuring], currency exchanges, and double-invoicing”.

1. Structuring:

Often known as smurfing, is a method of placement whereby cash is broken into smaller deposits of money, used to defeat suspicion of money laundering and to avoid anti-money laundering reporting requirements.

A sub-component of this is to use smaller amounts of cash to purchase bearer instruments, such as money orders, and then ultimately deposit those, again in small amounts.

2. Bulk Cash Smuggling:

This involves physically smuggling cash to another jurisdiction and depositing it in a financial institution, such as an offshore bank, that offers greater bank secrecy or less rigorous money laundering enforcement.

3. Cash-intensive Businesses:

In this method, a business is typically expected to receive a large proportion of its revenue as cash uses its accounts to deposit criminally derived cash.

This method of money laundering often causes organized crime and corporate crime to overlap. Such enterprises often operate openly and in doing so generate cash revenue from incidental legitimate business in addition to the illicit cash.

In such cases, the business will usually claim all cash received as legitimate earnings.

4. Trade-based Laundering:

This method is one of the newest and most complex forms of money laundering. This involves under- or over-valuing invoices to disguise the movement of money.

5. Shell Companies and Trusts:

Trusts and shell companies disguise the true owners of money. Trusts and corporate vehicles, depending on the jurisdiction, need not disclose their true owner.

Sometimes referred to by the slang term rat hole, though that term usually refers to a person acting as the fictitious owner rather than the business entity.

6. Round-tripping:

Money is put in an offshore controlled foreign firm, preferably in a tax haven with limited records, and then sent back as a tax-free foreign direct investment.

A variation on this is to send money to a legal firm or similar organization as retainer monies, then cancel the retainer and, when the money is remitted, portray the sums obtained from the attorneys as a legacy under a will or as lawsuit proceeds.

7. Bank Capture:

In this case, money launderers or criminals buy a controlling interest in a bank, preferably in a jurisdiction with weak money laundering controls, and then move money through the bank without scrutiny.

8. Invoice Fraud:

An example is when a criminal contacts a company saying that the supplier payment details have changed. They then provide alternative, fraudulent details in order for you to pay them money.

9. Casinos:

In this method, an individual walks into a casino and buys chips with illicit cash. The individual will then play for a relatively short time.

When the person cashes in the chips, they will expect to take payment in a check, or at least get a receipt so they can claim the proceeds as gambling winnings.

10. Other Gambling:

Money is spent on gambling, preferably on high odds games.

One way to minimize risk with this method is to bet on every possible outcome of some event that has many possible outcomes, so no outcome(s) have short odds, and the bettor will lose only the vigorish and will have one or more winning bets that can be shown as the source of money.

The losing bets will remain hidden.

11. Black Salaries:

A company may have unregistered employees without written contracts and pay them cash salaries. Dirty money might be used to pay them.

12. Tax Amnesties:

For example, those that legalize unreported assets and cash in tax havens.

13. Transaction Laundering:

When a merchant unknowingly processes illicit credit card transactions for another business.

It is a growing problem and recognized as distinct from traditional money laundering in using the payments ecosystem to hide that the transaction even occurred (e.g. the use of fake front websites). Also known as “undisclosed aggregation” or “factoring”.

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How Much Money is Laundered?

The International Monetary Fund estimates that the amount of money laundering occurring on a yearly basis could range between 2 and 5 percent of the world=s gross domestic product- or somewhere between $600 billion and $1.5 trillion. 

Estimates come from a variety of sources based upon bath macroeconomic theories and on microeconomic approaches. 

What the Government Knows About Laundering

Due to the clandestine nature of the laundering activity, governments and concerned organizations cannot accurately quantify the amount of money laundered each year. 

Some estimates suggest that the amount of money laundered each year is approximately $2.8 trillion, an amount over four times greater than the figure generally accepted.

Many economists, law enforcement executives, and policymakers agree on the need to develop an acceptable means of identifying the scope of the laundering problem. 

The inability to determine the amount of money laundered impedes an adequate understanding of the magnitude of the crime, its macroeconomic effect, and the effectiveness of current counter-laundering efforts. 

Influence of Money Laundering on Economic Development

Launderers are continuously looking for new routes for laundering their funds.

Economies with growing or developing financial centers, but inadequate controls are vulnerable as established financial center countries implement comprehensive anti-money laundering regimes.

Launderers, who tend to move their networks to countries and financial systems with weak or ineffective countermeasures will exploit differences between national anti-money laundering systems.

Some might argue that developing economies cannot afford to be too selective about the sources of capital they attract. But postponing action is dangerous. The more it is deferred, the more entrenched organized crime can become.

Fighting money laundering and terrorist financing is, therefore, a part of creating a business-friendly environment which is a precondition for lasting economic development.

What is Terrorist Financing?

The offense of terrorist financing involves the provision, collection, or receipt of funds with the intent or knowledge that the funds will be used to carry out an act of terrorism or any act intended to cause death or serious bodily injury.

It also includes collecting or receiving funds intending that they be used or knowing that they will be used for the benefit of a terrorist group. 

Proliferation Financing

Generally speaking, proliferation is the spread of nuclear, radiological, chemical, or biological weapons.

Their means of delivery such as missiles, rockets, and other unmanned systems, as well as related materials, such as WMD-sensitive materials, equipment, and technology.

They can also become accessible by terrorists who are pursuing chemical, biological, radiological, or nuclear (CBRN) capabilities.

Proliferation financing is the provision of financial services for the transfer and export of nuclear, chemical, or biological weapons; their means of delivery, and related materials.

It involves the financing of trade in proliferation-sensitive goods, but could also include other financial support to individuals or entities engaged in proliferation.

The financial elements of a WMD program can be divided into three stages:

• Raising of funds
• Obscuring of funds
• Shipping of necessary items

Financial Sanctions for Terrorist Financing

Financial sanctions are political measures taken to restrict the movement of funds to achieve a specific outcome. Targeted Financial Sanctions are a specific type of financial sanction with a stated objective, one of which is the prevention of terrorist financing.

Targeted Financial Sanctions can originate at the supranational level (EU) or international level (UN).

While there is a clear obligation to comply with EU Council Regulations, it is also necessary to have regard to the designation of persons and entities by the United Nations Security Council Sanctions Committees (“UN Sanctions Committee(s)”) in the terrorist financing context.

The EU gives legal effect to Targeted Financial Sanction designations by the UN Sanctions Committees through EU Council Regulations.

Once a person or entity is designated by the UN Sanctions Committees, it is intended that funds or other assets are frozen without delay and not made available directly or indirectly to that sanctioned individual or entity.

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Difference Between Money Laundering & Terrorist Financing?

While Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) preventative measures are dealt with together in the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 (as amended) (“CJA 2010”), it is important to note that a distinction exists in the nature of the two offenses.

• For money laundering to occur, the funds involved must be the proceeds of criminal conduct.
• For terrorist financing to occur, the source of funds is irrelevant, i.e. the funds can be from a legitimate or illegitimate source.

The key consideration when taking measures to prevent terrorist financing is to examine the intended use or destination of the funds as opposed to its origin.

Anti-Money Laundering and Anti-Terrorism Financing laws important?

Money laundering and Terrorist Financing diverts resources away from economically and socially productive uses and can negatively affect a country’s financial system by undermining its stability.

Weak Anti Money Laundering (AML) and Countering the Financial of Terrorism (CFT) controls will also have reputational consequences for a country’s financial system.

It is important that a country is seen as having a robust AML regulatory framework with financial firms effectively implementing AML systems and controls as it dissuades criminals from targeting that financial system.