Money Laundering - Case Study Example

MONEY LAUNDERING Introduction Money laundering takes place in the banking system, involving camouflaging the illegal and criminal characteristics of funds by moving them without leaving a trail, to be invested in legitimate economies.1 In today’s world, almost all individuals and businesses are aware of money laundering and the disastrous effect it could have on their reputation, the integrity and honour of their staff and its threat to their very existence.2 The problem has mushroomed into prominence due to the high-profile public disclosure of prominent international personalities embroiled in money laundering scams (like Ferdinand Marcos {late Philippines President} and Raul Salinas {brother of Mexican President}),3 increasing incidents of frauds involving credit cards, e-money and other elements, and most vitally due to the life support provided to organised crime and terrorist organisations, allowing terrorists like the one-and-only Osama Bin Laden to plan and carry out attacks with chilling consequences; the events of 9/11 and the Bali bombings have thrust money laundering into global limelight as never before. Money Laundering Problem Money laundering is defined as the “conduct/acts designed in whole or in part to conceal or disguise the nature, location, source, ownership or control of money (can be currency or equivalents, e.g. cheques, electronic transfers, etc.) to avoid a transaction reporting requirement under state or federal law or to disguise the fact that the money 1 United Press, Money Laundering in A Changed World – U.SA, 2003. 2 Tilleke & Gibbins, Money Laundering – Thailand, 17 February 1999. 3 United Press, Money Laundering in A Changed World – U.SA, 2003. was acquired by illegal means”.4 Money laundering is a crime as the money involved is obtained by fraudulent means like narcotics trafficking, extortion, bribery, smuggling, trafficking in women and prostitution, white slavery, tax evasions, fraud etc. on national and international levels. The illegal money is then ‘laundered’ and converted into legitimate money.5 Money laundering is a problem because it is a source of corruption for government officials, financial institutions and their employees; it undermines legal capital; it contributes to volatile exchange rates; it makes money supply uncertain and beyond control; and it makes legal sections of a country’s economy impure and unscrupulous.6 Money laundering involves 3 steps: physically dispose of the money (placement); make the money ‘vanish’ by moving it around to various entities in different places, thus camouflaging an audit path (layering); and re-introduce it into the prevailing current lines of commerce and investment as legal money (integration).7 The 3 steps involve banking, non-banking and non-financial businesses. Banking institutions are used to direct transactions through false name accounts, ‘payable through accounts’, cash deposits and withdrawals, bank drafts, cashier’s cheques, travelers’ cheques, telegraphic transfers, internet banking etc.. Non-banking institutions used are exchange houses, giro houses, postal parcels, underground banking (‘hawala’, ‘hundi,’ ‘chit funds’) etc.. Non-financial businesses used are real estate companies, casinos, Free Trade Zones and facilitators like lawyers, trustees, notaries and financial advisors.8 4 ‘Lectric Law Library, Money Laundering – U.S.A 5 Tilleke & Gibbins, Money Laundering – Thailand, 17 February 1999. 6 United Press, Money Laundering in A Changed World – U.SA, 2003. 7 Tilleke & Gibbins, Money Laundering – Thailand, 17 February 1999. 8 Tilleke & Gibbins, Money Laundering – Thailand, 17 February 1999. Money laundering has acquired the dubious distinction of the world’s third largest business by value. In 1996, the IMF estimated that money laundered annually equals 2 to 5 per cent of world GDP (between 800 billion to 2 trillion U.S Dollars).9 In the U.S, nearly 90 per cent of the currency notes in use are infected by the narcotics trade; in the U.K it is 40 per cent. Black money generated in 1997 was 7 per cent of U.K GDP, 9 per cent of U.S GDP, 10 per cent of German GDP, 50 per cent of Russian GDP and 25 per cent of the GDPs of Spain, Greece and Italy.10 International Money Laundering Law Due to mounting fears over money laundering, the G7 nations founded the Financial Action Task Force (FATF) in 1989. An independent, intergovernmental policy-making body its function is to monitor money laundering and terrorist financing activities, and formulate national and international measures to deter and defeat them.11 The FATF made an everlasting contribution to the world’s anti-money laundering (AML) efforts by establishing its famous Forty Recommendations, unanimously accepted globally as the world’s ‘best practice policy guideline.’12 (the Forty Recommendations can be downloaded from the FATF website at “www.fatf-gafi.org/document/ 28/0,2340, en_32250379_32236930_33658140_1_1_1_1,100.html#r4).13 These Recommendations “provide a comprehensive blueprint for action against money laundering, covering the criminal justice system and law enforcement, the financial system and its regulation; and 9 United Press, Money Laundering in A Changed World – U.SA, 2003. 10 Tilleke & Gibbins, Money Laundering – Thailand, 17 February 1999. 11 Tilleke & Gibbins, Money Laundering – Thailand, 17 February 1999. 12 AUSTRAC, An overview of Australia’s Anti-Money Laundering Strategy – Australia, 4 September 2006. 13 FATF-GFI, Financial Task Force on Money Laundering – France, No date. international cooperation.”14 To help identify cyber space customers, the FATF issued a ‘Report on Money Laundering Typologies’ in 2001.15 The original Forty Recommendations, revised and extended by 9 additional Recommendations in 1996 and 2002, are intended for universal application.16 Guidelines based on FATF 40+9 Recommendations have been provided by organisations like the United Nations (UN), European Union (EU), Gulf Cooperation Council (GCC), Organisation of American States (OAS), Organisation for Economic Cooperation and Development (OECD), and INTERPOL. These organisations are doing their best to help the FATF in combating money laundering globally. In 1988 the U.N held the ‘United Nations Convention on Narcotic Drugs and Psychotropic Substances’.17 In 1997 Australia was instrumental in establishing ‘The Asia-Pacific Group on Money Laundering {APG}’ to pursue AML policies in that region. In 1998 the U.N established a ‘Political Declaration and Action Plan against Money Laundering.’18 Also in 1998, the OECD passed the ‘Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.’19 The European Commission held ‘The Committee for the Prevention of Money Laundering and Terrorist Financing’ in 2005, passing the Third Directive comprising measures to prevent money laundering and terrorist financing.20 14 Tilleke & Gibbins, Money Laundering – Thailand, 17 February 1999. 15 United Press, Money Laundering in A Changed World – U.SA, 2003. 16 Tilleke & Gibbins, Money Laundering – Thailand, 17 February 1999. 17 Tilleke & Gibbins, Money Laundering – Thailand, 17 February 1999. 18 AUSTRAC, An overview of Australia’s Anti-Money Laundering Strategy – Australia, 4 September 2006. 19 Tilleke & Gibbins, Money Laundering – Thailand, 17 February 1999. 20 Europa.eu, Money Laundering & Terrorist Financing; Member States agree to Commission Draft for ‘Level 2’ implementing Measures – France, 11 May 2006. The FATF conducts mutual evaluation with member nations periodically to monitor their compliance with its 40+9 Recommendations, and check the potency of AML measures developed indigenously to counter regional threats.21 Comparison of Australian Money Laundering Laws with those of the U.S, Europe and other parts of the World Australia has adopted the FATF’s 40+9 Recommendations and additional measures reflecting regional factors. These measures are contained in the ‘Proceeds of Crime Act 1987’, the ‘Mutual Assistance in Criminal Matters Act 1987’, and the ‘Financial Transactions Reports Act 1988.’22 The ‘Australian Federal Police (AFP)’ is the main law enforcing body. The ‘Australian Crime Commission (ACC)’ was set up to tackle money laundering. The primary financial intelligence body is ‘The Australian Transaction Reports & Analysis Centre (AUSTRAC)’ which oversees compliance to AML measures.23 Australia’s AML programme concentrates on cash transactions against the backdrop of known methods used by money launderers.24 It is a crime to give or receive funds related to terrorism. Assets of those linked with terrorism are frozen (up to 2004, Australia has frozen assets of more than 500 persons).25 Financial institutions must compulsorily inform AUSTRAC about any transactions worth A.$ 10,000 or more, 21 The Law Society, FATF Evaluation of the U.S Provides Lessons for the U.K – U.K, 7 August 2006. 22 AUSTRAC, An overview of Australia’s Anti-Money Laundering Strategy – Australia, 4 September 2006. 23 DPMC, Australia’s Preparedness & Prevention Capability – Australia, 2004. 24 AUSTRAC, An overview of Australia’s Anti-Money Laundering Strategy – Australia, 4 September 2006. 25 DPMC, Australia’s Preparedness & Prevention Capability – Australia, 2004. instructions of all international fund transfers in or out of Australia, and transactions which arouse suspicions about their financial integrity.26 FATF’s 1996 mutual evaluation found the Australian system to be in full conformity with its 40+9 Recommendations – proof that Australia has an exemplary AML system.27 The United States, being a global financial centre is a vital benchmark for AML policies and elaborate plans of action.28 It has the most powerful AML system in the world, based on a broad spectrum that applies to much more than cash and drug trafficking money.29 The U.S Patriot Act designates smuggling of cash in or out of the U.S as a federal crime.30 Persons indicted for money laundering crimes face up to 20 years in prison and $ 500,000 in fines.31 Banks send reports compulsorily to the U.S Treasury Department’s ‘Financial Crimes Enforcement Network (finCEN)’. In 2004, 15 million reports were sent, U.S banks had to pay $ 10 million in 1998 due to AML violations;32 over 1,500 money laundering convictions took place in 1998.33 Unlike Australia, U.S banks are required to secure specified undertakings and keep specific records about correspondent banks outside U.S territory.34 26 Axiss, Anti-Money Laundering Rules – Australia, 2 November 2005. 27 AUSTRAC, An overview of Australia’s Anti-Money Laundering Strategy – Australia, 4 September 2006. 28 The Law Society, FATF Evaluation of the U.S Provides Lessons for the U.K – U.K, 7 August 2006. 29 Alert Global Media, U.S Money Laundering Laws – USA, 10 October 2006. 30 Kirkpatrick & Lockhart Nicholson Graham, Anti-Money Laundering – U.K, 2006. 31 Alert Global Media, U.S Money Laundering Laws – USA, 10 October 2006. 32 United Press, Money Laundering in A Changed World – U.SA, 2003. 33 Alert Global Media, U.S Money Laundering Laws – USA, 10 October 2006. 34 Australian Bankers Association, Financial Action Task Report – Australia, 2005. Unlike Australia, U.S AML law allows its prohibitions and sanctions to reach U.S or non-U.S citizens (if part of the offence is performed on U.S territory) in foreign countries.35 Unlike Australia, the U.S Department of Justice can sue financial institutions (by association) on the grounds that their employees are guilty of money laundering.36 Canada’s AML system is governed by the ‘Proceeds of Crime (Money Laundering) & Terrorism Financing Act’, supervised in general by ‘Integrated Proceeds of Crime Units (POC)’ and in detail by ‘The Financial Transactions & Reports Analysis Centre of Canada (FINTRAC)’.37 U.K’s AML system, the strongest in Western Europe,38 comprises 3 parts: ‘The Money Laundering Regulations 2003,’ ‘The Proceeds of Crime Act 2002’ and ‘The Terrorism Act 2000.’ AML compliance is overseen by ‘The U.K Financial Services Authority’, which has so far penalised U.K banks for millions of Pounds Sterling.39 Unlike Australia, U.K makes it legal to conceal beneficial owners;40 ownership details of a Company are also allowed to be hidden.41 Unlike Australia, Switzerland’s banks conceal depositors’ identity; in Spain and France courier systems to used transport black money,42 Ireland and Netherlands 35 Alert Global Media, U.S Money Laundering Laws – USA, 10 October 2006. 36 Alert Global Media, U.S Money Laundering Laws – USA, 10 October 2006. 37 Moneylaundering.ca, Money Laundering in Canada 2006; Changes, Challenges & Choices – Canada, 2006. 38 The Law Society, FATF Evaluation of the U.S Provides Lessons for the U.K – U.K, 7 August 2006. 39 Kirkpatrick & Lockhart Nicholson Graham, Anti-Money Laundering – U.K, 2006. 40 The Law Society, FATF Evaluation of the U.S Provides Lessons for the U.K – U.K, 7 August 2006. 41 United Press, Money Laundering in A Changed World – U.SA, 2003. 42 United Press, Money Laundering in A Changed World – U.SA, 2003. Antilles have been identified as tax-havens (who do not disclose the identity of their depositors) by the OECD/FAFT in 2004.43 Asia-Pacific region countries have been assisted by Australia to put in place effective AML legislation based on the FATF 40+9 Recommendations (Australia convened the ‘Pacific Islands Law Officers Meeting (PILOM)’, the ‘South Pacific Forum’ and the ‘Forum Economic Ministers Meeting’ towards this goal.44 Countries in Eastern and Southern Africa have established a regional AML Group while Caribbean nations have formed a ‘Caribbean Financial Action Task Force.’ Central and East European nation (specially Ukraine, Macedonia, Belarus and Albania) banks are susceptible to attack by money launderers.45 In these nations, organised crime has spread so alarmingly that it is difficult to distinguish between criminals and politicians.46 Asian countries like India, Sri Lanka and Pakistan lack stringent AML laws to combat ‘Hawala’ networks. FATF identified Indonesia as a ‘black hole’, meaning it has very poor AML regulations.47 Mauritius, Singapore, Malta, Seychelles and Hong Kong have been identified as tax-free havens.48 Many Gulf and Middle Eastern banks do not check the identity of depositors and money remitters (especially Saudi Arabian Islamic charities).49 Bahrain, Israel, 43 Orca Anz, Offshore Innovations – Australia, 2004. 44 AUSTRAC, An overview of Australia’s Anti-Money Laundering Strategy – Australia, 4 September 2006. 45 AUSTRAC, An overview of Australia’s Anti-Money Laundering Strategy – Australia, 4 September 2006. 46 United Press, Money Laundering in A Changed World – U.SA, 2003. 47 Alert Global Media, U.S Money Laundering Laws – USA, 10 October 2006. 48 Orca Anz, Offshore Innovations – Australia, 2004. 49 United Press, Money Laundering in A Changed World – U.SA, 2003. Cyprus and Lebanon have been identified as tax-free havens.50 The FATF has identified Israel as a ‘black hole’, meaning it has very poor AML regulations.51 Israel has been guilty of not investigating the origin of funds deposited by Jews from South Africa and Russia.52 Loopholes in the Australian Money Laundering Law On grounds of fundamental human rights and justice, Australia does not extradite a person convicted of money laundering if that person could face the death penalty, also refusing police and other mutual assistance in criminal matters.53 Australian law permits mutual assistance in criminal matters only with such countries whose AML system it deems as ‘sound’. By this definition, Australia only exchanges such information with other FATF members.54 Australian law has no extraterritorial reach if money laundering crimes are committed by Australian citizens in foreign countries or by non-Australian citizens in foreign countries whose crimes are at least partly based in Australia.55 (By such non-cooperation, Australia secludes itself from receiving valuable information of possible regional and international implications).56 Australian banks are vulnerable vis-à-vis dealings with foreign correspondent banks 50 Orca Anz, Offshore Innovations – Australia, 2004. 51 Alert Global Media, U.S Money Laundering Laws – USA, 10 October 2006. 52 United Press, Money Laundering in A Changed World – U.SA, 2003. 53 AUSTRAC, An overview of Australia’s Anti-Money Laundering Strategy – Australia, 4 September 2006. 54 AUSTRAC, An overview of Australia’s Anti-Money Laundering Strategy – Australia, 4 September 2006. 55 Alert Global Media, U.S Money Laundering Laws – USA, 10 October 2006. 56 AUSTRAC, An overview of Australia’s Anti-Money Laundering Strategy – Australia, 4 September 2006. as they do not obtain specific undertakings nor maintain specific records about such banks.57 Australian AML does not offer protection against insider information gained in Australia being used overseas with malicious intention.58 Australian intelligence sources found there are various form value transfers (apart from cash and other known value transfers), that evade domestic reporting systems.59 Electronic commerce and other newly developed payment channels present a challenge to the Australian AML system, with a strong possibility of evasive transactions going undetected.60 How to prevent Money Laundering Money laundering can happen naively (rarely) or intentionally (in most cases). Businesses in general can adopt the following deterrent methods: Check independent internal control instruments, put into place internal AML methods, train employees. Use third party due diligence to get familiarised with customers, suppliers and other business partners. Introduce weekly or monthly (rather than yearly) audit of accounts. Refer suspicious transactions to internal compliance officers and relevant AML authorities.61 57 Australian Bankers Association, Financial Action Task Report – Australia, 2005. 58 The Age, No Regulation on International Playing Field – Australia, 8 August 2005. 59 AUSTRAC, An overview of Australia’s Anti-Money Laundering Strategy – Australia, 4 September 2006. 60 AUSTRAC, An overview of Australia’s Anti-Money Laundering Strategy – Australia, 4 September 2006. 61 Tilleke & Gibbins, Money Laundering – Thailand, 17 February 1999. We should ensure that all our dealings are correct and ethical, always being vigilant against any money laundering activities around us. No restriction (financial or otherwise) should interfere with putting in place the best possible deterrents.62 Internationally, money laundering can be prevented if all countries cooperate in a multilateral effort under FATF leadership to exchange information about money laundering activities. Conclusion The FATF and other worldwide Financial Intelligence Units have acknowledged the growing risks of money laundering and the increasingly sophisticated techniques regularly developed.63 Many nations eagerly cooperate because this crime has evolved into a mushrooming domestic political and economic problem.64 At present, AML laws are yet to prove effective deterrents due to the lack of a comprehensive international network. However, a universal consensus is slowly but surely emerging based on the 40+9 FATF Recommendations, with the U.S and Western European nations calling upon all countries to adhere to FATF guidelines or face sanctions.65 We hope the world will soon have a strong, united, effective AML network. Then, criminally inclined persons like the evasive Osama Bin Laden will not find it easy to wire funds to U.S accounts from the Sudanese Al Shamal Bank (a hitherto correspondent of 33 62 Tilleke & Gibbins, Money Laundering – Thailand, 17 February 1999. 63 Moneylaundering.ca, Money Laundering in Canada 2006; Changes, Challenges & Choices – Canada, 2006. 64 United Press, Money Laundering in A Changed World – U.SA, 2003. 65 United Press, Money Laundering in A Changed World – U.SA, 2003. U.S banks)!66 66 United Press, Money Laundering in A Changed World – U.SA, 2003. References used Anon. 2006. An overview of Australia’s Anti-Money Laundering Strategy: AUSTRAC. [Online]. Available: http://www.austrac.gov.au/publications/overview_money_laundering/ [10 October 2006] Anon. 2006. Anti-Money Laundering: Kirkpatrick & Lockhart Nicholson Graham. [Online]. Available: http://www.klng.com/practices/ServiceDetail.aspx? service=54 [10 October 2006] Anon. 2005. Anti-Money Laundering Rules: Axiss Australia. [Online]. Available: http://www.axiss.gov.au/index.cfm?event=object.showContent& objectID=D8CBCD4C-D9D9-4294-536C10F09B6BAE9B [10 October 2006] Anon. 2004. Australia’s Preparedness & Prevention Capability: Department of the Prime Minister & Cabinet (DPMC). [Online]. Available: http://www.pmc.gov.au/ publications/protecting_australia/preparedness/3_enforcement.htm [10 October 2006] Anon. No date. Financial Task Force on Money Laundering: FATF-GFI. [Online]. Available: http://www.fatf-gafi.org/pages/0,2987, en_32250379_32235720_1_1_1_1_1,00.html [10 October 2006] Anon. No Date. Money Laundering: ‘Lectric Law Library. [Online]. Available: http://lectlaw.com/def2/m038.htm [10 October 2006] Anon. 2006. Money Laundering & Terrorist Financing; Member States agree to Commission Draft for ‘Level 2’ implementing Measures: Europa.eu. [Online]. Available: http://europa.eu/rapid/pressReleasesAction.do?reference=IP/06/605& format=HTML&aged=O&language=EN&guiLanguage=fr [10 October 2006] Anon. 2006. Money Laundering in Canada 2006; Changes, Challenges & Choices: Moneylaundering.ca. [Online]. Available: http://www.moneylaundering.ca/public/documents/conference/MLinCanada 2006_brochure.pdf [10 October 2006] Anon. 2004. Offshore Innovations: Orca Anz. [Online]. Available: http://www.orca.vg/formations.html [10 October 2006] Anon. 2006. U.S Money Laundering Laws: Alert Global Media. [Online]. Available: http://www.moneylaundering.com/freeresources/mllaws.aspx [10 October 2006] Lyman, David. 1999. Money Laundering: Tilleke & Gibbins. [Online]. Available: http://www.tginfo.com/Publications/Articles/corporate/money.htm [10 October 2006] Moncrief, Mac. 2005. No Regulation on International Playing Field: The Age. [Online]. Available: http://www.theage.com.au/articles/2005/08/07/ 1123353208576.html [10 October 2006] Odlum, Che. 2006. FATF Evaluation of the U.S Provides Lessons for the U.K: The Law Society. [Online]. Available: http://www.lawsociety.org.uk/ newsandevents/news/view=newsarticle.law?NEWSID=295978 [10 October 2006] Vaknin, Sam. 2003. Money Laundering in A Changed World: United Press Int. [Online]. Available: http://samvak.tripod.com/pp96.html [10 October 2006] Wellard, Heather. 2005. Financial Action Task Report: Australian Bankers Association. [Online]. Available: http://www.bankers.asn.au/default.aspx?ArticleID=939 [10 October 2006] Read More