Anti-Money Laundering - Case Study Example

Customer Inserts His/her Name Customer Inserts Tutor’s Name Customer Inserts Grade Course 14 March 2009 Anti money Laundering: How governments are using this technology in absolutely different ways Introduction Money laundering and terrorist financing is a serious issue for most countries and it raises important issues in relation to avoidance, detection and prosecution. Complex systems are used in order to launder money and finance terrorism further increase the complication of these issues. These systems include various financial institutions; numerous financial transactions; using intermediaries like financial advisers, accountants, shell corporations and other service providers; transfers to, through and from various countries; and using several financial devices and similar other value storing assets1. However, money laundering is quite a simple idea. It is simply the process through which income obtained due to criminal activities are camouflaged in order to conceal their source. Money laundering is actually the profits of criminal obtained assets and not the asset themselves. Similarly, the financing of terrorism is also a simple idea. It is merely the financial aid that is given to terrorists or to those who are involved in planning it. The similarity between money laundering and terrorist financing is the transactional features, which are involved with disguise. The people involved with money laundering transfer illegal funds by means of legal channels which helps them hide their origins. The ones who finance terrorism transfer funds, either legal or illegal, such that the source and usage is concealed. However, both have the same result, namely reward. During the process of money laundering the criminals earn money as they are “rewarded” for having helped in the concealment of criminal acts. Even those financing terrorism are rewarded due to the same reason. Money Laundering Money laundering has a number of definitions. Most of the countries use the definition given by the United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (1988) (Vienna Convention) and the United Nations Convention Against Transnational Organized Crime (2000) (Palermo Convention)2: Modification or sending of property while knowing that the property has been obtained through criminal doings, or similar things. This is done to conceal the source of the property in order to avoid getting caught. The disguising of the real source, usage, ownership of the property, while knowing that the property has been obtained through wrongdoings. Acquirement, ownership or using of such a property that has been obtained through some wrongdoing, while knowing about its source3. The Financial Action Task Force on Money Laundering (FATF) is the international standard setter for anti money laundering (AML) efforts. It defines the term “money laundering” as: “the processing of…criminal proceeds to disguise their illegal origin” in order to\“legitimize” the ill-gotten gains of crime4. Money laundering occurs in the banking system. Large quantities of money are distributed to a number of accounts (can be in free economic zones, financial off shore centres or tax havens). Or conversion to bearer financial mechanism takes place (that is, money orders and bonds), or even that they are kept with trusts or charities. After this the cash is transported to other places. It can be done by bogus payments. These payments are for the products by counterfeit invoices which are announced by lawyers or accountants in the name of unidentified recipients. After the cash reaches its end place, it is accumulated and returned to the lace of source but using another identity. This is the laundered money. Next, these funds are used for investing in legal economy. Although it is quite an uncomplicated process, it is very efficient. After that, the accounts are always shut down and any hints or traces are gotten rid off. Anti money Laundering Anti money laundering (AML) is a term that is basically used in the financial and legal companies in order to explain the legal controls which need financial institutions along with further regulated entities. This is required to stop or report money laundering activities. It was in 2000 that the Fund reacted to requests from the international community that asked them to enhance their operations in the anti money laundering (AML) sector5. It was after the September 11, 2001 attacks, following which there was the enactment of USA PATRIOT Act, that anti money laundering guidelines became prominent throughout the world6. The Problem Money laundering and terrorist financing talk about secrecy and deception since their nature is such, and they are not available for statistical analysis. Launderers certainly do not publicize the degree to which they carry out their operations neither is the amount of their money made public. As these activities are taking place throughout the world, it becomes all the more difficult to get the estimates. Launderers make use of several countries in order to disguise and conceal their illegal profits and they take advantage of the fact there are differences among countries regarding anti money laundering, regimes, international cooperation and enforcement efforts. Due to this reason there are no dependable estimates for the degree of money laundering taking place and terrorist financing problems. Regarding only money laundering, according to the International Money Fund estimates the total quantity of funds that are laundered globally could possibly be between two and five per cent of the world’s gross domestic product. According to the 1996 statistics, these percentages would be nearly between US $590 billion and US $1.5 trillion7. The lesser number is approximately what the value of the total output of an economy the size of Spain is. Therefore, using any approximation the problem of money laundering is a great one and looms at the world. It requires special attention from each and every state. Effects Criminal projects are quite successful as they are able to hide the sources of their money and disguise the profits by moving them through national and international financial organisations. The countries having no anti money laundering rule, or a corruption in it has much more criminal activities as it allows the criminals to operate as they wish. This results in their using the profits to further expand their criminal activities and encourage it. Although it is possible for money laundering to occur in any state, its effects are more felt in developing countries due to the fact that their markets tend to be smaller and thus, more vulnerable to disturbance due to criminal activities. Even the countries with delicate financial systems are liable to disruption due to money laundering and terrorist financing. Eventually, the economy of such countries is put in danger. The enormity of this problem is such that it is difficult to ascertain. This is because the adverse effects of it are not easy to be enumerated accurately. Solution The presence of an efficient structure for anti money laundering (AML) and combating the financing of terrorism (CFT) can be important in countering such effects. The benefits due to anti money laundering can be: Low levels of crime and corruption Higher stability of financial institutions and markets Constructive effects on economic growth and reputation in the world community Improved risk management methods for the country’s financial establishment Augmented market reliability The international community has taken some steps in order to counter the increasing money laundering and terrorist activities. It has been recognized internationally that the people involved in money laundering and terrorist financing use high speed international transfer procedures to their benefit, that is, in order to achieve their aims. For this reason, intensive cross-border teamwork as well as management is required so that the operations of criminals and terrorists can be prevented. Work on this started internationally when it became clear that drug trafficking is an international dilemma and in order to address it efficiently, it has to be looked at with multilateral basis. That means, the initial international convention about money laundering concerned only drug trafficking as an offense. However, now that other crimes have become international, most countries have included other offenses in their money laundering predicate offenses. The United Nations The first international organization to commence action against money laundering world-wide was the United Nations. The UN has a great deal of importance in relation tot his as it is an international organization and it has an extensive range of membership. Also, the UN runs an agenda against money laundering. It is called, the Global Programme Against Money Laundering (GPLM)8 and its headquarter is located in Vienna. It is a part of the UN Office of Drugs and Crime (ODC). Another reason is that the UN owns the capability to implement international agreements that have the results of law in a country after that country has signed the convention. Sometimes, the UN Security Council Resolution can even oblige all member countries through a Security Council Resolution. The Financial Action Task Force on Money Laundering The Financial Action Task Force on Money Laundering (FATF) was formed in 1989 by the G-7 countries. It is an intergovernmental organization which aims to develop and encourage a world-wide response in order to fight money laundering9. In October 2001 the FATF furthered its mission and included fight against financing of terrorism to its aims. FATF is a policy making organization that unites legal, financial and law enforcement professionals in order to attain national legislation and regulatory AML and CFT reforms. Along with this, FATF works in cooperation with numerous international institutions. The three basic roles of FATF in relation to money laundering are: To observe members’ growth in executing anti money laundering measures To review and report on laundering trends, procedures and solutions To encourage the acceptance and execution of FATF anti money laundering standards world-wide. The Basel Committee on Banking Supervision In 1974 the central bank governors of the Group of 10 countries formed The Basel Committee on Banking Supervision (Basel Committee)10. Either the central banks of each country or the relevant authority represent them. As the committee has not got any formal international supervisory authority, it formulates wide bank supervisory standards and rules and proposes statements of best practices on a diverse range of bank supervisory subjects. These standards and rules are implemented and it is expected that the suitable officials of each country will handle all that is required in order to put them in action through comprehensive procedures, legal, authoritarian or otherwise, which are most appropriate for the country’s national system. Among the Basel Committee’s supervisory standards and guidelines, three relate to money laundering matters. To ensure that a country’s anti money laundering institutional structure is according to standards set internationally, each country has to undertake certain steps. International standard setters are aware of the fact that every country has different legal systems and thus, no country can implement the same laws as of another country. There are eight requirements that matter anti money laundering. These prerequisites are essential for any country’s legal structure fighting against money laundering and under these rules all countries are allowed to implement laws which are coherent with their particular cultural situations, legal principles and constitution, and also international standards. The eight requirements are: Criminalization of money laundering in accordance with the Vienna and Palermo Conventions; Criminalization of terrorism and terrorist financing; Laws for arrest, confiscation and penalty and unlawful proceeds; The types of bodies and persons to be covered by AML laws; veracity standards for financial institutions; and Uniform laws for execution of FATF recommendations. Collaboration among capable authorities Inspections Use of Anti Money Laundering Indonesia Different countries are using this anti money policy in various ways. For example, Indonesia has included the crime of illegal logging under anti money laundering laws. It was in 2003 in the month of September that the Indonesian House of Representatives (DPR) made the decision. The Centre for International Forestry Research (CIFOR) welcomed the decision as it played a major part in offering research as well as advice that was required to persuade the DPR to include forest crimes in its new legislation. The problem of illegal logging in the country of Indonesia is a complicated one with no simple solution being present for it. However, according to the CIFOR the above decision would certainly help in combating illegal logging and is the best practice undertaken to solve this problem. The Director of CIFOR for Forests and Governance Programme is Dr. Doris Capistrano. He spoke on this issue, saying that illegal logging provides with a lot of profit to numerous Indonesian and international organizations. He said: “Including forestry crimes under anti money laundering laws is a significant step in fighting illegal logging. While it won’t provide an overnight cure to the problem, it will make it more difficult for large Indonesian and foreign businesses to engage in illegal logging. Since damage from illegal logging is overwhelmingly associated with big business and large-scale operations, it is good to see the government focusing on these areas.” Very often the banks and other financial institutions are caught up in financing for illegal forestry. They do this as they loan money for investments in extensive logging and similar processes. However, now that there is the new legislation, the banks would have to see to it that their customers are not involved in unlawful doings before they decide to loan them money. Indonesia is the first country that has included environmental and forest crimes in anti money laundering legislation. This is expected to assist in removing Indonesia from the OECD’s Financial Action Task Force’s list of disobliging countries in its world wide action to stop money laundering activities. Russia John Walker estimated that in 1998 money laundering comprised of 15 percent of the Russian GDP. In the same report Russia stood third among the top twenty sources of laundered money as well as the top twenty destinations for laundered money11. Due to such damaging data and because of the underdevelopment of Russian legislation on anti money laundering, the Financial Action Task on Money Laundering (FATF) put Russia on the blacklist of “tax havens” in 2000. Due to this several prejudiced measures against Russian financial institutions took place. However, during the last couple of years Russia has strived a lot to improve the situation. A vital measure that Russia took was its ratification in 2001 of the Council Laundering, Tracing, Seizure and Confiscation of Proceeds from Crime (1990 Convention). Due to the ratifying national anti money laundering legislation was created. In only a little time Russia has executed and improved its AML/CFT system. It has done more than other countries in a similar time span. The FIU (Rosfinmonitoring) has performed the conventional operations of an FIU in full agreement with the FATF Standards along with several other works as well that include functioning as the central responsible agency for AML/CFT issues. Policy reviews and risk evaluations by Rosfinmonitoring should be followed up by the authorities and executed immediately by other governments. After the Money Laundering Law was implemented, several other laws were also adjusted. They included the Criminal Code, this labels money laundering as an offense; the banking Law and the Securities Law. These improvements were put in effect in 2002 and 200312. Due to the ratification of the Money Laundering Law, the setting up of the Financial Monitoring Committee (FMC) was encouraged. It is a new supervisory authority that monitors transactions which involve cash. After that the FMC was renamed as the Federal Service for Financial Monitoring or FSFM. The function of the FSFM is to coordinate all Russia’s anti money laundering and counterterrorism financing works. Due to the execution of the Money Laundering Law, it is possible to impose legal responsibility for money laundering license. This can be done by revocating the bank’s license, imposing fines or imprisonment of the officers who are responsible. In Russia, the punishment for money laundering or the financing of terrorist activities is a 15 year imprisonment. As FSFM statistics report, in 2003 the courts found 14 people guilty of money laundering; in 2005 the number was 419 and in 2006 it climbed up to 53213. Financial institutions can also be punished for their actions. They can be fined or their licenses can be revocated for breaching the Money Laundering Law. In 2006, it is reported that the CBR undertook an investigation of 779 banks. Out of them the CBR needed to apply preventive actions in 343 cases; it was done by either fining them or limiting their activities or even by revoking their licenses (51 cases)14. UK The UK government is concerned a lot about money laundering prevailing in the country. This is due to the fact that the criminals tend to make use of trade monetary services that include mortgage credit, and they launder money which has been obtained from wrongdoings. They use the money in order to finance crime and terrorism. Mortgage lenders have a role to play in placing systems and controls that would discover and stop any utilization of residential mortgages by offenders for such objectives. Also, any distrustful information is reported to the authorities. Other than these steps, the CML works beside the government and industry for the prevention of money laundering works. Such steps include: Making ready the most recent European money laundering systems that the government of UK will execute Operating in collaboration with other industry trade associations in the Joint Money Laundering Steering Group Making the reporting mechanisms better. The industry and the government are involved in this Assisting members in improving their anti money laundering practices. This can be done by training along with other programmes. The Joint Money Laundering Steering Group (JMLSG) is a group of 17 financial services trade associations in the UK15. Its objectives are to prevent anti money laundering system prevailing. The JMLSG spreads anti money laundering practice that is prevailing around the industry. It works to get people aware of it. It is also the means through which the governments anti money laundering companies (like FSA and SOCA) can get to the industry. A third objective of JMLSG is offering sound help in understanding the money laundering rules in the UK. It does this by publishing guidance notes. Criticisms Although anti money laundering is being used for the betterment of the country and to prevent crimes and terrorism, it is not wholly preferable as the means to do so since it is against the privacy of people. Therefore, as it happens anti money laundering is in confliction with some other laws that are prevalent in various countries. Basically, the anti money laundering allows the bank to report about the people’s money transactions to the authorities. When a person makes a transaction or deposits a large amount of money in his bank account, all information is sent to the Bank of England and the Ministry of Internal Affairs for investigation. This is the situation in the UK and is against some laws that require protection of people’s privacy. Bank secrecy is an authorized tenet that allows banks to safeguard personal data that they have about their customers. They can do this by means of numbered bank accounts or other ways. The most efficient bank secrecy is attained only in particular countries, for example Switzerland, or in tax havens. There, off shore banks hold on to chosen or legal levels of privacy. The rule of bank secrecy was brought up by the Swiss Banking Act of 1934 and it is thought to be an important tenet of private banking. NGOs and governments have blamed the system for helping in organized crime and the evolution of underground economy. This accusation has been particularly made after the class action suit against the Vatican Bank (1990s), the Clearstream scandal and September 11 attacks. Swiss Banking Act – 1934 The 1934 Swiss Banking Act introduced bank secrecy after which the Swiss banks attained a global fame because of the numbered bank accounts that they have. According to some critics, like the ATTAC NGO, this plays a part in assisting to legalize tax evasion and money laundering; overall, the underground economy. Following the tenet of bank privacy, privacy is constitutionally imposed in Switzerland. The Swiss law firmly limits any kind of data that can be revealed to third parties. They include tax authorities, foreign governments and even Swiss authorities. However, the data is made available if asked for by a Swiss judge’s subpoena. Although there is the principle of privacy prevailing, the term anonymous banking is not completely accurate because all Swiss bank accounts are connected to a known person under Swiss banking law. According to this law, the only time that the data can be shared with others is in the case of some serious illegal activity. This may include detecting a terrorist’s bank account. If a bank employee happens to violate any customer’s privacy, he is punished for it by law. Thus, as we see, in this case the system of anti money laundering is completely illegal as it violates the privacy of individuals. Although designed to help out with the detection of wrongdoings, anti money laundering happens to be against the Swiss laws. Although these were the laws until now, only very recently the Switzerland government is seeking a change. The Swiss are debating on how their country would be affected by the change in bank secrecy laws; they have been asked to change the bank secrecy laws as the United States, Britain, Germany plus other countries seek to eliminate tax havens. Like in the 1990s, today also Switzerland is under a lot of international pressure, and the problem is the Swiss banks. The principle of bank secrecy is at risk, although Switzerland and bank secrecy have always gone together. It was on the 18th of Feb this year when a major bank UBS was compelled to share information about the individuals who had attempted tax evasion to the American tax authority. And they did pass on the information because they were threatened of being sued. Ironically, it was the bank that had always been strongly in favour of bank secrecy laws who had went against them. As it turned out, the bank had been found guilty of promoting tax fraud. Therefore, UBS had to pay a fine of $78016. However, still the world’s greatest off shore banking for private customers occurs at Switzerland. Bank Secrecy Act - 1970 The Bank Secrecy Act of 1970 (BSA) in the United States is also called the Currency and Foreign Transactions Reporting Act). According the BSA regulations, every financial establishment is supposed to present five kinds of reports to the government concerning money transactions. Also, a business that receives cash payments which add up to $10,000 or more are required to file form 8300. They are required to keep account of any cash purchases of transferable tools, record reports of cash dealings that are more than $10,000 and to inform the authorities about any suspicious acts which may appear to be linked to money laundering, tax evasion, or various further illegal acts. Official Secrets Act On August 2, 2006, the Official Secrets Act bill was presented to Congress by Sen. Kit Bond, R-MO17. This act is also supported by other senators. According to this bill, it would be a crime to reveal any classified information. There is already the First Amendment Centre, which says that whoever reveals the most dangerous information is a criminal. This is another law that protects the privacy of people and any violation of their privacy would mean a violation of this law. That is, committing an offence. So, as we view anti money laundering in this case, it is violating the Official Secrets Act and thus, is in conflict and open to discussion. Other Secrecy Acts In 1964 the Bahamas implemented the Bank Secrecy Act. It was first implementation in the Caribbean. Since then, Switzerland has been known as the banking haven; private banking goes synonymous with Switzerland. The next year the Cayman Islands treaded in the footsteps of the Bahamas, and implements the Bank Secrecy Act. The legislation was almost same. This is the reason that the Cayman Islands are known as one of the top off shore banking centres. Again, anti money laundering would be against these acts. There is a confliction between them and thus anti money laundering cannot be the right way to detect crime. Conclusion Whenever one makes purchases using a major bank, there is the chance that all the transactions that one makes are being investigated. This is done using the Anti money Laundering software (AML). Many people would view this as a trespass on their privacy. The software keeps a track of all distrustful transactions, deposits and withdrawals which are according to the total statistical models. Bank directors, according to the Patriot Act, have to reveal the information about their customers in case of money laundering. They have to participate in the fight against crimes and terrorism. Since always, Israel has ignored the source of the money that is deposited in Russia by the Jews in South Africa. According to the laws in Great Britain, an individual can conceal the true possession of an organization. The Asian bank clerks who are underpaid, and are the immigrants to the Gulf States do not need to show their identity credentials. Hawaladars carry on with their practice using “paperless and trust-based”18 trade. That involves transferring billions of dollars throughout the world. Banks in America and Switzerland work together with mistrustful banks in off-shore centres. “Tax planning” is done; it is the international shifting of the money by means of tax free states. Around 2.6 billion British pounds are laundered every year by the British Bureaux de Change. It is even easier to smuggle money out of Europe because of the 500 Euro note. According to a French parliamentary committee, the City of London is responsible for acting as a money laundering harbour. Intelligence services conceal the traces of any secret businesses. They do this by opening up bank accounts in the little known tax harbours; that is, from Cyprus to Nauru. The methods of money laundering and the areas where it is done, is an essential section of the economic structure of this world. Money laundering is an issue for concern due to the fact that it makes the government officials, banks and their officers dishonest. Plus, it also pollutes the lawful areas of the economy, makes legal and foreign capital limited, makes money supply volatile and unmanageable, and raises cross border shifting of funds. This leads to an enhanced instability of exchange rates. All the tax havens in the world have Secrecy or Confidentiality Ordinances. However, there is the state of Bermuda which never did implement any secrecy act. These Secrecy and Confidentiality Acts and Ordinances have been boosting off shore banking and businesses for the tax havens. They still are doing this. Although the concept of Banking Secrecy was welcomed by the off shore havens, as it was good for them, there are criticisms against it, for example by the US Treasury Department as well as their enforcement agency. Which is the IRS19. For the purpose of anti money laundering privacy and bank secrecy laws are being changed and loosened up. Any kind of cooperation with off shore banks is being prohibited. Business with patrons of correspondent banks has been restrained and banks have been converted to law enforcement agencies. They have the duty of validating the identities of their foreign customers and also locating the source plus origin of their money. Securities and currency trading industry, insurance companies and money transfer services are now being investigated a lot in order to confirm if they are the means of dirty cash. Greater than 150 states have pledged to collaborate with the US in fighting in opposition to the financing of terrorism. In fact, of these 150 states, 81 (Bahamas, Argentina, Kuwait, Indonesia, Pakistan, Switzerland, and the EU) halted assets of doubtful people, alleged charities, and mistrustful organizations. Or, they have implemented laws for anti money laundering and have started regulating it strictly (the Philippines, the UK, Germany)20. Every country has a right to implement and encourage banking secrecy. However, it leads to certain problems, and it is better that they are avoided. Such problems include increased crimes like money laundering, tax evasions, and drug trafficking. It is an issue for the industrial states, such as the United States, the United Kingdom, Australia and Canada. Even if there weren’t any bank secrecy laws, there would still be an argument regarding anti money laundering due to the fact that the privacy of individuals would be at stake. It is not right that due to certain people, who are criminals, the rest of the public is also subject to scrutiny by the officials, and their every transaction and dealing is checked and reported. Works Cited “Anti-money Laundering.” Council of Mortgage Lenders. 23 January 2009. 14 March 2009. Central Bank of Russia. (n.d.). 11 March 2009. Ensminger, John J. “September 11 Brings New Anti-Terrorism and Anti money Laundering Responsibilities to Financial Institutions.” Review of Business Vol. 23 (2002). FATF, GAFI. 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In association with The International Bank for Reconstruction and Development/The World Bank/The International Monetary Fund. Washington DC: “Stop the Official Secrets Act bill.” Society of Professional Journalists. (n.d.). 14 March 2009. “Switzerland to Loosen Bank Secrecy”. Spigel Online International. 3 March 2009. 14 March 2009. “The IMF and the Fight against Money Laundering and the Financing of Terrorism.” International Monetary Fund. 9 April 2008. 11 March 2009. “United Nations Global Programme against Money Laundering.” International Money Laundering Information Network. December 1998. 14 March 2009. Vienna Convention, articles 3(b) and (c)(i); and Palermo Convention, article 6(i). Vito Tanzi, “Money Laundering and the International Finance System,” IMF Working Paper No. 96/55 (May 1996), at 3 and 4. Read More