Stages of Money Laundering - Term Paper Example

Your full December 8, Money Laundering Introduction According to the Article of the 1990 European Communities (EC) Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime (Council of Europe), the term money laundering is defined as: The conversion or transfer of property, knowing that such property is derived from serious crime, for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in committing such an offence or offences to evade the legal consequences of his action, and the concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property, knowing that such property is derived from serious crime. In simpler words, Hopton (1) defines money laundering as that process in which the criminals conceal the origins of their possessions and the ownership of their proceedings of criminal activities. Their whole objective behind doing so is to maintain control over their illegal possessions (income, wealth or property) by covering them unlawfully. Hence, we can understand money laundering as a process by which dirty money is shown as clean money. The money needs not to be intangible form. Instead, modern day money laundering includes all such transactions of relationships that involve any kind of tangible or intangible wealth or possession that has been gained through criminal activities. Literature Review Alldridge (437-463) studied the imperatives that the money laundering panic of 1990s generated with the arrival of globalization. He states in his research that, “If there is to be an attempt legally to regulate laundering, it (laundering) must be a relatively serious offence, and consequently the anticipated harm must be something other than complicity”, which means that money laundering should be considered as a serious threat at an international level thus uniting all nations to make combined efforts to stop it. This will help homogenize the criminal justice system worldwide. Shneider and Windischbauer (387-404) have quantified and estimated the volume of money laundering activities in their research. According to them, “The overall turnover in organized crime for example had a value of 800 billion USD in 2001 and increased to 1.700 billion USD in 2007.” These statistics show how great the turnover of money laundering in the modern world is. Article no. 22 of Pursuant to the Law on prevention of money laundering (Ministry of Finance) states how the law for the prevention of money laundering is to be implemented. According to it, the Law on Prevention of Money Laundering is to be implemented to make sure that money laundering does not take place at all. Article 2 of the Federal Act on Combating Money Laundering and Terrorist Financing in the Financial Sector, also called as Anti-Money Laundering Act (AMLA), defines the financial intermediaries that are at vulnerable end in money laundering business (Federal Authorities of the Swiss Confederation). These include banks, fund managers, investment companies, insurance institutions, security dealers, casinos, and persons who carry out credit transactions and provide their services for payment transactions. Stages of Money Laundering There are three stages of money laundering. Placement The first stage of the washing cycle of money laundering is placement. Being a cash-intensive business, large cash is generated from illegal activities which is then placed in the economic structure or is smuggled out of the country, so that the location of acquisition of that cash can be covered (Levy 2-5). In this way, the authorities cannot figure out the location. The cash acquired is also converted into other forms like postal orders. Layering The first step in the layering phase is the concealment of the source of ownership of funds by way of creating such complicated layers of transactions that aim at impersonating the audit trail by providing inscrutability (Frank 256). The complicated mesh of financial transactions tends to dissociate the illegal money from its source. The audit trail, the source, and the ownership of source, all are concealed. We can never know how much clean or dirty is wire transfer which is an excellent way the launderers can move money in and out of the country. The risks of being traced are meager. Integration Integration is the final stage in money laundering in which the cash acquired through illegal means is integrated into the legal financial system of the country and is assimilated with the system’s assets (International Monetary Fund (Legal Dept) 146). This makes the illegal money appear as legal. This is the stage at which it is very hard to differ between legal and illegal money. For this purpose, anonymous companies are started which grant loan to themselves for future legal transactions. Money is also transferred to any legitimate bank through ETF (electronic funds transfer). Effects of Money Laundering on the Economy This section discusses the effects of money laundering on the economy on three different levels. Real Estate Level At real estate level, money laundering depresses growth, distorts investment and depresses productivity. It facilitates corruption and crime at the expense of development. It also increases the risk of macroeconomic instability. “For developing countries, the diversion of such scarce resources to less productive domestic assets or luxury imports is a serious detriment to economic growth”, states Barlett (1). Economic/Financial Level At economic/financial level, money laundering tends to undermine domestic capital formation. It erodes financial institutions like banks and equity markets, and weakens the financial sector’s role in economic growth. The financial institutions play an important role in “the concentration of capital resources from domestic savings—and perhaps even funds from abroad—and the efficient allocation of such resources to investment projects that generate sustained economic development” (Barlett 1), and money laundering tends to weaken these institutions because of the correlation between money laundering and deceptive activities being carried out by employees, and also because of the loss of customers’ interest (Barlett 1). The eroded financial institutions are supported by the anti-money-laundering reforms through enhanced financial prudence. Social Level Money laundering diverts capital away from development. This facilitates illicit capital flight through outbound capital flows, and depresses foreign investment through inbound capital flows. Trade is also affected through distorting prices and content. Country’s imports and exports get significantly affected. For example, criminals may use illegal proceeds to buy imported goods by means of laundered funds. This process does not initiate domestic economic activity and often leads to depressing the domestic prices and devaluing domestic companies. Factors that Facilitate Money Laundering There are several factors that facilitate money laundering. Globalization of Markets and Financial Flows Since the concept of a single market has arisen, money launderers have found it really easy to move money within seconds. This facilitates multiple jurisdiction leaps within no time. Deregulation of Financial Markets Deregulation of financial markets has robbed the anti-money-laundering reforms of their consistency. Also, there are too few restrictions in today’s global market which facilitates money laundering. Global Competition Global competition implies an increasing number of competitors which in turn increases pressure to deliver proceeds and turnover. The profit that comes from criminal activities is very large because these people can at times do business with big corporations that want profit. Unlawful Activities Unlawful activities and predicate offences that give rise to or facilitate money laundering include drug trafficking, counterfeiting, smuggling, theft, embezzlement, racketeering, tax evasion, kidnapping, illegal arms sales, bribery, and illegal trade of cultural property. Efforts to Combat Money Laundering On International Level Many efforts have been made on international level to combat money laundering. The 1990 Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime is one proof of international level efforts. Article 7 of section 1 of chapter 3 of the 1990 Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime talks about international co-operation regarding anti-money-laundering (Council of Europe) and puts forward a common criminal policy on money laundering. It states that: 1. The Parties shall co-operate with each other to the widest extent possible for the purposes of investigations and proceedings aiming at the confiscation of instrumentalities and proceeds. 2. Each Party shall adopt such legislative or other measures as may be necessary to enable it to comply, under the conditions provided for in this chapter, with requests: a. for confiscation of specific items of property representing proceeds or instrumentalities, as well as for confiscation of proceeds consisting in a requirement to pay a sum of money corresponding to the value of proceeds; b. for investigative assistance and provisional measures with a view to either form of confiscation referred to under a above. Other than this Act, some worth mentionable efforts include United Nations Vienna Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (the Vienna Convention), Basle Committee, and many money laundering legislations in the UK. Examples are the Terrorism Act 2000; Anti-terrorism, Crime and Security Act 2001; Proceeds of Crime Act 2002; Serious Organized Crime and Police Act 2005; and, Money Laundering Regulations 2003 & 2007: (EU LAW). On Domestic Level Domestic level efforts include the formation of anti-money-laundering reforms and centers that help combat money laundering at national level. One such center is The Financial Action Task Force (FATF) which is an inter-governmental body “whose purpose is the development and promotion of policies, both at national and international levels, to combat money laundering and terrorist financing” (FATF). Such policy-making bodies significantly help the government and authorities in stopping money laundering. Are the Efforts Sufficient? Yes, the efforts are sufficient enough but the point to be considered is that money laundering has become such a complicated matter in today’s technological world that it is very hard to distinguish between legal money and illegal money because of the ways the launderers form transaction layers and hide the ownership of sources through anonymity. However, it is still important to enforce all laws and regulations so that money can be saved from being laundered. Conclusion To sum up, money laundering is a process by which criminals conceal the ownership of sources so that it becomes impossible to figure out whether the money acquired is legal or not. Money laundering is carried out in three stages: placement, layering, and integration. Money laundering has many devastating effects on real estate sector, financial sector, and also at social level. Factors that facilitate money laundering include globalization of markets and financial flows; deregulation of financial markets; and, global competition. Many efforts have been made at both international and domestic level to combat money laundering but it is still very hard to completely eliminate the chances of money laundering because of the prevalence of very sophisticated and complex means used in the process. Works Cited Alldridge, Peter. “Money Laundering and Globalization.” Journal of Law and Society, 35.4(2008): 437-463. DOI: 10.1111/j.1467-6478.2008.00446.x Barlett, Brent L. “Financial Sector.” The Negative Effects of Money Laundering on Economic Development. The Asian Development Bank, 2002. Web. 9 Dec 2011. . Council of Europe. Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime. European Treaty Series, 1990. Web. 9 Dec 2011. . Council of Europe. Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime and on the Financing of Terrorism. Council of Europe, 2005. Web. 8 Dec 2011. . FATF. About the FATF. FATF/OECD, n.d. Web. 8 Dec 2011. . Federal Authorities of the Swiss Confederation. Federal Act on Combating Money laundering and Terrorist Financing in the Financial Sector. The Federal Authorities of the Swiss Confederation, 1998. Web. 8 Dec 2011. . Hopton, Doug. “Introduction to Money Laundering.” Money Laundering: A Concise Guide for All Business. UK: Gower Publishing, Ltd., 2009. International Monetary Fund (Legal Dept). Gibraltar: Detailed Assessment Report on Anti-Money Laundering and Combating the Financing of Terrorism. USA: International Monetary Fund, 2007. Levy, Steven Mark. “The Three Stages of Money Laundering.” Federal Money Laundering Regulation: Banking, Corporate, and Securities Compliance. USA: Aspen Publishers Online, 2003. Ministry of Finance. Procedures on Implementation of the Law on Prevention of Money Laundering. Ministry of Finance, 2004. Web. 9 Dec 2011. . Schneider, Friedrich, and Ursula Windischbauer. “Money Laundering: Some Facts.” European Journal of Law and Economics, 26.3(2008): 387-404. DOI: 10.1007/s10657-008-9070-x Shanty, Frank. Organized Crime: From Trafficking to Terrorism, Volume 2. USA: ABC-CLIO, 2008 Read More