Anti Money Laundering and Compliance - Essay Example

Anti Money Laundering and Complaince Introduction Money laundering is the method of converting illegal money into legal tender. This happens when money is obtained through extortion or robbery or drug sales or through any other illegal means. Naturally, money laundering is mostly used by people in illegal business. Organised crimes, terrorist organisations all make use of money laundering methods to take care of their expenses. According to International Monetary Fund1, the total money laundering in the world is any where between two and five percent of the World GDP. Money laundering is executed in three steps normally. The first one is the placement which involves disposal of the funds obtained illegally through some other means. This is primarily handling cash. The second stage of money laundering is normally called the layering when the cash gets involved in multiple modes of transactions. This would make tracking back money or source a problem and cause confusion in the audit trails. The third stage is the one when the money laundered merges with the normal economy and integrates with the financial system as if it is sourced from normal business. This is normally called the Integration stage. Invariably, at one of the stages, money enters the banks and money laundering could be caught at this point in time. Money laundering is done using various mechanisms which have their own names. Some are called the ‘star burst’, when the money is deposited in one account and is immediately distributed to a number of other accounts losing slowly the trace of the money2. The second method employed is called the boomerang. In this method, the deposit is done in one account and then passes on to another account soon after. From there it goes on a third and so on until it comes back to the original account where it started. Countering all these and an innumerable number of other creative methods that are adopted by launderers is certainly a challenge. However, banks have been generically advised to ‘know your customer and to know your employee’ to counter such money laundering activities. History of Money Laundering Money laundering has its beginning in the US when Al Capino legalised money obtained through extortions, bootleg liquor business and other such illicit activities by using the Laundromats. May be that was the reason why it was called ‘Money Laundering’3. Robinson says, as quoted by Billy Steel, "Money laundering is called what it is because that perfectly describes what takes place - illegal, or dirty, money is put through a cycle of transactions, or washed, so that it comes out the other end as legal, or clean, money. In other words, the source of illegally obtained funds is obscured through a succession of transfers and deals in order that those same funds can eventually be made to appear as legitimate income". Money laundering improved from a small time business to a multi national one with Meyer Lansky. His large accounts with Swiss banks helped him convert large volume of money to legal tender. Money laundering took a dirty turn with the rise in terrorism. Until then, it was more of the drug money and money through other illicit activities that ruled the roost. However, by 1990, the terrorism has started showing its ugly face on the surface of the earth. With that, came in another application for money laundering. Drug mafias, on one side, could collect large sums of money because of their unnatural population. The 1980s say a massive rise in drug abuse and hence a large mafia controlling the drug trade. Since they had large quantum of money under their control, the mafia could get things done at all levels in the Government. With the rise in terrorism taking a different hue, large quantum of cash needed to stashed away for varying uses; all the same, illegal. Many of the countries felt the negative impacts of money laundering and started coming down heavily on them. During the nineties most of the countries launched their own programs to counter money laundering and to curb them. IMF and United Nations took the action to bring in a uniform controlling measure in the late 1990s and revised it further during the early twenty first century. Laws against Money Laundering The UN conventions on narcotics provided a common platform for drug related money laundering. While the initial conventions, the 1961 UN Convention on Narcotic Drugs and later the 1971 UN Convention on Psychotropic Substances both laid the foundation for fighting money laundering primarily targeted at drug trafficking. As a matter of fact, this did not even recognise other forms of money laundering except that ones that was derived out of illicit drug trade. Most of the countries that followed this convention ran up into a similar law that did not cut out all the modes of money laundering. This was further strengthened in 1988. But there was no substantial change in the approach and still drug trafficking was the offence that was of interest to the UN council. There was no categorical change in the understanding by the Convention. However, in the clarification that the UN council made by 1998, they have acknowledged the increasing trend of using money laundering for other purposes, other than drug trafficking. With the increase in terrorism, the scenario changed drastically, with governments calling in for cessation of all illicit money transfers. With every country having its own laws on money laundering and few going beyond drug trade, there was no reason for any body to question the money that is coming into the banks. This was very much comfortable with the Swiss banks where secrecy of every account holder is assured. However, the 1988 convention brought about a law in almost all countries against drug related money laundering. The basic principles were enacted; typically, the know-your-customer policy and reporting any doubtful transaction to the treasury where brought in along with other methods of control4. However, the terrorism and the growth of terrorist related activities in the last few years have seen the money laundering as a major concern for all nations. Still not clear solution in terms of legal control could be brought in, though the money laundering acts in most of the countries are wider and covers all forms of illegally begotten wealth and movement of such wealth in cash or over the bank. All this was brought into the Convention for the Suppression of the Financing of Terrorism in 1999. This ensured that all the countries signatory to this treaty, would have funding of terrorism as a predicate crime and amounts to money laundering and included reverse money laundering as a part of the money laundering exercise. This also wanted the members to stop or freeze such accounts should there be an evidence from any of the other member states who are signatories to this. Terrorism and Money Laundering Terrorism is the major modifier to the approach in fighting money laundering. But for this the methodology to fight money laundering has not changed. Terrorism and terrorism related activities provide a new kind of money laundering. As Stephen Cassella5 says, ‘the terrorists use what is called the reverse money laundering’. They might produce money legitimately but use it for illicit purposes. In most cases, money also comes from illegitimate sources too. But in any case, legitimate money movement also need to be monitored and any unnatural movement of money should give rise to doubt. The difference in this methodology is that, while the source of the money itself is illegal in the traditional money laundering cases, here it is not so. It was easier to stop and it is legitimate also since the source itself is illegal. Whereas in the case of terrorism, since the source is perfectly legal and there is no reason to stop the movement of money, it just flows through. This also makes it difficult to identify what is wrong and what is right. On most occasions the money moved is also very small unlike in the case of drug trading. The illegal activity is done after the movement of the money when there is no way to stop the money and all this can do is to help in post-mortem of the incident. There is a necessity to counter this and the step taken by UN in 1998 is the step one in this direction. However, more elaborate and non intrusive structure needs to be worked out for the every nation to adopt. Nations might not like to let down their sovereignty when it comes to answering questions from another nation. Therefore, the effectiveness of the 1998 convention will be in working out a suitable and more viable law that all the parties are able to adopt for their own countries without many hiccups. Conclusion From our analysis in the previous paragraphs, it is clear that the money laundering business has changed colour once more. At one end, it has gone up with the regular money launderers using modern electronic transfers to their advantage and realising their funds moved within seconds and also ensuring that the money is layered multiple times. On the other hand, the terrorism has brought in new and a different dimension to money laundering in the form of reverse money laundering which has made the countries all the more concerned. Unless a common and a workable solution is reached this might continue to be a major problem for the developing and the developed countries. Unlike the drug or illicit monetary sources, it is very difficult to identify the origin of the funds in the case of the terrorist funding. Therefore, nipping it at that point of time is difficult. On most occasions it could only be the fear of prosecuting later that could stop people to fund any such activity. This would of course, be a post mortem effort. Finally, money laundering laws are present and they do not and cannot cover every aspect of money laundering business. The only way that anything could be done is in the banks being agile and by following the KYC and the CTR (Currency Transaction Reports). This would help the banks in doubting any of their clients whose transactions or behaviour does not vibe with the normal expectations. Note on Myself As a Director of Business Development for a Fortune 500 insurance brokerage company, I tend to meet a large number of clients and probable clients. Target of any company is to further their business and I need to rope in as many clients as I could and more so, if they are large ones. However, we need to be cautious so that we are not in the loop getting in the way of money laundering. In the course of my work, I have the opportunity to meet many large companies and regularly peruse their financial results. I would be the front end man for my company to filter if there is any negative client and I need to protect the interests of my company as well. This program therefore, would help me further my knowledge in law pertaining to money laundering and related monetary transactions. This would help me in executing my job more efficiently and to the requirements of my company and protect the interest of its shareholders. References Read More