Risks Posed by Money Laundering - Essay Example

Swarna1 Word count: 4547 Order # 303067 d 4th June 2009 Investment law Analysis of the risks posed by money laundering and terrorists finance to the global financial system, and identification of the international efforts being made to deal with this threat. Introduction Money laundering is the practice of manipulating the finances or funds which were possessed illegally or through unfair means but after the manipulation an impression would be generated that the obtained funds are quite legal1. The extent and magnitude of 1:Richards, J.R. (1998). Transnational Criminal Organizations, Cybercrime, and Money Laundering: A Handbook for Law Enforcement Officers, Auditors, and Financial Investigators. CRC publication. P:344. ISBN-10: 0849328063. manipulation or management of illegal funds varies from nation to nation based on their nature of legislations to control money laundering2. In some countries including United Kingdom, money laundering would be treated as a severe crime and persons indulged in money laundering would be punished strictly. It is not necessary that money laundering is restricted to only organized crime, it may be employed to create new assets or to increase the present assets illegally so that it would hamper the national economic growth rate of any nation in terms of gross domestic product3. The measures which lead to tax manipulations and faulty 2: Woods, B.F. (1998). Art And Science Of Money Laundering. Paladin publication. P:208. ISBN-10: 0873649699. 3: Blair, W. (2002). Banking and Financial Services Regulation. Tottel publication. ISBN-10: 1845924010. http://74.125.153.132/search?q=cache:WDGICRzCIJoJ:www.unodc.org/pdf/convention_1988_en.pdf+vienna+convention+against+illicit+traffic+innarcotic+Drugs+and+psychotropic+substances(1988)&cd=1&hl=en&ct=clnk&gl=in accounting also come under money laundering and strict punishment is common for those people who are guilty of involved in money laundering in United Kingdom. As discussed earlier, money laundering may be operated by different agencies or persons ranging from private individuals to terrorists at both national and global levels. The main concern of the society now a days is the role of money laundering played in strengthening the organization and financial health of terrorist outfits which is highly dangerous for establishing world peace4. There are sympathisers operated at various levels from the society who support terrorists by financing them through illegal means which also come under money laundering. Hence there is a strong connecting link between money laundering and terrorist financing. The alarming thing before us at this moment is the increasing magnitude of the problem of money laundering. Various types of processes are involved in terrorist financing terrorists and money laundering is most important means out of these processes. People 4: Nick Kochan. (2005). The Washing Machine: How Money Laundering and Terrorist Financing Soils Us. Texere publication. P:352. ISBN-10: 1587991594. from regular streams like employees, scientists and artists may be involved in online transactions which finance the terrorist outfits. Hawala is one of the most important means through which money is laundered. Terrorist organizations like Alkhaida got tremendous benefit through hawala transactions in building their financial resources needed for purchase of modern warfare. The most important problem in tackling the terrorist finance and money laundering is diversity of the laws operated in different nations which contradict with regulations of other nations. Hence there is a strong necessity to refine these legal provisions of various nations so that global efforts for eliminating terrorism would be further strengthened and money laundering can be controlled effectively. Keeping these in consideration, the study is being made to assess the nature of money laundering operated in present day society and various means of money laundering. In addition, efforts have also been made to analyze the gaps in the present national laws and international regulations. Methodology The present study mainly focused on review of literature related to various laws and regulations that govern the practice of controlling money laundering. Efforts were also done to collect the information related to nature and extent of money laundering at national and international levels and to analyze the role of money laundering in international terrorism. Similarly, efforts were also done to assess the gaps exist in the present national and international laws and strategies for formulating unified international laws for successful management of money laundering and terrorist financing practices. Results and Discussion Money laundering is a process in which illegal money is made legal by some most refined manipulations5. In this process, money would be multiplied and concentrated in fewer hands leading to the differences between different sections of the society. Money laundering is practices in general to create more illegal wealth by some anti social elements to meet their financial requirements and for building their infrastructure and weapons for fighting 5 : Alldridge, P. (2003). Money laundering law. Hart publication P:328. ISBN-10: 1841132640. with the governments. Hence the most undesirable effect of money laundering on society comes in the form of tax evasion and terrorist financing. Both these practise are equally dangerous in blocking the overall development of the society. However, terrorist finance is even more vulnerable due to its violent implications on the society. The establishment of peace and social and economic equity among various sections of the society would be severely affected due to money laundering. To curb the extent of money laundering, one has to first analyse the causes and origin of money laundering6. There are various means of money laundering exist in the society. There is a need for generating opinion among the agencies fighting against money laundering in the form of organizing international conferences from time to time. For example, the first international conference on “Stop money laundering” which was held in London in 2002 could generate solid action plan for implementing some meaningful future strategies for controlling money laundering. It is accepted fact that 6 : Reuter, P and Truman, E.M. (2004). Chasing Dirty Money: Peterson Institute publication. P:248. ISBN-10: 0881323705. the huge sums are involved in money laundering which in turn block the economic development of many countries. It was also opined that by fighting money laundering at global level, major source of terrorist funding can be interrupted leading to destabilization of terrorist outfits. All the agencies involved in regulating money laundering at national international arena like the United Nations, IMF, World Bank, Ministries of Finance, and other national and international organisations and regulatory and control bodies have to work in full coordination for fighting against terrorist financing and money laundering. It is understandable that the approaches followed by various nations in controlling money laundering vary significantly due to their varied political and economic systems and levels of social development. At times, it may so happen that the genuine persons involved in online transactions may be punished by wrong interpretation though they are not involved in money laundering. This requires payment of compensation to these aggrieved persons and unification of international law on controlling money laundering for reducing the error component. The successful examples of anti money laundering policies of nations must be taken in to consideration while solving the terrorist finance mechanisms at global level7. For example, the cases of the Russian Federation and the Ukraine in combating money laundering must be taken as element of inspiration in nations like United Kingdom. It must be remembered that all the laws and regulations that inhibit the restitution of stolen money should be revised. All governments of those nations which have suffered badly from the theft of national funds, should pass legislation to make it increasingly difficult for such monies to be lodged in any bank in the world. At the same time, legal delays must be reduced and the whole process accelerated. Moreover, the developed countries should not hide under the due process of law as a reason for delay before returning stolen money to the appropriate third world countries. There are several international regulations that paid great attention to combat money laundering and its associated terrorist finance activities. 7 : John Madinger. (2006). Money Laundering: A Guide for Criminal Investigators, Second Edition. CRC publication. P: 560. ISBN-10: 0849333954. Let us analyse one by one here. International legal sources and their domestic effects. United Nations United Nations has been instrumental in taking initiatives at global level for reducing the extent of money laundering. It has brought up several conventions at international level to combat money laundering associated terrorism. Let us have a critical look at some important conventions here. Vienna convention against illicit traffic in narcotic Drugs and psychotropic substances It is one of the most important international conventions aimed at reducing illicit traffic in narcotic drugs and psychotherapic substances8. Article 2 of this convention explains about the scope in reducing the illicit use of narcotic drugs. Its main objective is to promote co-operation among the nations or parties so that they may address more effectively the various aspects of illicit traffic in narcotic drugs and psychotherapic substances. It emphasises on sovereignty and further that a Party 8 : United Nations Convention against illicit traffic in narcotic drugs and psychotherapic susbstances. (1998). United Nations. should not undertake in the territory of another Party the exercise of jurisdiction and performance of functions which are exclusively reserved for the authorities of that other Party by its domestic law. Similarly in article 3 of the convention explanation was provided about the offences and sanctions under illicit traffic. It mentions that each Party shall adopt such measures as may be necessary to establish as criminal offences under its domestic law, when committed intentionally: At the same time, the cultivation of opium poppy and cannabis for the purpose of the production of narcotic drugs would be treated as contrary to the provisions of the 1961 convention. Moreover, the possession or purchase of any narcotic drug makes persons liable for legal punishment. International Convention for the suppression of the financing of Terrorism This is one of the most important conventions of United Nations aiming at terrorist crisis management. Article 1 of this convention9. has given some specific items 9 : International Convention For The Suppression of The Financing Of Terrorism. (1999). United Nations. http://untreaty.un.org/English/Terrorism/Conv12.pdf categorized under funds subjected to money laundering. The assets of any nature, whether tangible or intangible, movable or immovable and legal documents or instruments in any form would come under funds. Article 2 of the convention declares that any person would be punished under offences if that person by any means, directly or indirectly, unlawfully and wilfully, provides or collects funds with the wrong intention or to compel a government or an international organization to do or to abstain from doing any act. The United Nations convention against Transnational Organized Crime and its protocols It is one of the most significant conventions of United Nations committed against Transnational Organized Crime and it was adopted by General Assembly resolution no. 55/25 dated 15 November 200010. It entered into force in 2003. This Convention is aimed at some specific areas of organized crime like Prevention, Suppression and Punishment of Trafficking in Persons, 10 : The United Nations convention against Transnational Organized Crime and its protocols, 2000. http://www.unodc.org/unodc/en/treaties/CTOC/index.html especially Women and Children. It also targets the Protocol against the Smuggling of Migrants by Land, Sea and Air and the Protocol against the Illicit Manufacturing of and Trafficking in Firearms, their Parts and Components and Ammunition. United Nations Convention against corruption at Mexico As corruption is a serious economic, social, political and moral blight, especially in many emerging countries, United Nations has initiated a convention against corruption in 2003 which came into force in December 200511. Money laundering and other means of corruption became severe problems that affect companies in particular, especially in international commerce, finance and technology transfer. This is the first truly global instrument to prevent and combat corruption, built on a broad international consensus. UN Security Council anti terrorism resolution The security council of United Nations, decided that all 11 : Antonio Argandona. 2006. The United Nations Convention Against Corruption and its Impact on International Companies. IESE Business School Working Paper No. 656 States should prevent and suppress the financing of terrorism, as well as criminalize the wilful provision or collection of funds for such acts12. The funds, financial assets and economic resources of all the persons involved in money laundering would be frozen immediately. The Council also decided that States should prohibit their nationals or persons or entities in their territories from making funds and financial assets. They should also ensure that terrorist acts should be treated as very serious and severe legal punishment must be given according to their domestic laws and regulations. The Council also urges that States should help each other in criminal investigations or criminal proceedings relating to the financing or support of terrorist acts.  Emphasis was also paid to prevent the movement of terrorists or their groups by effective border controls as well. 12 : UN Security council anti terrorism resolution. (2001). (SC/1373 of 28 September 2001) Security Council. 4385th Meeting (Night). Security Council Unanimously Adopts Wide-Ranging Anti-Terrorism Resolution; Calls For Suppressing Financing, Improving International Cooperation. http://www.un.org/News/Press/docs/2001/sc7158.doc.htm According to Chapter VII of the Charter of the United Nations, all States shall prevent and suppress the financing of terrorist acts; criminalize the wilful provision or collection, by any means, directly or indirectly, of funds by their nationals or in their territories with the intention that the funds should be used, or in the knowledge that they are to be used, in order to carry out terrorist acts; freeze without delay funds and other financial assets or economic resources of persons who commit, or attempt to commit, terrorist acts or participate in or facilitate the commission of terrorist acts; prohibit their nationals or any persons and entities within their territories from making any funds, financial assets or economic resources or financial or other related services available, directly or indirectly. Similarly, all States should refrain from providing any form of support, active or passive, to entities or persons involved in terrorist acts, including by suppressing recruitment of members of terrorist groups and eliminating the supply of weapons to terrorists and to take the necessary steps to prevent the commission of terrorist acts. Moreover, following action plans have been suggested under which all States would play meaningful role. (a)  States should find ways of intensifying and accelerating the exchange of operational information, especially regarding actions or movements of terrorist persons or networks. This is very much needed for tackling terrorists who are well versed with the recent trends in communications. (b) States should exchange information in accordance with international and domestic law and cooperate on administrative and judicial matters with an objective to prevent the commission of terrorist acts; (c) States should co operate each other through bilateral and multilateral arrangements and agreements, to prevent and suppress terrorist attacks and take action against perpetrators of such acts; (d) They should become parties immediately to the relevant international conventions and protocols relating to terrorism, including the International Convention for the Suppression of the Financing of Terrorism of 9 December 1999; (e)  States should also take appropriate measures in conformity with the relevant provisions of national and international law. UN Security committee sanctions committee resolution for freezing the funds of Osama Bin Laden and associates This is one of the most important resolutions initiated by the Security Council in reaffirming its strong commitment to the sovereignty, independence, territorial integrity and national unity of Afghanistan, and its respect for Afghanistan’s cultural and historical heritage13. It also emphasized that the situation in Afghanistan is a complex one which requires a comprehensive, integrated approach to a peace process and issues of narcotics trafficking, terrorism, human rights, and international humanitarian and development aid. It strongly condemned the continuing use of the areas of Afghanistan under the control of the Afghan faction known as Taliban, for the sheltering and training of terrorists and planning of terrorist acts, and reaffirming its conviction that the suppression of international terrorism is essential for the maintenance 13 : UN Security commitee sanctions commitee resolution for freezing the funds of Osama Bin Laden and associates) (2000). (S/RES 1333 of 19 December 2000). United Nations. http://daccessdds.un.org/doc/UNDOC/GEN/N00/806/62/PDF/N0080662.pdf?OpenElement of international peace and security. It observed that the Taliban has been getting benefit directly from the cultivation of illicit opium and this should be discouraged. It expressed concern over the Taliban’s capacity to harbour terrorists, including Osama bin Laden which otherwise made the acts of terrorists easy in attacking specific targets in different parts of the world from a network of terrorist training camps in Taliban-controlled territory in Afghanistan. Council of Europe Convention on the suppression of terrorism It came into operation on 17th December 1986. According to the schedule 1 to The Order and Article 2, this section applies to any offence of which a person is involved in terrorist acts in domestic place and who is convicted for the same outside the Territory constitute one of the offences listed in Schedule 1 to this Act14. Under Schedule 1 To The Act and Sections 1 and 4, the list of offences include the common law offences like 14 : Bermuda Consolidated Legislation, 1986. Suppression of Terrorism Act 1978 (Overseas Territories) Order (1986). United Kingdom Statutory Instrument. SI 1986 No. 2019. http://www.commonlii.org/bm/legis/consol_act/sota1978to1986622/ murder, manslaughter, rape, kidnapping and abduction, false imprisonment, actual bodily harm or causing injury and wilful fire-raising. The following come under Offences against the Person Act 1861 (a) section 18 (wounding with intent to cause grievous bodily harm); (b) section 20 (causing grievous bodily harm); (c) section 21 (attempting to choke etc. in order to commit or assist in the committing of any indictable offence); (d) section 22 (using chloroform etc. to commit or assist in the committing of any indictable offence); (e) section 23 (maliciously administering poison etc. so as to endanger life or inflict grievous bodily harm); (f) section 24 (maliciously administering poison etc. with intent to injure etc.); (g) section 48 (rape). The following offences under the Firearms Act 1968 also come under this convention (a) Section 16 (possession of firearm with intent to injure); (b) Section 17 (use of firearm or imitation firearm to resist arrest) involving the use or attempted use of a firearm within the meaning of that section. European Union Council Regulation on specific restrictive measures directed at certain persons and entities with a view to combating terrorism. In its extraordinary meeting on 21 September 2001, the European Council declared that terrorism is a real challenge to the world and to Europe and that the fight against terrorism will be a priority objective of the European Union15. The European Council declared that combating the funding of terrorism is a decisive aspect of the fight against terrorism and called upon the Council to take the necessary measures to combat any form of financing for terrorist activities. Council Directive on prevention of the use of the financial system for money laundering Article 1 of this directive explains that money laundering means the following conduct when 15 : Council Regulation (Ec) No 2580/2001. (2001). Dated 27 December 2001. On specific restrictive measures directed against certain persons and entities with a view to combating terrorism http://www.unhcr.org/refworld/publisher,Council,,,47fdfb230,0.html committed intentionally. Money laundering is a process in which the conversion or transfer of property takes place, even after having awareness that property is derived from criminal activity or from an act of participation in such activity. In this process, aim is for concealing or disguising the illicit origin of the property or of assisting any person who is involved in the commission of such activity to evade the legal consequences of his action16. Money laundering may also mean the acquisition, possession or use of property, knowing, at the time of receipt, that such property was derived from criminal activity or from an act of participation in such activity. It also includes participation in, association to commit, attempts to commit and aiding, abetting, facilitating and counselling the commission of any of the actions mentioned in the foregoing paragraphs. 16 : Council Directive 91/308/EEC. (1991). Dated 10 June 1991 on prevention of the use of the financial system for the purpose of money laundering. Official Journal L 166, 28/06/1991 P. 0077 - 0083 Finnish special edition: Chapter 10 Volume 1 P. 0068. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:31991L0308:EN:HTML. European parliament and council directive on currency exchange measures According to this directive, the European Parliament has expressed concerns that the activities of currency exchange offices and money transmitters are vulnerable to money laundering17. UK implementing measures Several organizations are involved in implementing anti-money laundering laws and regulations in United Kingdom. The Council of Europe made the Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime in 1990 in Strasbourg. The Council of the European Communities in 1991 issued Council Directive 91/308/EEC on “Prevention of the Use of the Financial System for the Purpose of 17 : Directive 2001/97/EC of the European Parliament and of the Council. (2001). Dated 4 December 2001 amending Council Directive 91/308/EEC on prevention of the use of the financial system for the purpose of money laundering - Commission Declaration. http://eur-lex.europa.eu/smartapi/cgi/sga_doc?smartapi!celexplus!prod!CELEXnumdoc&numdoc=32001L0097&lg=en. Money Laundering.” The Commonwealth Secretariat has prepared the Model Law on the Prohibition of Money Laundering and also published A Model of Best Practice for Combating Money Laundering in the Financial Sector18. The Basel Committee on Banking Supervision, established by the central bank governors of the G-10 countries in 1974, issued the Statement on “Prevention of Criminal Use of the Banking System for the Purpose of Money Laundering”. In 1997, the Basel Committee issued the Core Principles of Banking Supervision. The International Organization of Securities Commissions, whose members are national securities commissions, stock exchanges, and regional and international organizations, prepared the Resolution on Money Laundering in 1992. Self-Regulating Bodies like the International Federation of Accountants, established in 1977, provided guidance on the role of auditors in detecting fraud and errors in financial statements. 18:Anti-Money Laundering/Combating The Financing Of Terrorism. Efforts of Other International, Regional, And Specialized Bodies. http://www.adb.org/Documents/Policies/ADB_Money_Laundering_Terrorism/appendix.pdf. In addition, a group of nine leading international private banks, in cooperation with Transparency International, published the Global Anti-Money Laundering Guidelines for Private Banking (Wolfsberg AML Principles) in 2000, and issued Statement on the Suppression of the Financing of Terrorism in January 2002. The European Bank for Reconstruction and Development (EBRD) has enhanced its AML measures by increasing staff awareness through training. The African Development Bank (AfDB) became an observer at Financial Action task Force (FATF) meetings in January 2002 and strong cooperation between AfDB and FATF is required for information exchange regarding ML and implementation of the Financial Action Task Force on Money Laundering Recommendations by AfDB and its borrowers. It will also help in sensitization of African governments and regional organizations to the need to adopt and implement those recommendations. Financial Action Task Force on Money Laundering: FATF emphasizes on inclusion of increased multilateral co-operation and mutual legal assistance in money laundering investigations and prosecutions and extradition in money laundering cases, where ever possible. Each country should take legislative measures to enable it to criminalize money laundering as set forth in the Vienna Convention. Each country should treat the offence of drug money laundering as very serious offences. Countries should adopt legislative measures as set forth in the Vienna Convention, to enable their competent authorities to confiscate property laundered. FATF mentions that financial institutions should not keep anonymous accounts or accounts in obviously fictitious names. They should be required to identify, on the basis of an official or other reliable identifying document, and record the identity of their clients when establishing business relations or conducting transactions. Financial institutions should take reasonable measures to obtain information about the true identity of the persons on whose behalf an account is opened or a transaction conducted if there are any doubts as to whether these clients or customers are acting on their own behalf, for example, in the case of domiciliary companies. Countries must give special attention to money laundering threats inherent in new or developing technologies. Countries should consider implementing feasible measures to detect or monitor the physical cross-border transportation of cash and bearer negotiable instruments, subject to strict safeguards to ensure proper use of information and without impeding in any way the freedom of capital movements. The proceeds of crime act 2002 Part 1 of this act defines the nature of activities come under regulated sector in the United Kingdom. They include the activities of the National Savings Bank, any activity carried on for the purpose of raising money authorised to be raised under the National Loans Act 1968 (c. 13) under the auspices of the Director of Savings and the business of operating a bureau de change. They also include activities like transmitting money by any means or cashing cheques which are made payable to customers19. The regulated activities include accepting deposits, dealing in investments as principal or as agent, arranging deals in investments, and managing investments and safeguarding and administering investments. 19 : Statutory Instrument (2003). No. 3074. The Proceeds of Crime Act 2002 (Business in the Regulated Sector and Supervisory Authorities) Order 2003. http://www.opsi.gov.uk/si/si2003/20033074.htm Money laundering regulations 2003 PART I of these regulations suggest that "the 2000 Act" means the Financial Services and Markets Act 200020. It also defines the relevant business in terms of regulated activities like accepting deposits; dealing in investments as principal or as agent; arranging deals in investments, sending dematerialised instructions and issuing electronic money and the business of operating a bureau de change, transmitting money by any means or cashing cheques which are made payable to customers. Under these Regulations, some supervisory authorities in United Kingdom were recognized like the Bank of England, the Council of Lloyds, the Office of Fair Trading, the Occupational Pensions Regulatory Authority and the Gaming Board for Great Britain. Conclusion Money laundering is the practice of manipulating the finances or funds which were obtained illegally and efforts would be made to convert the same to legal money. The concern of the day is the extent of role 20 : The Money Laundering Regulations 2003. (2003). No. 3075. Financial Services. ISBN 0 11 048400 2. played by money laundering in terrorist financing and destabilizing the economy and peace of the world. Several international agencies including United Nations have been working hard to fight against this menace. Several conventions were initiated at global level for generating action plan in combating money laundering and terrorist finance21. There are efforts in almost all nations to fight against money laundering associated terrorist finance, but the extent of seriousness varies from one country to other. In some of the cases, international law and national laws conflict each other making the implementation of legal action quite complex. Hence, all legislation that tends to encourage the receiving of dirty money into countries, should be amended. There should be enhanced co-operation between the developed countries and the developing countries in expediting the return of laundered money to the people from whom it was stolen22. The West should Hughes, D., Ieberman, L., Osuntokun, S., Howard, C., Bridges, M. and Allen, D. 1998. Butterworths Money Laundering Law (Loose Leaf). Butterwoths law publication. ISBN-10: 0406903123. Parlour, R. (2002). Butterworths International Guide to Money Laundering Law and Practice. Tottel publication. P: 223. ISBN 0406904359. change its approach by showing genuine concern for anti-money laundering particularly as it concerns developing countries. The efforts of Vienna convention on illicit traffic in narcotic drugs and psychotherapic substances (1988), Financial Action Task Force on money laundering, the proceeds of crime act (2002) and Money laundering regulations (2003) played crucial role in reducing money laundering in nations like United Kingdom. Read More