Money laundering methods and the three-stage laundering process

Combating Money Laundering - Imperative to Cut down on Terrorism

FATF - Financial Action Task Force

GAO - General Accounting Office

UGAO - United States General Accounting Office

OECD - Organization of Economic Cooperation and Development

IFA - International Federation of Accountants

Money Laundering

What is Money Laundering?

The act of converting money earned from illegal activities such as drugs, arms smuggling and other crimes, including insider trading, embezzlement, bribery and computer fraud schemes as well as fraudulent pyramid marketing schemes, all of which generate vast sums money which can be moved between locations only by what is called money laundering. Since these large amounts are not declared to the government, and since these perpetrators have no intention of paying tax at any level to any authority, they devise a million ways to break their profits into different entities, invest and spend the money without falling into the hands of the police. Diverse methods are used for laundering this money, which they accomplish by disguising the sources changing the forms, or moving to locations, which are less likely to attract attention. The myth goes that the word money laundering was derived from Al Capone's string of launderettes in Chicago, which were used by him to input and legitimize his illegal income from extortion, prostitution and gambling rackets. However, the truth is that money laundering has acquired this name for its involvement with removal of stains and smells acquired by the money through its close proximity to the criminals who handle it. Money laundering is a process which criminals use to camouflage the origin, ownership and the source of criminal activity behind its generation. Their ultimate intention is to obtain a cover to legitimize the money. J.D. McLean defined money laundering as under (Rowan, et al., 1994):

"Although the proceeds of crime will be kept as capital for further criminal ventures, the sophisticated offender will wish to use the rest for other purposes. If this is to be done without running a risk of detection, the money which represents the proceeds of the original crime must be "laundered"; put into a state in which it appears to have an entirely respectable provenance"

The three-stage model of the money-laundering scheme (Rowan, et al., 1994):

a) Placement: Cash derived from a criminal activity like drugs, extortion; prostitution or gambling is deposited in conniving financial institutions or other assets like property could be purchased.

b) Layering: Concealment/disguise of the source and ownership of the funds is carried out at this stage.

c) Integration: this is the state were illegal money is sought to be integrated into legitimate financial systems using the camouflage of the other assets.

Steps taken by the U.S.A. To combat this menace

Frank discussions between the officers from the GAO and those of the treasury, justice and financial regulatory officers revealed that in spite of the earlier decisions accruing from the erstwhile money laundering strategy meetings, clear results did not merge because of conflict of opinions between the various agencies, which were entrusted with implementing the decisions and seeing it through. At this juncture, they all fell in line and decided to accept and support the concept of the Federal government efforts to combat money laundering with a consolidated effort based on positive inter-agency interaction, planning and communication. However, there was a still difference of opinion on this scope and commitment required to be given by each agency. At this time, 9/11 terrorist attack took place and the whole scenario changed with the formation of the Homeland Security Department (USGAO, 2003).

Unfortunately, it seems that the strategies evolved at these meetings did not provide conclusive results in effective inter-agency coordination in the investigation of money-laundering activities. The role of money laundering in terrorist financing had not figured prominently during the earliest discussions, and the fight was on as to which agency would lead the investigations. The Justice Department and Homeland Security, in 2003, reached a consensus on resolving the problem.

Most of the agencies felt that strategy per se had a little effect on curbing money laundering. They felt that their successful efforts at compliance with the bank Secrecy Act, and the recent USA Patriot Act of 2001 were better aimed to fight terrorist financing and enhance their anti-money laundering efforts.

Chronologies of actions taken by the U.S. against money laundering since the year 2000 are given below:

Consequent upon OECD's Financial Action Task Force (FATF) reporting that AML programs were ineffective because of various deficiencies in them, many of them stemming from Inter-agency non-cooperation, new initiatives were opened on the subject (IFA, 2004).

In 2000 the International Press took up the idea in publishing money-laundering matters.

In October 2000, most of the world's largest banks started working with the anti-corruption wing OECD.

The U.S. Treasury, simultaneously, issued a guide on matters like enhanced scrutiny on the proceeds of foreign official corruption.

Shortly, thereafter, Basel Committee on Banking Supervision issued instructions to the banks to be highly watchful in the 4 areas of their business that is customer identification, risk management and monitoring of high-risk accounts, thus disabling banks from easily accepting money for laundering.

Earlier, in 1989 the "G-7" nations created a task force (Financial Action Task Force) under the wing of the OECD, which came up with 40 recommendations, under three categories to combat money laundering, reduce it and ultimately eradicate it IFA. (2004).

Legal: All governments were requested to criminalize money laundering individually, not in connection with drug trafficking.

Financial Regulatory: Governments were asked to make it mandatory for situations for financial institutions to collaborate, report suspicious activities to authorities.

International Cooperation: By this it was obligatory each country shared information on criminal activities including money laundering transparently between them and to share the valuable information.

The FATF 40 recommendations are still the back bone on which the anti-money laundering work is carried out. In June 2003, the FATF issued a report revising the earlier recommendations of 1990, including their jurisdiction over several financial institutions (Myers, 1998).

Conclusions

Several of the foregoing measures have been instrumental in closing several revenues for the money launderers to carry out their trade. Since, all the possible outlets have been strengthened or fortified against money laundering; it has become extremely difficult for those indulging in this business. This is not to say that money laundering is no longer prevalent. However, due to the multinational and multilateral cooperation between the countries, the agencies, the various financial institutions and the banks the noose is gradually tightening over the money launderer's neck, and he is finding it more and more difficult to avail the loopholes that he was exploiting earlier.