Money laundering: methods, detection, and prevention

Management

Fighting Money Laundering: Definitions and the Lebanese Approach

Money Laundering has long been a major problem in fighting crime, in particular the kind of crime controlled by syndicates or unscrupulous businesses. Long associated with drugs, prostitution, and assorted "vices;" money laundering has taken on new importance in an age of global terrorism. Laundered funds can be used to finance a host of illicit operations from the purchase of deadly arms and weapons of mass destruction, to the setting up of terrorist or insurgent networks. Money laundering can be defined as, "the process by which one conceals the existence, illegal source, or illegal application of income, and disguises that income to make it appear legitimate."

The Financial Action Task Force, an intergovernmental agency of the comprised of various member states and international bodies possesses its own methodology for discovering whether, in fact, an instance of money laundering has occurred. In 1990, the FATF introduced a set of Forty Recommendations that set the standard for investigation of international money laundering, the regulations being revised in 1996 and again in 2003.

Central to the approach of FATF is the concept of "know your customer," an idea that includes strenuous attempts to eliminate anonymous accounts, identify all customers involved in a given transaction, maintain transaction records for at least five years, and the making of such records readily available to the appropriate authorities; authorities who would also be notified immediately upon commission of any suspicious activity.

Violation of any of these standards would lay an individual or organization open to suspicion of money laundering or collusion in such activity.

The Stages of Money Laundering

Money laundering is an often complex process, one that has become only more difficult to track as criminals seek to evade the web of international regulations and the oversight of organizations like FATF. In the first stage, illicit funds are introduced into the world financial system. This step frequently involves the breaking up of large sums into smaller amounts that can be placed in different locations or institutions in order to avoid detection.

In the case of Lebanon, investigators might watch for suspicious numerous small transfers of funds to the Banque du Liban from a single source, or from a group of apparently allied sources. Regular transfers of similar amounts would send up a red flag for those watching for potential money laundering activity.

The second phase of money laundering is known as layering and consists of the process whereby funds are distanced from their original source. Illicit funds, having been invested in, for example, the Banque du Liban, or used to purchase Lebanese or other financial instruments, are then moved to other locations. The investigator would note the movement of recently deposited funds out of the Banque du Liban, or the sudden sale of recently purchased financial instruments. Often, especially in those areas that remain non-compliant with FATF stipulations, money is simply moved from one bank to another in an attempt to obscure the trail.

Lebanon is among those nations that have already set up a Financial Intelligence Unit, or FIU, that shows its compliance with the FATF campaign against international money laundering. FIU's serve as an official, local investigative arm for the tracking of suspicious financial transactions.

In the third and final phase of money laundering there occurs what is called "integration." The frequently moved funds are now re-integrated into the legitimate economy. In the case of Lebanon, investigators might watch for the purchase of luxury items, real estate, or additional investments that can be traced back ultimately to the moneys entered in the first stage.

Sizable purchases can be tracked as these may indicate the re-assemblage of funds by their intended recipients. As for terrorists, these purchases may involve the sudden appearance of arms shipments, or the movement of personnel around the globe. Tracking of funds that move through Lebanese banks and back out into the legitimate economy can be extremely difficult. Historically, the Lebanese economy has been especially dependent on the banking and financial sector. "Lebanon has a long history of strict bank secrecy codes and accordingly it was perceived as a potential centre for money laundering... Bank secrecy remains an issue to be openly and seriously discussed."

While Lebanon has succumbed to international pressure in so far as compliance with many of the requirements of international reportage, threats to banking secrecy appear as threats to its lifeblood. Integration tracking requires being aware of the origin of funds, and their movement from one identifiable entity to another. A chain must be established that can be pursued by investigators. In 2001, new regulations were adopted in Lebanon that permitted bankers to abandon traditional secrecy in cases of "suspicious activity."

Reporting Requirements in Lebanon

The new laws of 2001 stipulate specific conditions that would require action on the part of the Banque du Liban. Among the measures enacted are those that deal with the need to positively identify the real nature of entities that use proxies to conduct business through the Banque du Liban.

The law is applicable to all those entities covered by the original Bank Secrecy Law of 1956. Presumably, money launderers will attempt to transfer funds through other entities, or through entities created specifically for the purpose of hiding their activities. By watching these proxy transactions, investigators can hope to discover the criminal enterprises that may underlie them. The Lebanese case is difficult because of the traditions of banking secrecy. Any methodology for dealing with money laundering must take into account the need to respect the privacy of legitimate clients while exposing the activities of those with criminal intent. Many of the demands of FATF can be seen as explicit violations of traditional international law and treaty obligations in that they attempt to control the legislative and administrative practices of sovereign nations. FATF purports to,