Money laundering

Money laundering is the practice of disguising the origins of illegally-obtained money. Ultimately, it is the process by which the proceeds of crime are made to appear legitimate. The money involved can be generated by any number of criminal acts, including drug dealing, corruption, accounting and other types of fraud, and tax evasion. The methods by which money may be laundered are varied and can range in sophistication from simple to complex.

Many regulatory and governmental authorities quote estimates each year for the amount of money laundered, either worldwide or within their national economy. In 1996 the International Monetary Fund estimated that two to five percent of the worldwide global economy involved laundered money. However, the FATF, an intergovernmental body set up to combat money laundering, admitted that "overall it is absolutely impossible to produce a reliable estimate of the amount of money laundered and therefore the FATF does not publish any figures in this regard. Academic commentators have likewise been unable to estimate the volume of money with any degree of assurance.

Regardless of the difficulty in measurement, the amount of money laundered each year is in the billions and poses a significant policy concern for governments. As a result, governments and international bodies have undertaken efforts to deter, prevent and apprehend money launderers. Financial institutions have likewise undertaken efforts to prevent and detect transactions involving dirty money, both as a result of government requirements and to avoid the reputational risk involved.

Enforcement

The first defense against money laundering is the requirement on financial intermediaries to know their customers—often termed KYC know your customer requirements. Knowing one's customers, financial intermediaries will often be able to identify unusual or suspicious behavior, including false identities, unusual transactions, changing behaviour, or other indicators of laundering. But for institutions with millions of customers and thousands of customer-contact employees, traditional ways of knowing their customers must be supplemented by technology. Many Companies provide software and databases to help perform these processes. Bank and corporate security directors can also play an important role in fighting money laundering.

Technology

Information technology can never be a replacement for a well-trained investigator, but as money laundering techniques become more sophisticated, so too does the technology used to fight it. Anti-money laundering software filters customer data, classifies it according to level of suspicion, and inspects it for anomalies. Such anomalies would include any sudden and substantial increase in funds or a large withdrawal. Smaller transactions that meet certain criteria may be also be flagged as suspicious. For example, structuring can lead to flagged transactions. The software will also flag names that have been placed on government "blacklists" and transactions involving countries that are thought to be hostile to the host nation. Once the software has mined data and flagged suspect transactions, it generates a report.

The various software packages are capable of name analysis, rule-based systems, statistical and profiling engines, neural networks, link analysis, peer group analysis, and time sequence matching. Also, there are specific KYC solutions that offer case-based account documentation acceptance and rectification, as well as automatic risk scoring of the customer taking account of country, business, entity, product, transaction risks that can be reviewed intelligently. Other elements of AML technology include portals to share knowledge and e-learning for training and awareness.

This software is not used exclusively to track money laundering, but more often the common theft of credit cards or bank details. Unusual activity on an account may trigger a call from the card issuer to make sure it has not been misused.

FATF: Financial Action Task Force against Money Laundering

Formed in 1989 by the G7 countries, the Financial Action Task Force on Money Laundering (FATF) is an intergovernmental body whose purpose is to develop and promote an international response to combat money laundering. In October 2001, FATF expanded its mission to include combating the financing of terrorism. FATF is a policy-making body, which brings together legal, financial and law enforcement experts to achieve national legislation and regulatory AML and CFT reforms. Currently, its membership consists of 34 countries and territories and two regional organizations. In addition, FATF works in collaboration with a number of international bodies and organizations. These entities have observer status with FATF, which does not entitle them to vote, but permits full participation in plenary sessions and working groups.

FATF has develop 40 Recommendations on money laundering and 9 Special Recommendations regarding terrorist financing. FATF assesses each member country against these recommendations in published reports. Countries seen as not being sufficiently compliant with such recommendations are subjected to financial sanctions.

Methods

Money laundering often occurs in three steps: first, cash is introduced into the financial system by some means (“placement”), the second involves carrying out complex financial transactions in order to camouflage the illegal source (“layering”), and the final step entails acquiring wealth generated from the transactions of the illicit funds (“integration”). Some of these steps may be omitted, depending on the circumstances; for example, non-cash proceeds that are already in the financial system would have no need for placement.

Money laundering takes several different forms although most methods can be categorized into one of a few types. These include "bank methods, smurfing, [also known as structuring], currency exchanges, and double-invoicing.

Structuring: Often known as "smurfing," it is a method of placement by which cash is broken into smaller deposits of money, used to defeat suspicion of money laundering and to avoid anti-money laundering reporting requirements. A sub-component of this is to use smaller amounts of cash to purchase bearer instruments, such as money orders, and then ultimately deposit those, again in small amounts.

Bulk cash smuggling: Physically smuggling cash to another jurisdiction, where it will deposited in a financial institution, such as an offshore bank, with greater bank secrecy or less rigorous money laundering enforcement.

Cash-intensive businesses: A business typically involved in receiving cash will use its accounts to deposit both legitimate and criminally derived cash, claiming all of it as legitimate earnings. Often, the business will have no legitimate activity.

Trade-based laundering: Under- or over-valuing invoices in order to disguise the movement of money.

Shell companies and trusts: Trusts and shell companies disguise the true owner of money. Trusts and corporate vehicles, depending on the jurisdiction, need not disclose its true, beneficial, owner.

Bank capture: Money launderers or criminals buy a controlling interest in a bank, preferably in a jurisdiction with weak money laundering controls, and then move money through the bank without scrutiny.

Casinos: An individual will walk in to a casino or a horse race track with cash and buy chips, play for a while and then cash in his chips, for which he will be issued a check. The money launderer will then be able to deposit the check into his bank, and claim it as gambling winnings. If the casino is controlled by organized crime and the money launderer works for them, the launderer will lose the illegally obtained money on purpose in the casino and be paid with other funds by the criminal organization.

Real estate: Real estate may be purchased with illegal proceeds, then sold. The proceeds from the sale appear to outsiders to be legitimate income. Alternatively, the price of the property is manipulated; the seller will agree to a contract that under-represents the value of the property, and will receive criminal proceeds to make up the difference.

Black salaries: Companies might have unregistered employees without a written contract who are given cash salaries. Black cash might be used to pay them.