Money Laundering

A Concise Guide for All Business

Second Edition

doug hopton

Introduction to Money Laundering

There have been many books written in recent years on the subject of money laundering. There have been so many that one may easily forget that although, as a concept, money laundering has existed since the days of Prohibition in the USA, the fight against it, as we now understand it, has had a relatively short history. However, even over this short history the definition and meaning of money laundering has changed. This book, while considering the rationale of money laundering and its modern definition, will look not only at the current legislation and regulations, but also at some of the practical difficulties they impose and ways of overcoming these. However, to achieve this we must not only understand money laundering and the reasons for it but also understand the current laws, regulations and practice, particularly in the context of the United Kingdom. It will therefore be necessary to trace the history of money laundering both in the UK and internationally. Money laundering has traditionally been considered to be a process by which criminals attempt to hide the origins and ownership of the proceeds of their criminal activities. The aim is to enable them to retain control over the proceeds and to provide, ultimately, a cover for their income and wealth. This has led people to believe that money laundering can be described in one of the following ways:

turning dirty money into clean money; washing drug money; disguising criminal money.

These historical descriptions are fine as far as they go, but the actual term money laundering is itself a misnomer. It does not recognise that in the modern world undertaking a laundering operation does not have to involve actual

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money. Consequently a modern definition would be that money laundering occurs every time any transaction takes place or relationship is formed which involves any form of property or benefit, whether it is tangible or intangible, which is derived from criminal activity. One must also not overlook the fact that you do not have to actually move the criminal proceeds to launder them. This is an aspect that can leave financial institutions, particularly banks, in a vulnerable position. The classic example would be in a case of tax evasion. Money earned for a legitimate activity is placed directly into a bank account in another country. At this point there is no problem as the money is legitimate. However, if the account holder fails to declare this income on a tax return in the country in which it was earned, the funds then become the proceeds of crime and the bank, although it may be unaware of it, is laundering the funds. Another traditional view of why money laundering is undertaken is that the criminals objectives are the avoidance of detection, prosecution and confiscation of their ill-gotten gains. Now while in many cases this is true, there are cases that demonstrate that criminals primary objective is not the conversion of property but the need to disguise the fact that they own the property. In doing so they break the connection between themselves and any property that can otherwise link them to the criminal offence for which they are seeking to avoid detection. Money laundering is therefore as much about disguising the ownership of property as it is about converting or washing criminal property. This clearly shows that even in a relationship where there is no obvious process by which money is received or paid away, money laundering can still occur.

The Money Laundering Process

Obviously there is no one way of laundering money or other property. It can range from the simple method of using it in the form in which it is acquired to highly complex schemes involving a web of international businesses and investments. Traditionally it has been accepted that the money laundering process comprises three stages: 1. Placement placing the criminal funds into the financial system directly or indirectly. Layering the process of separating criminal proceeds from their source by using complex layers of financial transactions designed to hide the audit trail and provide anonymity.

2.

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3.

Integration if the layering process succeeds, integration schemes place the laundered proceeds back into the legitimate economy in such a way that they appear to be normal business funds.

These stages, while they can be separate and distinct, more often occur simultaneously or overlap. It all depends on the facilities of the launderer, the requirements of the criminals, and on the robustness, or otherwise, of the regulatory and legal requirements linked to the effectiveness of the monitoring systems of the financial or regulated sector. However, this three-stage model, while a convenient way of describing the activity, is a little simplistic and does not fully reflect what really happens. It relates back to the common historical definition of money laundering discussed earlier. While they are examples of money laundering, they do not define what money laundering actually is. This has led to those with the duty of recognising money laundering having insufficient knowledge to be able to identify it in all its guises. Too often we have looked at money laundering from the aspect of what we expect it to look like, rather than by reference to what it actually is. Numerous cases have come to light where employees have failed to identify relationships in which property has been laundered, simply because what happened did not match with what they had been taught to expect such activity to look like. So while the traditional model is useful, it does not adequately cover all situations in which money laundering occurs. Let us consider the following simple example: X is the beneficial owner of a Guernsey company (G) administered by a local corporate service provider. The company owns shares in another company, Y. X, acting on inside information regarding company Y, requests the corporate service provider to sell the shares owned by G. It does so.

The question is, has the corporate service provider assisted in the laundering of property? The simple answer is yes. However, this scenario does not fit into a traditional three-stage model since there is no placement, no layering and, so far, no attempt at integration. So having considered this historical and traditional view of money laundering and the changes which have taken place, it leads us to recognise that this is a major international problem and not restricted to one country. Therefore, we now need to view this on an international basis and examine the efforts and

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actions that have been taken to combat it by the international community over the years. However, when examining the various actions against what I will call normal money laundering, we must also consider terrorism and terrorist financing. This has become of greater importance across the world since the events of 11 September 2001 and subsequent terrorist actions.

Terrorism and Terrorist Financing

Terrorist financing is considered by many to be just part of money laundering. To some extent this is correct, but it does have its own special aspects. First we will look at what we mean by terrorism. The International Convention for the Suppression of the Financing of Terrorism adopted by the United Nations General Assembly in December 1999 defines the primary objective of terrorism as to intimidate a population, or to compel a government or an international organisation to do or abstain from doing any act. As can be seen, this is different from other forms of criminal activity where obtaining financial gain is often the ultimate objective. However, despite these different objectives, terrorist organisations, like other criminals, require financial help and support. Terrorist organisations require finance for all aspects of their aims including training, materials and travel, so it is vital to them that they have an international flow of funds which they can use for their aims. It must be remembered that while the overall funds required by a terrorist organisation may be large, the cost of a particular attack can be relatively small. The US authorities have, for example, estimated that the total cost of planning and carrying out the September 11 attacks in America at under US$300 000. The 1993 Bishopsgate Bomb in the City of London which caused loss of life as well as damage to property in excess of 1 billion has been estimated by the UK authorities to have only cost approximately 3000. So how do terrorists raise the funds they need? Many different methods are used, but they generally fall into one of two categories: 1. 2. funds from supporter states or organisations; fund-raising either from legitimate or illegitimate sources.

Some examples of the second category are donations, charities and fundraising, people-smuggling, drug trafficking, kidnapping and extortion or any

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other criminal activities. Recognising terrorist financing is, however, not easy, particularly in view of the small amounts frequently involved. This is discussed in detail in Chapter 14. Having looked at money laundering and terrorist financing in general we will, over the next few chapters, examine the international initiatives and the UK legal and regulatory requirements. We will then go on to discuss practicalities, and problems of meeting these requirements.