BACKGROUND

Money laundering as a crime only attracted interest in the 1980s, essentially within a drug trafficking context. It was from an increasing awareness of the huge profits generated from this criminal activity and a concern at the massive drug abuse problem in western society which created the impetus for governments to act against the drug dealers by creating legislation that would deprive them of their illicit gains. Governments also recognised that criminal organisations, through the huge profits they earned from drugs, could contaminate and corrupt the structures of the state at all levels. Money laundering is a truly global phenomenon, helped by the International financial community which is a 24hrs a day business. When one financial centre closes business for the day, another one is opening or open for business. As a 1993 UN Report noted: The basic characteristics of the laundering of the proceeds of crime, which to a large extent also mark the operations of organised and transnational crime, are its global nature, the flexibility and adaptability of its operations, the use of the latest technological means and professional assistance, the ingenuity of its operators and the vast resources at their disposal. In addition, a characteristic that should not be overlooked is the constant pursuit of profits and the expansion into new areas of criminal activity. The international dimension of money laundering was evident in a study of Canadian money laundering police files. They revealed that over 80 per cent of all laundering schemes had an international dimension. More recently, "Operation Green Ice" (1992) showed the essentially transnational nature of modern money laundering.

WHAT IS MONEY LAUNDERING?

If you were to conduct a survey in the streets asking the above question, the general response from most people would be that they had no idea. This typical response is one of the problems the Government has in combating this type of crime. It seems to be a victimless crime. It has none of the drama associated with a robbery or any of the fear that violent crime imprints upon peoples psyche and yet, money laundering can only take place after a predicate crime (such as a robbery or housebreaking or drug dealing) has taken place. It is the lack of information about money laundering that is available to the person on the street, which makes it an invisible problem and hence difficult to tackle. There are various definitions available which describe the phrase Money Laundering. Article 1 of the draft European Communities (EC) Directive of March 1990 defines it as: The conversion or transfer of property, knowing that such property is derived from serious crime, for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in committing such an offence or offences to evade the legal consequences of his action, and the concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property, knowing that such property is derived from serious crime. Another definition is:

Money laundering is the process by which large amounts of illegally obtained money (from drug trafficking, terrorist activity or other serious crimes) is given the appearance of having originated from a legitimate source. If done successfully, it allows the criminals to maintain control over their proceeds and ultimately to provide a legitimate cover for their source of
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income. Money laundering plays a fundamental role in facilitating the ambitions of the drug trafficker, the terrorist, the organised criminal, the insider dealer, the tax evader as well as the many others who need to avoid the kind of attention from the authorities that sudden wealth brings from illegal activities.

ELECTRONIC MONEY

Financial systems are emerging in which economic value is represented by electronic patterns. This 'electronic cash' or 'e-money' can be exchanged through the use of 'smart cards' or over the Internet. E-money is expected to work just like paper money, but without the risks, inconvenience and costs involved in handling, administering and safeguarding actual physical currency. The explosion of e-money technology raises a number of policy issues, one of which is money laundering. Any crime that generates significant profits extortion, drug trafficking, arms smuggling and some kinds of white-collar crime - may involve attempts at money laundering. E-money may prove to be attractive to money launderers for two main reasons: Electronic transactions may become untraceable and are incredibly mobile. E-money transactions can easily be anonymous and may not leave a traditional audit trail. E-money systems also offer instantaneous transfer of funds with effectively no jurisdictional restrictions. Given these challenges, new legislative and regulatory action, investigative and enforcement techniques, and most important, enhanced international cooperation may be needed to prevent, detect and apprehend e-money launderers.

WHAT IS ELECTRONIC MONEY?

By its decentralized, distributive nature, electronic money has the same potential for transforming economic structure as personal computers did for overhauling management and communications structure.( Birch and McEvoy, 1996) Financial systems are emerging which allow economic value to be represented digitally by electronic patterns. This 'electronic money', or emoney, can be exchanged through the use of 'smart cards' or over the Internet. Unlike stored value cards, e-money can pass immediately between the two transacting on-line parties, without the need for an intermediary (e.g., e-cash by DigiCash Inc.). E-money is ultimately expected to work just like paper money, without the risk, inconvenience and cost associated with handling, administering and safeguarding traditional currency. A bewildering variety of electronic payment systems is currently being developed around the world. Given the constant changes to these systems, it would not be practical to launch into a technical discussion on how they work.

As technology has progressed, so too have payment systems. E-money is being introduced as the latest method of exchanging value. But governments have to be ready to react to the novel opportunities as well as the threats posed by this new form of currency. The electronic exchange of money is by no means a brand new invention. Banks and other financial institutions have been using computers to deal with one another for quite some time. In the United States, in terms of the volume of dollars exchanged, the computerbased Fedwire and Clearing House Interbank Payments System (or CHIPS) together account for 90% of all transactions. These systems are used mainly by large financial institutions. On the other hand, if we're counting by the number of individual transactions, 90% are still made by cash or cheque. These are small-scale transactions involving individuals. These US patterns also apply to Canada. Advances in three technological areas have made the widespread use of electronic cash economically viable, spurring interest in e-money. These advances are: reliable, quick networked communications with a low cost per transaction; better computer technology, allowing for the mass production of computer chip cards; and powerful public domain cryptography, to help ensure privacy and prevent fraud. What is revolutionary about the electronic cash systems currently being developed is that they are designed to mimic physical cash. This means they are strategically positioned to claim a large part of the small transaction market that accounts for the bulk of transactions. Electronic cash will affect society more
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than past electronic commerce advances because it will affect, and be affected by, the lives of ordinary people. (See Appendix III for a comparison of current payment systems.) The Scope of Electronic Money

The actual level of commerce on the Internet is still modest by any standards. Unofficial estimates suggest there is only about $100 million to $200 million in annual transactions on the Internet at this time (US Department of the Treasury Conference, 1996). However, some people expect the value of Internet transactions alone (not smart cards) to skyrocket to roughly $10 billion by the year 2000. Although commerce on the Internet is still fairly weak, e-money technology may be poised to take off. An industry trade magazine, Smart Cards, says "it is estimated that by 2001, over 100 billion transactions will be consummated using a smart card" (Cherneff et al., 1996). The hardware that will permit deep market penetration of the home-based emoney market is well on its way. Microsoft, Hewlett-Packard and Gemplus, for example, are already producing personal computer keyboards that will be able to read smart cards. AT&T plans to convert its public phones to operate by smart card. Mondex and Digi-Cash are testing smart card pilot projects around the world. Even the US government is moving toward implementing e-money systems; it is examining the feasibility of introducing 'paperless' benefit payments by 1999, using Electronic Benefit Transfer (EBT). Ultimately, consumer and business acceptance of e-money will determine the extent to which it is used. Some of the possible benefits of e-money to consumers include: faster, more efficient transactions; less need to carry pocket money; loyalty and frequent user plans;
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 automatic personal financial record-keeping; possible financial anonymity; possible security from theft; access to electronic commerce; and more personalized banking services and instruments.

The potential benefits of e-money to business are extensive. They include:

instant transactions; substantial cost savings because of the reduction in the physical handling of currency; easier collection of marketing information on customers; and promotion of 'free banking'.

Traditionally, the two most important constraints on trade were time and distance. E-money systems effectively erase both. They will almost certainly help to globalize trade. However, a number of barriers may halt or slow the widespread acceptance of emoney if they are not overcome. These include: competing e-money systems will have to be compatible and integrated with current methods of payment; the cost of using the system will have to be kept lower than the cost of using current payment systems; the risk of losing cards and their charged value could intimidate some
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consumers; because security is a major concern, full convertibility, receipted transactions and high levels of security may all become features of emoney systems; and privacy of personal information will also be an important issue.

Solutions will probably be found to all these problems. All things considered, it seems likely that e-money will be an important part of everyday life in the very near future.

THE POTENTIAL FOR E-MONEY LAUNDERING

E-money laundering is thought to be negligible, for now. However, to date, G-10 countries have not seen evidence of this activity in connection with electronic money products; if such products come to be used on a large scale, it is conceivable that criminals may seek to explore their potential for transferring illicit funds. (Group of Ten, 1997). Indeed, criminals are always looking for "a new type of detergent which allows for cleaner laundry" (Bortner, 1996). They have been quick to exploit each new method of financial transfer. In the 1980s and 1990s wire transfers became a popular method for moving money in both the legal and illegal sectors. By 2000 we may see the same situation with e-money. The abuse of e-money by money launderers may become a significant problem in the future because e-money systems will be attractive to money launderers for two reasons: transactions may become untraceable transactions are incredibly mobile.

UNTRACEABILITY

The use of e-money systems will mean fewer face-to-face financial transactions. The anonymity of e-money will make "knowing your customer" much more difficult. E-money systems also allow the parties to the transaction to deal with each other directly, without the assistance of a regulated financial institution. Thus, there may not be a traditional audit trail.

MOBILITY
Hypothetically, e-money could come from anywhere in the world, and be sent anywhere in the world. Thus, e-money systems may offer instantaneous transfer of funds over a network that, in effect, is not subject to any jurisdictional restrictions. The problem may be illustrated by separating the process of money laundering into three basic steps - placement, layering and integration - and then comparing traditional money laundering systems with cyber-systems. The first step in money laundering is the physical disposal of cash. Traditionally, placement might be accomplished by depositing the cash in domestic banks or other kinds of financial institutions. Or the cash might be smuggled across borders for deposit in foreign accounts, or used to buy high-value goods, such as artwork, airplanes, or precious metals and gems, that can then be resold with payment by cheque or bank transfer. With e-money laundering, cash may be deposited into an unregulated financial institution. Placement may be easily achieved using a smart card or personal computer to buy foreign currency, goods, etc. Powerful encryption may be used to guarantee the anonymity of e-money transactions. The second step, layering, involves working through complex layers of financial
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transactions to distance the illicit proceeds from their source and disguise the audit trail. This phase traditionally involves such transactions as the wire transfer of deposited cash, the conversion of deposited cash into monetary instruments (e.g., bonds, stocks, travelers' cheques), the resale of high-value goods and monetary instruments, and investment in real estate and legitimate businesses, particularly in the leisure and tourism industries. Shell companies, typically registered in offshore havens, are a popular device in the traditional layering phase. These companies, whose directors are often local attorneys acting as nominees, protect the identity of the real owners. These owners also benefit from restrictive bank secrecy laws and attorney-client privilege In an electronic-money system, layering can be done through a personal computer. There is usually no audit trail. In addition, e-money systems allow for instantaneous transfer of funds over a system that, in effect, has no borders. The last step is to make the wealth derived from crime appear legitimate. Traditionally, integration might involve any number of techniques, including using front companies to "lend" the money back to the owner or using funds on deposit in foreign financial institutions as security for domestic loans. Another common technique is over-invoicing, or producing false invoices for goods sold - or supposedly sold - across borders. In e-money laundering the criminal may be able to achieve integration by using a personal computer to pay for investments or to buy an asset, without having to call on the services of an intermediary financial institution. In short, the temptation of electronic forms of money for the criminal may be the potential for untraceable, mobile wealth.

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THE MONEY LAUNDERING PROCESS

Money laundering is not a single act but is in fact a process that is accomplished in three basic steps. These steps can be taken at the same time in the course of a single transaction, but they can also appear in well separable forms one by one as well. The steps are:a. Placement; b. Layering; and c. Integration. There are also common factors regarding the wide range of methods used by money launderers when they attempt to launder their criminal proceeds. Three common factors identified in laundering operations are; the need to conceal the origin and true ownership of the proceeds; the need to maintain control of the proceeds; the need to change the form of the proceeds in order to shrink the huge volumes of cash generated by the initial criminal activity.

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STAGES IN THE MONEY LAUNDERING PROCESS

Placement Stage

Layering Stage

Integration Stage

Wire transfers abroad Cash paid into bank (often (sometime usin s with staff g shell companies or mixe funds disguised as complicity or d with proceeds proceeds oflegitimate of legitimate business). business).

repayment False loan s or forged invoices used as cover for laundered money.

Cash exported.

Comple web Cash deposited in overseas x of transfers banking system. (both domestic and internationa l) makes tracing original source of funds virtually impossible.

Cash used to buy high value Resale of goods/assets. goods, property or business assets.

Income from property or legitimate business assets appears "clean".

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2. LAYERING

In the course of layering, there is the first attempt at concealment or disguise of the source of the ownership of the funds by creating complex layers of financial transactions designed to disguise the audit trail and provide anonymity. The purpose of layering is to disassociate the illegal monies from the source of the crime by purposely creating a complex web of financial transactions aimed at concealing any audit trail as well as the source and ownership of funds. Typically, layers are created by moving monies in and out of the offshore bank accounts of bearer share shell companies through electronic funds' transfer (EFT). Given that there are over 500,000 wire transfers representing in excess of $1 trillion - electronically circling the globe daily, most of which is legitimate, there isnt enough informat ion disclosed on any single wire transfer to know how clean or dirty the money is, therefore providing an excellent way for launderers to move their dirty money. Other forms used by launderers are complex dealings with stock, commodity and futures brokers. Given the sheer volume of daily transactions, and the high degree of anonymity available, the chances of transactions being traced is insignificant

3. INTEGRATION

The final stage in the process. It is this stage at which the money is integrated into the legitimate economic and financial system and is assimilated with all other assets in the system. Integration of the "cleaned" money into the economy is accomplished by the launderer making it appear to have been legally earned. By this stage, it is exceedingly difficult to distinguish legal and illegal wealth. Methods popular to money launderers at this stage of the game are:
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a. the establishment of anonymous companies in countries where the right to secrecy is guaranteed. They are then able to grant themselves loans out of the laundered money in the course of a future legal transaction. Furthermore, to increase their profits, they will also claim tax relief on the loan repayments and charge themselves interest on the loan. b. the sending of false export-import invoices overvaluing goods allows the launderer to move money from one company and country to another with the invoices serving to verify the origin of the monies placed with financial institutions. c. a simpler method is to transfer the money (via EFT) to a legitimate bank from a bank owned by the launderers, as off the shelf banks are easily purchased in many tax havens.

METHODS OF MONEY LAUNDERING.

STRUCTURING ("SMURFING")

Smurfing is possibly the most commonly used money laundering method. It involves many individuals who deposit cash or buy bank drafts in amounts under $10,000. This method is common to both Canada and the United State

BANK COMPLICITY

A criminally co-opted bank employee may facilitate money laundering. Given the Canadian Bankers Association's policy, procedures and training, it is becoming increasingly difficult for criminals to employ this method.
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CURRENCY EXCHANGES

Currency exchanges provide a service that permits individuals to buy foreign currency that can then be transported out of the country. Money can also be wired to offshore bank accounts anywhere in the world by these exchanges. SECURITIES' BROKERS A stock broker may take in large quantities of cash and issue securities in exchange.

ASSET PURCHASES WITH BULK CASH Money launderers purchase big ticket items such as cars, boats, planes, or real estate. In many cases, launderers may use the asset but will distance themselves by having assets registered in a friend's name. TELEGRAPHIC TRANSFER OF FUNDS Wiring money from one city or country to another without actually carrying the money.

POSTAL MONEY ORDERS Exchange cash for money orders, then shipping them out of the country for deposit.

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TRAVEL AGENCIES Exchanging cash for travel tickets. This is a common method of moving money from one country to another. CREDIT CARDS

Overpaying credit cards and keeping a high credit balance that can be turned over to cash at any time and place. GAMBLING IN CASINOS

Cash may be taken to a casino to purchase chips. After gaming and placing normal bets, chips are redeemed at the cashiers cage where a casino cheque is issued. REFINING

Individuals change small bills into large. This is easily done by visiting a number of banks so as not to arouse suspicion. The purpose of refining is to decrease the bulk of larger cash quantities. LEGITIMATE BUSINESS / COMMINGLING OF FUNDS Criminals take over and/or invest in businesses that customarily handle a high cash-transaction volume mixing the illicit proceeds with that of the legitimate business. Criminals will, from time to time, purchase businesses that generate gross receipts from cash sales such as restaurants, bars, night clubs, hotels, currency exchange shops, vending machine companies, car washes and other retail sales for this purpose.

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REVERSE FLIP

A money launderer may find a cooperative property seller who agrees to a reported purchase price well below the actual value and then accepts the difference "under the table". This way, the launderer can purchase a $2 million dollar property for $1 million, secretly passing the balance to the cooperative seller. After holding the property for a period of time, the launderer sells it for its true value of $2 million. LOANBACK

A criminal provides an associate with a specific amount of illegitimate money. The associate then provides a "loan or mortgage" back to the trafficker for the same amount with all the necessary "loan and/or mortgage" documentation. This creates an illusion that the trafficker's funds are legitimate. The scheme is re-enforced through "legitimately" scheduled payments made on the loan by the traffickers.

SWISS BANKING Swiss banks have earned a reputation around the world for providing sophisticated and discreet banking services. There are about 400 banks in Switzerland, ranging from the "Two Big Banks" down to small banks serving the needs of a single community or a few special clients. The Two Big Banks, namely Credit Suisse and UBS, have extensive branch networks both throughout Switzerland and in many international centers. Banks are licensed by the Swiss Federal Government through its Banking Commission, and may operate throughout the country. A number also have offices or other representation in

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foreign countries. Among the approximately 400 licensed banks in Switzerland are the Swiss branches of banks which have their headquarters elsewhere. What services do Swiss Banks provide?

Some banks specialize in only a few banking services, whereas others provide a wide range. As in most of continental Europe, individuals usually buy and sell stocks and bonds through their banks. The Swiss banks have a long reputation for managing investment portfolios for their clients, and providing other services such as estate planning, wealth management, trust companies, etc., for individual customers. What are the "Private Banks?"

Private banks are those which are not incorporated, and hence the entirety of their partners' assets are available to meet the liabilities of the bank. These banks have a very long tradition in Switzerland, dating back to at least the revocation of the Edict of Nantes (1685). They are primarily associated with portfolio management for private clients. Most have become incorporated companies, so the term is rarely strictly true anymore. The term "private banking" is used more loosely to encompass all the banking services provided to clients in the area of portfolio and other wealth management services. These services are directed primarily at "high net-worth individuals", and there are a number of "private banks" who refuse any account of less than $ 1 million (or equivalent). What is special about Swiss bank secrecy?

Banks in most countries are prohibited from divulging information about their clients, and the provisions of the Swiss law follow the same lines. Swiss law is especially strict on any breech of confidentiality, whether in
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banking or in other commerce. The banking act adds a special section (introduced in 1934, in order to protect accounts of Germans, especially German Jews, from Nazi confiscation) which makes it a criminal offense, with the possibility of an individual going to jail, for the bank or its employee or agent to improperly divulge any confidential information. These portions of the banking law have been interpreted, both in practice and by the courts, to make it a serious offense to divulge any information about a bank customer to a third party, including official requests of foreign governments, except in some very special and clearly defined situations. Swiss bank secrecy is reinforced by a constant awareness of the seriousness of the bank's obligation to maintain confidentiality, starting with bank employees having to sign the secrecy portion of the banking act as a condition of employment. Both individuals and the banks are prosecuted if a lapse is discovered; this keeps awareness of bank secrecy high and and lapses rare. While this culture of absolute discrection is integral to the Swiss banks, the branch offices outside of Switzerland must operate according to the law of the particular jurisdiction, which may not provide so much protection. WHAT ARE NUMBERED ACCOUNTS?

Numbered accounts (or pseudonym accounts) are not very different from normal bank accounts. The usual account records omit reference to the customer's name or other identifying information, replacing it with a code number or the pseudonym. The relationship between the code number or pseudonym and the actual customer is known only to a few senior managers and their secretaries within the bank. It is important to emphasize that a Swiss bank has an obligation to know the true identity of both the account holder and its beneficial owner, and that there is no such thing as an anonymous account. Because of the constant awareness and strict enforcement of bank secrecy, there is actually little need for numbered accounts, and it should be noted that they incur additional overheads for the bank (it is more difficult to validate transactions to and from such accounts). For all these reasons, the stories one reads about anonymous, numbered accounts are legend.
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Some banks offer Numbered Accounts as an alternative to the Named Account. The purpose of the Numbered Account is to reduce to a bare minimum the bank employees who have access to the name of the account holder. The classic Numbered Account is legendary in the popular culture, as expressed in countless movies and books. Every self-respecting spy, mercenary, or other financially astute international criminal always demands a substantial advance deposit in his Numbered Account before performing the requested services. The Numbered Account is like home base. It represents the ultimate in safety and security. Funds tucked away in the Numbered Account are home free. In this case the reality is fairly close to the popular conception. Numbered Accounts do offer increased privacy. In the usual case, the customers name and address will be provided on the account opening agreement together with the customers signature. The difference with the Named Account is that the information, other than the account number, will not be entered in the general bank system which most employees can access. Instead, the account will be assigned for personal handling to an individual account manager. The file with the customers name is maintained separately from the Named Accounts, with access available only to key personnel. Normally, the investment of the funds and any withdrawals or deposits are based upon some agreed form of communication between the account manager and the customer. When the communication is not face to face, such as by telephone or written instruction, a secret code will be applied in addition to the account number. Unlike the Named Account, the true Numbered Account requires a higher degree of special handling which not all banks are equipped to supply. And since every bank is justifiably averse to providing special services without compensation, the Numbered Account will be more expensive to maintain and may only be available to those with substantial sums to deposit.

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HOW CAN WE PREVENT MONEY LAUNDERING

The primary purpose of organised crime is to make profits. Like any business, the purposes of profit are to enjoy it and re-invest it in future activity. For the organised criminal, however, profit close to the source of the crime represents a particular vulnerability and unless the criminal can effectively distance himself or herself from the crime which is the source of the profit they remain susceptible to detection and prosecution. Hence the need to launder their illicit profits to make them appear legitimate. The biggest source of illicit profits comes from the drugs' trade and it was drug trafficking that provided the initial catalyst for concerted international efforts against money laundering. The drugs' industry is a highly cash intensive business and "in the case of cocaine and heroin the physical volume of notes received is much larger than the volume of drugs themselves". In order to rid themselves of this large burden it is necessary to use the financial services industry and in particular, deposit-taking institutions. The Financial Action Task Force (FATF) on Money Laundering has identified certain choke points in the money laundering process that the launderer finds difficult to avoid and where he is vulnerable to detection. The initial focus has to be on these areas if the war against the launderer is to proceed successfully. The choke points identified are:

a. entry of cash into the financial system; b. transfers to and from the financial system; and c. cross-border flows of cash.

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The entry of cash into the financial system, known as the placement stage is where the launderer is most vulnerable to detection. Because of the large amounts of cash involved it is extremely hard to place it into a bank account legitimately. The UKs system of reporting suspicious transactions to the authorities along with the procedures adopted by deposit-takers are powerful weapons against money launderers. In particular, the emphasis being placed on the importance of deposit-taking institutions knowing their customer has severely curtailed this activity to such an extent that one of the favourite methods for money launderers to place their money is to smuggle the money out of the country. There are penalties attached to the various money laundering offences for the deposit-taking institutions and these have provided for a powerful incentive for reporting suspicions to the National Criminal Intelligence Service (NCIS). However, cross-border flows of cash is one of the areas mentioned above where the launderer is vulnerable to detection. In the UK, legislation provides the police and customs service with the power to seize cash they believe could be the proceeds of drug trafficking. Part III of the Criminal Justice (International Co-operation) Act 1990 (CJICA) introduced the powers for customs and police officers to seize cash being brought into or out of the United Kingdom, where they have reason to believe that such money represents the proceeds of drug trafficking or is intended to be used in drug trafficking. The power operates in respect of consignments of cash of 10,000 or more. Additionally, the courts are empowered to order the confiscation of such cash, where they are satisfied, on the balance of probabilities, of the alleged link with drug trafficking.

These measures overcome the difficulty of custom officers coming across large amounts of cash with no reasonable explanation for their export/import
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but, at the same time, with no hard evidence of links to drug trafficking it allows the detention of the cash pending an investigation. Due to this, couriers limit the amount they carry out of the country at any one time and the risk is seen as being less than passing the money into a financial institution. The reporting of suspicious transactions is not limited to cash in the UK. Transfers to and from the financial system are also under the umbrella of reporting of suspicious transactions and this can provide useful information on the layering stage of the money laundering process. The keeping of comprehensive transaction records (part of the procedures) by financial organisations provides a useful audit trail and gives useful information on people and organisations involved in laundering schemes once discovered. It is important, therefore, to ensure that complacency does not creep into our financial institutions at this stage, now that the measures are in place to deny money launderers open access to these same institutions.

FATF (Financial Action Task Force)

What is the FATF? The Financial Action Task Force (FATF) is an inter-governmental body whose purpose is the development and promotion of policies, both at national and international levels, to combat money laundering and terrorist financing. The Task Force is therefore a "policy-making body" which works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas. The FATF monitors members' progress in implementing necessary measures, reviews money laundering and terrorist financing techniques and counter-measures, and promotes the adoption and implementation of appropriate measures globally. In performing these activities, the FATF collaborates with other international bodies involved in combating money laundering and the financing of terrorism. The FATF does not have a tightly defined constitution or an unlimited life
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span. The Task Force reviews its mission every five years. The FATF has been in existence since 1989, and it has been agreed that its current mandate extends through the end of 2004. It will only continue to exist and to perform its function after this date provided the member governments agree that this is necessary.

History of the FATF In response to mounting concern over money laundering, the Financial Action Task Force on Money Laundering (FATF) was established by the G7 Summit that was held in Paris in 1989. Recognising the threat posed to the banking system and to financial institutions, the G-7 Heads of State or Government and President of the European Commission convened the Task Force from the G-7 member States, the European Commission, and eight other countries. The Task Force was given the responsibility of examining money laundering techniques and trends, reviewing the action which had already been taken at a national or international level, and setting out the measures that still needed to be taken to combat money laundering. In April 1990, less than one year after its creation, the FATF issued a report containing a set of Forty Recommendations, which provide a comprehensive plan of action needed to fight against money laundering. During 1991 and 1992, the FATF expanded its membership from the original 16 to 28 members. Since then FATF has continued to examine the methods used to launder criminal proceeds and has completed two rounds of mutual evaluations of its member countries and jurisdictions. It has also updated the Forty Recommendations to reflect the changes which have occurred in money laundering and has sought to encourage other countries around the world to adopt anti-money laundering measures.

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BUSINESS PRONE TO MONEY LAUNDERING

1. BANKING. "If you want to steal, then buy a bank".-Bertolt Brecht

The best method of both stealing and laundering money is to own a bank. And though banks are an at risk group in relation to their main functions of deposit taker and opening of accounts, what can be done against this crime if the bank is international and in complicity with vast numbers of its depositors. When the CIA moved money via the BCCI it called it "facilitating the national interest". When the Mafia and the Libyans do it, it is called money laundering. The BCCI affair was a major scandal involving allegations of corruption, bribery, money laundering, etc.. One investigator quotes in the Kerry Report: "It had 3,000 criminal customers and every one of those 3,000 criminal customers is a page 1 story. So if you pick up any one of [BCCIs] accounts you could find financing from nuclear weapons, gun running, narcotics dealing and you will find all manner and means of crime around the world in the records of this bank". As Powis (1992) said, "money laundering becomes a relatively easy thing to do when a banking institution and a number of its key officials co-operate in the laundering activity".

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UNDERGROUND BANKING

Underground Banking is sometimes called parallel banking. These systems tend to mirror more conventional bank practices, but are highly efficient and wholly unauthorised methods of transferring money around the world. The best known among them are the Chop, Hundi, and Hawallah banking within various ethnic communities, which enables the avoidance of any conventional paper record of the financial transaction. Such methods do not require the actual movement of money but nonetheless facilitate the payment of funds to another party in another country in local currency, drawn on the reserves of the overseas partner(s) of the Hawallah banker. The system is dependant on considerable trust and considerable simplicity - the money launderer places an amount with the underground bank - the identifying receipt for a transaction being something as innocuous as a playing card or post-card torn in half, half being held by the customer and half being forwarded to the overseas Hawallah banker. The launderer then presents his receipt in the target country to obtain his money, thus avoiding exporting cash out of the country and limiting the risk of detection.

2.FUTURES

The UK experience showed that the futures market, through Capcom Commodities, a BCCI-related institution was another area that money launderers were taking advantage of for their money laundering schemes. Because of the anonymous nature of the trading strategies, all brokers trading as principals and not in their client's name, the true identity of the beneficial owner is not known. Commodities therefore are a zero sum game, which means you can only buy if someone is willing to sell, and vice versa. Launderers can take advantage by a strategy of buying and selling the same commodity, thereby taking a small hit for the commission charged by the broker. They pay the losing contract out of dirty money and receive a cheque that legitimises their profits and creates a paper trail for any one who asks where the money came from.
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3. PROFESSIONAL ADVISORS

Accountants/Solicitors/Stockbrokers

If involved in investment activity, this group is covered in the Regulations. For example, their clients account can be used as a bank account by clients and can put him at risk under s93 CJA93. See Michael Relton - Solicitor convicted in relation to money laundering proceeds from Brinks Mat robbery.

4. FINANCE HOUSES/BUILDING SOCIETIES

As with banks, any suspicious transactions must be reported. Money deposits in these institutions are where the placement stage usually takes place so vigilance is called for by staff. Any unusual change in regular customers depositing habits need to be investigated and lenders also have to be aware that money laundering techniques can also involve paying off a debt faster than income would support. You would already know a customers declared income on the loan application.

5. FINANCIAL TRANSMITTERS

Bureau de change/international money transmitters/travel agents.

All offer a wide range of services that can be used by the money launderer. Airline tickets, foreign currency exchanges in the form of cash and travellers cheques, are recognised as being widely used techniques. Money transmitting services in the form of wire, fax, draft, cheque or by courier exist for people unable to use traditional financial institutions. Customer
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anonymity is a primary feature of such transmissions which identifies the inherent level of risk. Covered under the Regulations if they offer currency exchange facilities.

6. CASINOS Casinos and gambling establishments are particularly attractive to money launderers. Cash can be deposited with a casino in exchange for chips or tokens. After a few turns at the table the player can cash in the remainder for a cashiers cheque which can be deposited in their account. Another method is to buy winning tickets from people in bookmakers and saying you have won making bookmakers vulnerable to being used.

7. ANTIQUE DEALERS/JEWELLERS/DESIGNER GOODS SUPPLIERS Any area that possesses the characteristics which represent high value goods that possess great portability and in many cases are used to being paid in cash is an attractive area for money launderers. All the above satisfy these criteria and owners and staff have to be aware of their obligations under the legislation if they are to avoid being unwittingly used in a money laundering MONEY LAUNDERING OFFENCES There are now five basic money-laundering offences:

i. ii. iii. iv.

assisting another to retain the benefit of crime; acquiring, possession and use of criminal proceeds; concealing or transferring proceeds to avoid prosecution or a confiscation order (also called Own Funds money laundering). failure to disclose knowledge or suspicion of money laundering;
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v.

tipping off.

I. Assisting another to retain the benefit of crime.

Assistance occurs where a person is involved in an arrangement with another person, and knows or suspects that the other person is, or has been involved in, or has benefited from drug trafficking or criminal conduct if the arrangement helps the other person to retain or control proceeds directly or indirectly or enables the other person to use the proceeds or to invest them for his benefit. The legislation allows disclosure to a constable which is normally to the FIU of the NCIS. This covers terrorist related activities as well. The penalty for commission of an offence under this section is imprisonment of up to six months, or a fine not exceeding the statutory maximum, or both, on summary conviction. On conviction on indictment, the penalty is imprisonment of up to 14 years, or a fine, or both.

II. Acquisition, possession or use of criminal proceeds.

Acquisition is the offence of use or possession of property which you know or have reasonable grounds to suspect to be the proceeds of drug trafficking or criminal conduct and have acquired at less than full value. The aim of the offence is to prevent criminal proceeds being passed on by criminals to be enjoyed by third parties. Here, the reference is to property, rather than to funds or investments as in section 93A (property including money). The penalty for commission of an offence under this section is the same as for assisting another to retain the benefit of crime.

III. Concealing or transferring proceeds to avoid prosecution or a confiscation order (also called Own Funds money laundering). Concealing is disguising, removing or transferring proceeds (directly or
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indirectly) of drug trafficking or criminal conduct for the purpose of avoiding or helping someone else avoid prosecution. The offence is committed by a person who assisted in the offence if s/he knows or has reasonable grounds to suspect the nature of the property. Concealing or disguising any property includes concealing or disguising its nature, source, location, disposition, movement or ownership or any rights with respect to it. The penalty for commission of an offence under this section is exactly the same as for the assisting and acquisition offences. IV. Failure to disclose knowledge or suspicion of money laundering.

This offence only relates to drug trafficking and terrorism and not to proceeds of crime in general. A person is guilty of an offence if, as a result of something he learns in the course of his trade, profession or employment, he does not report a suspicion to a police or customs officer. There is a question as to whether disclosure is a waiver of professional privilege or a breach of any express or implied duty of confidentiality owed to a customer or client. For example, legal privilege for solicitors. If there is a criminal transaction then disclosure to the police will not constitute a waiver of professional privilege nor will it give actionable grounds for a claim for breach of confidence. The penalty for commission of an offence under this section is imprisonment of up to six months, or a fine not exceeding the statutory maximum, or both, on summary conviction. On conviction on indictment, the penalty is imprisonment of up to five years, or a fine, or both.

V. Tipping off.

The requirement to report suspicions is not much use if the suspected person
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is tipped off to the fact that s/he is under investigation. In order to preserve the integrity of an investigation, the offence of tipping off occurs when information or any other matter which might prejudice the investigation is disclosed to the suspect of the investigation (or anyone else) by someone who knows or suspects (or, in the case of terrorism, has reasonable cause to suspect) that: a police investigation into money laundering has begun or is about to begin, or the police have been informed of suspicious activities, or a disclosure has been made to another employee under internal reporting procedures. The penalty for tipping off is the same as for the failure to disclose offence.

INTERNATIONAL INITIATIVES
The increasing integration of the worlds financial system, as technology has improved and barriers to the free movement of capital have been reduced, has meant that money launderers can make use of this system to hide their ill-gotten gains. They are able to quickly move their criminally derived cash proceeds between national jurisdictions, complicating the task of tracing and confiscating these assets. Because of this, it has been recognised by many governments that close international co-operation was needed to counter money laundering, and a number of agreements have been reached internationally in order to counter this menace. These agreements have been reached on two fronts - financial and legal.

BASLE STATEMENT OF PRINCIPLES

On the financial front, the Committee on Banking Regulation and supervisory Practices issued the Basle Statement of Principles on the prevention of criminal use of the banking system for the purpose of money laundering in December 1988. The Statement of Principles does not restrict itself to drug-related money
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laundering but extends to all aspects of laundering through the banking system, i. e. the deposit, transfer and/or concealment of money derived from illicit activities whether robbery, terrorism, fraud or drugs. It seeks to deny the banking system to those involved in money laundering by the application of the following principles: a. Know your customer - banks should make reasonable efforts to determine the customers true identity, and have effective procedures for verifying the bona fides of new customers (whether on the asset or liability side of the balance sheet)

b. Compliance with laws - bank management should ensure that business is conducted in conformity with high ethical standards, laws and regulations being adhered to and ensuring that a service is not provided where there is good reason to suppose that transactions are associated with laundering activities.

c. Co-operation with law enforcement agencies - within any constraints imposed by rules relating to customer confidentiality, banks should cooperate fully with national law enforcement agencies including, where there are reasonable grounds for suspecting money laundering, taking appropriate measures which are consistent with the law.

d. Adherence to the Statement - The full text of this section of the Statement is worth quoting in full.

"All banks should formally adopt policies consistent with the principles set out in this Statement and should ensure that all members of their staff concerned, wherever located, are informed of the banks policy in this
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regard. Attention should be given to staff training in matters covered by the Statement. To promote adherence to these principles banks should implement specific procedures for customer identification and for retaining internal records of transactions. Arrangements for internal audit may need to be extended in order to establish an effective means of testing for general compliance with the Statement".

Number of Suspicious Transaction Reports (STRs)

Year Number STRs Number disseminated STRs

1997 1998 1999 2000 2001 of 9 of ---13

2004 95,31 1,059 7,242 12,372 18,768 43,768 5 64,67 5,329 6,752 12,417 30,090 5

2002

2003

THE FUTURE

BANKING

Owning a bank, as mentioned earlier in the text, is a classic means to launder huge sums of money. In Russia and some East European States, banks can be readily purchased for very little money- though few of them have electronic banking access to SWIFT. (SWIFT is the principal international service for wire transfer message traffic that initiates funds transfers. Besides banks, SWIFT provides services to

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(1) securities brokers and dealers,

(2) clearing institutions, and

(3) recognised securities exchanges.

SWIFT is a co-operative society located in Belgium; it has more than 2,600 member institutions in 65 countries). This is what the future nightmare envisioned by the authorities will be like with organised crime in control of banks and able to launder huge sums of money, not only for themselves but for other criminal organisations. Already, in Russia it is said that criminal groups control over 400 banks and 47 exchanges. This is worrying bank chairmen in Russia as between 1994 to July 1995 there were thirty assassination attempts against top banking officials, sixteen of whom were killed. These killings along with earlier ones, were important indicators of the efforts by criminal organisations to infiltrate the Russian banking system. Infiltration of the banking system offers significant advantages for criminal organisations, not least the opportunity it gives to facilitate money laundering for both Russian and foreign criminal organisations. CYBER PAYMENTS

The term cyber payments is just one of many used to describe systems which facilitate the transfer of financial value (i.e., digital currency, e-money). In fact, these developments may alter the means by which all types of financial transactions are conducted and financial payment systems are operated. Such transactions may occur via the Internet or through the use of smart cards which unlike debit or credit cards, actually contain a microchip, which stores value on the card. Some Cyberpayments systems use both.

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The common element is that these systems are designed to provide the transacting parties with immediate, convenient, secure and potentially anonymous means by which to transfer financial value. This system will, once implemented, have the potential to facilitate the international movement of illicit funds. The speed, which makes the systems efficient, and the anonymity that makes them secure are positive characteristics from the money launderer's perspective and it is this that makes it attractive to them. However, these same characteristics may actually impede law enforcement from obtaining necessary information to detect illegal activity. Specific concerns appear to be the impact of Cyber payments on the effectiveness of current regulatory/policy initiatives against financial crime and the impact on traditional investigative techniques and analysis. There are also various international jurisdictional issues to be considered. The FATF say that one of the challenges for the future will be addressing the potential money laundering threats posed by the new payment technologies. E-CASH

There are several systems of e-money. There are stored value cards such as MONDEX which is a rechargeable card (charged by putting it in a special slot in an ATM), and is both an access device and a self contained store of value. Further to this is Internet-based payment systems that use the Internets telecommunications capability to facilitate financial transactions with other users. The personal computer which serves as the users interface with the Internet payment system can also store value and is therefore, also an access device and self contained store of value. Morris-Cotterill (How Not To Be a Money Launderer,1996) describes the Internet as being one of the greatest opportunities for laundering because of the total lack of traceable transactions, the use of encryption software will further make transactions totally secure. With the Internet, being connected to anywhere in the world is no problem and this will allow cross border movements of capital to take place. It remains to be seen whether money laundering managers take advantage of these new technologies to circumvent any legislation on other traditional laundering techniques (smurfing, wire transfers, bank drafts for example). It is however, a worry to
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the authorities. With MONDEX, the way it works is that each card will have a pre-set limit. The limits on the cards will be set by issuing banks. Banks will be franchised on a trickle down basis with the big banks sub licensing little banks. With banks so easy to buy, what is to stop them from making a few cards with unlimited spending power? This system is already in operation in Swindon, UK. It transfers money from one card to another by telephone. It leaves a note on the card that a "private" transfer has been made, but no record of who private is. MONDEX can also make card to card transactions. This system is tailor made for money laundering unless some safeguards are put in place. RECOMMENDATIONS Launderers have a list popularly called a "shopping list" which they use to size up specific opportunities when searching for jurisdictions to use. Knowing what is on this list can give rise to specific measures for countries to adopt to fight money laundering. These measures are a natural progression for countries who have the political will to combat this insidious crime. Recommendations; We need:-

A. to strengthen international co-operation on information exchange and law enforcement; B. proper mechanisms for handling suspicious reports; C. a compliance culture among financial institutions; and to ensure that they put proper systems and procedures in place; D. to encourage financial supervisors to apply bank licensing procedures strictly, exchange information, and train practitioners; E. to increase public awareness of the threat from money laundering;
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F. increasing co-ordination between the multiple agencies (national and international) involved and to improve the limited intelligence sharing; G. to increase the limited human resources involved in the labour intensive and time consuming work of investigating suspected violations; H. implementation on a world-wide basis of a consistent set of policies. (e.g. FATF 40 Recommendations); I. to focus on new technologies and increase countermeasures to combat their use for money laundering; J. to share forfeited proceeds with law enforcement agencies. (a particular police gripe); K. Introduce measures that make the movement of money more visible.

By implementing the recommendations above, the authorities should further strengthen the fight against the money launderer and show them that there is no place to hide. However, there will have to be political impetus to crystallise strong coordinated overall international action, and to define the best way to associate other countries, including drug-producing countries, to the fight against money laundering. I. Ratification and implementation of UN instruments

Each country should take immediate steps to ratify and to implement fully the 1999 United Nations International Convention for the Suppression of the Financing of Terrorism. Countries should also immediately implement the United Nations resolutions relating to the prevention and suppression of the financing of terrorist acts, particularly United Nations Security Council Resolution 1373. II. Criminalising the financing of terrorism and associated money laundering
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Each country should criminalise the financing of terrorism, terrorist acts and terrorist organisations. Countries should ensure that such offences are designated as money laundering predicate offences. III. Freezing and confiscating terrorist assets

Each country should implement measures to freeze without delay funds or other assets of terrorists, those who finance terrorism and terrorist organisations in accordance with the United Nations resolutions relating to the prevention and suppression of the financing of terrorist acts. Each country should also adopt and implement measures, including legislative ones, which would enable the competent authorities to seize and confiscate property that is the proceeds of, or used in, or intended or allocated for use in, the financing of terrorism, terrorist acts or terrorist organisations.

IV. Reporting suspicious transactions related to terrorism

If financial institutions, or other businesses or entities subject to anti-money laundering obligations, suspect or have reasonable grounds to suspect that funds are linked or related to, or are to be used for terrorism, terrorist acts or by terrorist organisations, they should be required to report promptly their suspicions to the competent authorities.

V. International co-operation

Each country should afford another country, on the basis of a treaty, arrangement or other mechanism for mutual legal assistance or information exchange, the greatest possible measure of assistance in connection with criminal, civil enforcement, and administrative investigations, inquiries and proceedings relating to the financing of terrorism, terrorist acts and terrorist organisations.
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Countries should also take all possible measures to ensure that they do not provide safe havens for individuals charged with the financing of terrorism, terrorist acts or terrorist organisations, and should have procedures in place to extradite, where possible, such individuals.

VI. Alternative remittance

Each country should take measures to ensure that persons or legal entities, including agents, that provide a service for the transmission of money or value, including transmission through an informal money or value transfer system or network, should be licensed or registered and subject to all the FATF Recommendations that apply to banks and non-bank financial institutions. Each country should ensure that persons or legal entities that carry out this service illegally are subject to administrative, civil or criminal sanctions.

VII. Wire transfers Countries should take measures to require financial institutions, including money remitters, to include accurate and meaningful originator information (name, address and account number) on funds transfers and related messages that are sent, and the information should remain with the transfer or related message through the payment chain. Countries should take measures to ensure that financial institutions, including money remitters, conduct enhanced scrutiny of and monitor for suspicious activity funds transfers which do not contain complete originator information VIII. Non-profit organisation Countries should review the adequacy of laws and regulations that relate to entities that can be abused for the financing of terrorism. Non-profit organisations are particularly vulnerable, and countries should ensure that they cannot be misused:
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i. ii.

by terrorist organisations posing as legitimate entities; to exploit legitimate entities as conduits for terrorist financing, including for the purpose of escaping asset freezing measures; and to conceal or obscure the clandestine diversion of funds intended for legitimate purposes to terrorist organisations.

iii.

IX. Cash couriers

Countries should have measures in place to detect the physical cross-border transportation of currency and bearer negotiable instruments, including a declaration system or other disclosure obligation. Countries should ensure that their competent authorities have the legal authority to stop or restrain currency or bearer negotiable instruments that are suspected to be related to terrorist financing or money laundering, or that are falsely declared or disclosed. Countries should ensure that effective, proportionate and dissuasive sanctions are available to deal with persons who make false declaration(s) or disclosure(s). In cases where the currency or bearer negotiable instruments are related to terrorist financing or money laundering, countries should also adopt measures, including legislative ones consistent with Recommendation 3 and Special Recommendation III, which would enable the confiscation of such currency or instruments.

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