GLOBAL MONEY LAUNDERING − THE SILENT FLOW OF MONEY

Sukumar Nandi

is invested formally in legitimate

activities.

Money laundering is now a widely

circulated phrase and many
governments are worried about this
phenomenon. Money laundering (ML)
refers to all activities and systems
intended to camouflage the identity of The opportunities for generating
money earned from activities that are profits through illegitimate means
strictly not legal, by the legal system come for the following factors:
of the country and this is done to (i) Existence of a large
create the impression that the money unorganized or informal
in circulation has a legitimate source. economy,
ML is the transactional processing of (ii) The porous and ill-
illicitly obtained funds towards defined legal system, and
disguising its source, nature, poor record of its
ownership or intended destination. implementations,
The desired outcome of this process is (iii) Existence of systemic
‘clean’ money (or money is laundered) corruption, and
and it can be legally accessed through (iv) Lack of proper
legitimate financial institutions. governance

The Origin The size of unorganized sector in

The process of ML is driven by a
criminal imperative, aimed at
generating profits in an illegal fashion.
Such funds generated through
organized crime or frauds remain
‘outside’ the formal and legitimate
financial system. The LM process aims
to camouflage such funds by passing
them through multiple accounts and
shell companies1 towards either totally
obscuring the original source, or
towards associating the funds with a
source that seems to be legal. Once
the process is complete, such money
many developing countries is very
large. In India, the importance of
unorganized sector in the gross
domestic product is above 40 per
cent2 and the situation is along similar
lines in many countries. Since
documentation is absent, tax
authorities are denied tax revenue and
illicit transactions are difficult to
identify. The transactions in this
sector are hardly recorded, and this
facilitates the use of so-called black
money in regular business.
The legal systems in many developing
countries are not sufficiently full-proof

1 2
A shell company is often a company created as a Poonam Gupta and Sanjeev Gupta, Estimates of the
front company to do business when required. Unreported Economy in India, Economic and
Generally this type of companies do no business and Political weekly, 17 ( 3), January 1982. This study
remain on paper, but they are used to cover many puts the figure slightly below 50 per cent in 1980
business operations. itself.
1
and as a result, many suspect money
transactions remain beyond the arms
of law. This aspect of inefficient legal
system is associated with systemic
corruption in many developing
countries. This sort of legal vacuum
creates a space for the growth of a
culture in which money power draws
certain respect in the society and that
makes people believe in a type of
system, where people think in terms
of the following dictum:
“We live by the golden rules. People
who have the gold make the rules”3.
Effective governance is a luxury many
less developed countries cannot afford
and the result is that rule of law does
not reach in all regions of countries
like Afghanistan, Mongolia, many
countries in Africa and also in some
regions of Eastern Europe. As a result,
private money power is more powerful
than state power in those regions.
Taking advantage of the vacuum of
effective governance interested
parties can pursue semi-political
ambitions in the guise of some popular
issues and that is facilitated by money
power. For this reason, it is said
sometimes:
“The invisible money power is working
to enslave mankind. It financed
Communism, Fascism, Marxism,
Zionism and Socialism”4
Stages of Money Laundering
There are three primary stages in the
money laundering cycles:
(i) The placement stage
(ii) The layering stage
(iii) The integration stage
First, during the placement stage, the
hard money generated by the illicit
activities (like drug smuggling, sale of
illegal arms and other type of cross-
3
A quote by Buzzi Bavasi
4
Quoted in American Mercury Magazine
border trade that has no legal
sanction) needs to be placed safely
and it is generally deposited in an
institution of business, or invested in
expensive assets. The whole operation
becomes an informal affair and thus,
remains beyond the scanning of law
enforcing institutions.
Second, in the layering stage, the
agents try to separate illegally
generated funds from the original
source and this is done by creating
layer upon layer of transactions. The
latter take the form of movements of
money between different accounts,
and/or between businesses through
buying and selling of assets on a
global basis. This goes on until the
original source of funds virtually
becomes untraceable.
Third, upon completion of the layering
process the illegal funds are
introduced in the financial system in
legal way as payments of services
and/or against transaction of
commodities. At this stage money
becomes legal and laundering is
complete.
The three processes described above
can be explained through an example
so that modus operandi of the whole
mechanism becomes clear.
In the golden crescent5
bordering Pakistan, Afghanistan and
Iran, illicit opium cultivation is an open
secret. The result is illegal drug
dealing. The money generated
through sale of drugs is invested in a
posh hotel, frequented by travellers
from all over the world. Now the
proceeds from the drug deals are used
for payments related to this legal
business, along with other regular
trading incomes. The launderer now
5
This mountainous region bordering three countries,
Pakistan, Afghanistan and Iran is a huge space that is
famous for illegal opium cultivation and known as
golden crescent in Asia.
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opens up other supply companies to
serve the business of the hotel. These
companies now issue invoices that the
hotel settles through cheque
payments. The increased amount of
such transactions and movement of
money along with this make a
smokescreen, so that the criminal
origin of money is effectively
obscured. The whole process
continues for the enrichment of the
persons involved.
The Global Infrastructure: the
Offshore Centres
The large number of so-called tax-
haven offshore centres gives enough
facility to keep money in numbered
accounts, while keeping the true
ownership of money anonymous to the
outside world. The existence of
offshore finance centres (OFC) is a
weak spot in the global financial
system, as the regulation of the
financial transactions in OFC is seldom
effective because of its nature of
operations.
There are more than one hundred
offshore finance centres spread all
over the world. Prominent among
these are located in Hong Kong,
Thailand, Tahiti, Macao, Philippines,
Singapore in Asia and Pacific, Andorra,
Cyprus, Dublin, Liechtenstein, London,
Switzerland in Europe, Bahrain, Israel,
Lebanon in Middle East, Bahamas,
Belize, Cayman Islands, St. Lucia,
United States in Western Hemisphere.
International banks in OFCs accept
deposits in multiple currencies and
conduct banking operations on behalf
of clients and they maintain secrecy.
In fact, it is the secrecy and
confidentiality that is their main
product and these banks charge their
clients for that.
Many small countries encourage the
growth of offshore financial services,
as these attract large volume of
foreign capital and that is invested for
local development. In lieu of that OFC
provides certain services like;
(i) maintenance of secrecy
and confidentiality,
(ii) no exchange control,
(iii) absence of any tax
burden,
(iv) the facility of disguising
the ownership of
corporate vehicles
through the use of
nominee directors,
(v) no reporting
requirements for
companies like annual
reports,
(vi) no system of supervision
of companies such as
annual general meetings.
In essence, it is the absence of state
(in the form of rules and regulations)
that is the main attractions of money
flowing to the offshore centres. The
above features are ideal for disguising
the true origin of money and also true
ownership. As a result, OFC has
become favourite medium for money
laundering. The geography is not
important, as same international bank
in New York can maintain offshore
operations in a separate table, along
with normal banking in the branch.
Offshore banking services include the
borrowing of money from non-
residents and lending to non-
residents. This may assume the form
of lending money to corporates,
funded by liabilities to the offices of
lending banks elsewhere. Some of
these transactions are captured in the
statistics published by Bank for
International Settlements (BIS). But
significant volumes of funds are
managed by such institutions at the
risk of investors, and such off-balance
sheet activity is not reported. The OFC
in tax-haven zones are often the
conduit of capital flight and money
laundering.
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Anti Money Laundering Measures
In 1998, Mr. Stanley Morris, Chairman
of the Financial Action Task Force
(FATF) of the Organization for
Economic Cooperation and
Development (OECD) stated that “
the need to estimate the size of
money laundering and quantify its
constituent parts has been a concern
of the FATF6 since its initial report”.
The report identified the following
areas of legitimate demand for
quantitative measures of money
laundering:
observed that “There is not, at
present, any economic dues ex
machina that will allow the accurate
measurement of money laundering
world-wide, or even within most large
nations. The basis for such estimations
simply does not exist”.
The Financial Action Task Force
( FATF) is active in its pursuit of anti
money laundering measures and it is
reflected in its Annual Report of 2008
in which the ministers under FATF
have given the mandate to the
organization to have four clear
objectives, which are:

(a) Understanding the (a) To establish and maintain

magnitude of the crime so global standard and
that different agents of legal measures for countering
system can reach agreement money laundering, along
on the place of anti money with its assessment of
laundering programmes implementation
within national and (b) To identify money
international enforcement laundering methods , and
systems. (c) To expand cooperation with
(b) Understanding the stakeholders and partners in
effectiveness of counter- order to make the system
money laundering efforts work effectively and
with a given baseline and globally.
scale of measurement.
(c) Understanding the Prevention of Money Laundering
macroeconomic effects of Act, 2002
money laundering, as it has
adverse effects on the Taking a cue from the activities of
overall economy and FATF, Government of India enacted
financial institutions. ML has the Prevention of Money Laundering
undesirable influence on Act, 2002 that came into effect from
demand for money, July 1, 2005. As per different
exchange rate movement, provisions of the Act, every banking
interest rate and company, financial institutions like
effectiveness of fiscal cooperative banks, housing finance
policies. institutions and mutual funds and
other intermediaries7 shall have to
Considering the above aspects of maintain a record of all transactions.
money laundering, Mr. Stanley Morris The nature and value of the

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The FATF comprises 34 members: 32 member These include stock brokers, share transfer agents,
jurisdictions and two regional organizations ( EU and trustee to a deed, merchant bankers, portfolio
Gulf Cooperation Council) representing most major managers, and any other intermediaries associated
financial centers of the world. Again, republic of with the securities markets and registered under
Korea and India became observers in 2006 and are section 12 of the Securities and Exchange Board of
working to become members. India Act, 1992.
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transactions have been prescribed in it shows the enormous power of the
the Act. Such transactions include: money launderers.
The top ten origins of laundered
(i) All cash transactions of money in the world are (percentage of
the value of more than the total basis per annum): United
Rs. 10 lakhs in foreign States ( 46.3%), Italy (5.3%), Russia
currency ( 5.2%), China ( 4.6%), Germany
(ii) All series of cash ( 4.5%), France ( 4.4%), Romania
transactions integrally ( 4.1%), Canada ( 2.9%), U.K. ( 2.4%),
connected to each other, and Hong Kong ( 2.2%). One estimate
which have been valued puts the USA figure of laundered
below Rs. 10 lakhs in money per year as USD 1320 billion.
foreign currency, where This is a huge sum, and it shows the
such series of money power of the launderers.
transactions take place
within one month Money has no colour as the proverb
(iii) All cash transactions goes, and it is a fungible asset. This
where forged or quality is its beauty and present day
counterfeit currency money transfer technology (SWIFT
notes have been used as System) makes transfer of money
genuine, or where any across the globe very easy. But there
forgery of a valuable is a one-to-one relation between the
security or a document degree of effective control on the
has taken place, money laundering process and socio-
facilitating the economic welfare of the country.
transactions
(iv) All suspicious
transactions, whether or
not made in cash and
including, inter-alia,
credits or debits into from
any non-monetary
account such as demat
account, security account
maintained by the
registered intermediary.

In spite of the rigorous implementation

of the Act, it is difficult to stop the flow
of laundered money because of global
connections and India is basically an
open economy.

Global Position of Money

Laundering

The power of the money launderers of

the world is very high. The annual flow
of money through laundering process
in the world is as high as 5 per cent of
world GDP per year, and this is
obviously a scientific guess work. But
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