Introduction to Money Laundering
This course is made possible through the generous financial support of the Arab Gulf Program for Development (AGFUND). _For more information visit the Global Platform on Financial Inclusion _
Module Objectives By the end of this module, you should be able to: Understand the concept of money laundering. Discuss what money laundering is and what are the various processes of money laundering. Understand various methods or typologies employed by money launderers to launder their illegitimate funds. Have a broad understanding of the economic and social impacts of money laundering on international development. Discuss why a few countries are more highly vulnerable to money laundering risks and threats than other countries.
Money laundering and terrorist financing has become a major concern for the international community. Countries have always been concerned about the threats posed by the laundered proceeds of crime. It is a major policy concern, both at the national and international levels.
Money laundering can have very devastating effects on the social and economic development of a country and therefore it becomes highly significant to promote international awareness about money laundering and terrorist financing and to develop efficient and effective anti-money laundering and financing of terrorism regimes.
These illicit funds generated through illegal activities and then cleaned through the process of money laundering have extensive adverse social and economic consequences for a country.
Money Laundering... destabilizes the financial institutions of a country, increases the problem of corruption and other crimes, destroys the country’s international reputation and results in slow economic development of a country by pushing away genuine investors and by complicating the government’s efforts to manage economic policy.
What and Why of Money Laundering
Although there are differences among countries on the definition of Money Laundering. Most countries subscribe to the definition of ‘money laundering’ adopted by the Vienna Convention 1988 and the Palermo Convention 2000.
These UN Conventions provide that a person commits a crime of money laundering if they are involved in: a. ‘The conversion or transfer of property, knowing that such property is the proceeds of crime, for the purpose of concealing or disguising the illicit origin of the property or of helping any person who is involved in the commission of the predicate offence to evade the legal consequences of his or her action;
b. The concealment or disguise of the true nature, source, location, disposition, movement or ownership of or rights with respect to property knowing that such property is the proceeds of crime;
c. The acquisition, use or possession of property, knowing, at the time of receipt that such property is the proceeds of crime.’
Why Does Money Laundering Occur?
The main motive of criminals for choosing the process of money laundering is to commit **“predicate offences” ** and accumulate significant amount of “dirty” money to lead a luxurious life.
Despite these differences, in most jurisdictions all serious crimes, are capable of predicating money laundering offences. These include such crimes as: Fraud (mortgage fraud, benefit fraud or any other fraud)
Drug or Arms Trafficking
Bribery or Corruption
Which of these offences are agreed upon by most countries as Money Laundering? Choose all that apply
Stages and Techniques of Money Laundering
Money Laundering and the Insurance Sector
Here is an example of money laundering using life insurance. A money launderer has purchased two single premium life insurance policies from an insurance company in the sum of 1 million US Dollars each.
He deposited 2 million US Dollars to the insurance company in cash and then opted for an early surrender of the policy at an economic loss of 40% of the original investment to be cashed outside the jurisdiction.
Since the deposit was paid in cash, the insurance company was not sure about the origin of money. The money may have come from the trade of illicit drugs or any other serious crime There is also the possibility that the person may be trying to evade creditors seeking remuneration from his fraudulently declared bankrupt company.
Which of these are true? Money used in money laundering can come from
VAT Carousel fraud generally involves organised criminal groups that misuse the tax system of countries to generate profits.
It is not a form of tax evasion, but a very systematic and deliberate way of trading that will attack government revenues. Criminals generally get involved in VAT Carousel fraud to make profits or to launder the proceeds of crime.
In VAT Carousel fraud, the goods or services are moved between different owners, and each time when they are moved, a small amount of profit was attached to the purchasing price to increase the VAT which would then be reclaimed at the end of the chain and obscures the illegitimacy of the transactions. The goods are often undervalued in carousel fraud before they are circulated again so that the prices of goods should remain under control and may not go unexpectedly high.
Few companies in a transaction become missing traders to avoid making payment of VAT to respective authorities and when goods are sold back to an EU country, the buffer company in a transaction again claims back VAT from the EU country.
**The Banking Sector ** Money launderers increasingly use private banking system operations to facilitate their money laundering mechanisms. Criminals launder vast amount of proceeds of crime through private banking that have less adequate levels of compliance and anti-money laundering procedures.
Money Laundering and Alternative Remittance Systems Besides the banking system, the parallel banking system or alternative remittance system has also been at a high risk of money laundering.
Here is one example: A criminal organization that wants to transfer part of its illicit funds which are obtained as a result of their illegal activities from Country B to Country A.
The organization found and contacted a group of persons in Country A to achieve their objective who agreed to receive remittances from abroad in exchange for a commission on each transaction.
The name, ID and telephone numbers of those persons were collected by the criminal organization in Country B and then, within 3 days, they made 30 remittances each consisting of USD 1500 each by using 4 different operators in Country B.
Funds were transferred to 40 different beneficiaries in 2 nearby cities of Country A by using 4 different local brokers for that purpose. Most of these beneficiaries were housewives, students, or pensioners to avoid any suspicion.
Once the money was received by the brokers, they will contact all the beneficiaries to collect money from their offices.
Often international remittance systems are used by persons to send legal remittances to their families abroad; however, at times they are also used for placing illicit proceeds from criminal organisations or to finance terrorist activities.
Money Laundering and The Legal Sector
Money launderers have not only been using financial institutions to launder the proceeds of crime but are also using various non-financial businesses and professions to achieve their goal.
The legal profession is amongst one such profession that can be easily targeted by money launderers to clean their dirty money by engaging the services of a lawyer in different ways.
A simple money laundering scheme could be, for example, if your client has “accidentally” paid your firms bill twice, using dirty money for one of the payments, and then requesting a refund, which would be paid in the form of a cheque drawn on your firm’s client account.
Practice Question 1 Georges conducted a Ponzi scheme by luring innocent domestic investors to invest. He claimed they would get a steady stream of payments over time and would receive a handsome return on their investments.
Practice Question 1 The underlying criminal activity in this case was wire fraud. At which point did money laundering FIRST take place?
Practice Question 2 A compliance officer at a major insurance company has recently noticed a pattern of potentially suspicious transactions from a long-time customer.
The customer is employed in a consulting position that requires her to travel internationally on an unpredictable schedule and she often resides overseas for extended periods. The customer has several properties insured with the company for large amounts.
In the past three years, she has overpaid her premiums numerous times and then requested a refund be issued.
Concerned that the customer may be laundering funds through the overpayment of premiums, the officer is investigating the transactions.
Practice Question 2 Which fact would BEST indicate money laundering may be taking place?
Social and Economic Impacts of Money Laundering
Economic Impacts of Money Laundering
Money laundering can damage the integrity of a country’s financial institutions. Financial Institutions, including banks, insurance companies and asset management institutions, which may have proceeds of crime deposited within their institution have to be very careful of their assets, liabilities and operations.
Money laundering can pose significant legal, operational, **reputational **and concentration risks to these institutions, which may result in huge financial losses.
Money Laundering causes a country to have a damaged international reputation and reduced foreign investment.
No country however developed or advanced it may be, is immune to money laundering. Money laundering can have devastating effects on the international reputation of a country. This may adversely affect the confidence of world economy and investors in that country’s financial system.
Countries with a damaged international image due to high risk of money laundering will become home to criminals from all over the world. It can result in various other social, security and economic problems in a country.
When proceeds of crime are circulating there is trouble. Criminals will spend these proceeds, which were not hard earned by them, to commit various other crimes. Increased crime and corruption in a country will also increase government expenditure to combat serious consequences of increasing crime.
**Why Some Countries are More Attractive | Money Laundering and AML Measures **
No country is immune to money laundering.
Money launderers often target such countries to launder their proceeds of crime so that their techniques will go undetected.
FATF Measures The FATF issues two public documents, three times a year, to identify jurisdictions with weak measures to combat money laundering and terrorist financing. As of February 2020, the FATF has reviewed over 100 countries and jurisdictions and publicly identified 80 of them. Of these 80, 60 have since made the necessary reforms to address their AML/CFT weaknesses and have been removed from the process.
AML/CFT MEASURES AND FINANCIAL INCLUSION The FATF has recently published its updated guidance on ‘Anti-Money Laundering and Terrorist Financing Measures and Financial Inclusion’ in 2017, the purpose of which is to provide support for designing AML/CFT measures that meet the goal of financial inclusion, without compromising their effectiveness in combating crime.
Introduction: Combating Money Laundering
Module Objectives By the end of this module, you should be able to: Understand the role of various international organizations, regional bodies and other relevant groups in a fight against money laundering. Discuss the international standards developed against money laundering. Understand the various tools and techniques developed and used by different organizations to assist countries in developing effective anti-money laundering regimes. Understand the role of various organizations in effectively implementing international AML standards.
** The United Nations **
** Financial Action Task Force (FATF)**
** International Organizations of Securities Commissions **
** World Bank**
** Basel Committee on Banking Supervision**
** International Monetary Fund (IMF) **
The Role of International Organisations in Combating Money Laundering | Part 1
We will be looking at the role of international organizations in combating money laundering in this lesson. The United Nations (UN) The Financial Action Task Force (FATF) International Organisation of Securities Commission (IOSC) The World Bank and the International Monetary Fund (IMF) The Basel Committee on Banking Supervision (BCBS) International Association of Insurance Supervisors (IAIS)
The steps taken by the UN can have significant impacts on combating money laundering worldwide due to the membership of 193 countries. Let's take a look at the UN's history in AML efforts.
The United Nations Convention Against Illicit Traffic in Narcotic Drugs and Psychotropic Substances, adopted in 1988, (hereinafter the ** Vienna Convention**) is the first international convention that identified and addressed the issue of proceeds of crime and is also the first international instrument that required countries to criminalize money laundering.
The UN has also established ** The Global Programme Against Money Laundering ** at Vienna within the United Nations Office of Drugs and Crime to assist its member states to: effectively implement various measures to combat money laundering and terrorist financing and to enable them to efficiently detect, seize and confiscate the proceeds of crime in accordance with the UN instruments and other international standards.
The UN is also running an internet-based ** ‘International Money Laundering Information Network’ (IMOLIN **) to help governments, organisations and individuals fight against money laundering.
** The Vienna Convention ** The United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (The Vienna Convention) was adopted in Vienna on 20 December 1988.
** This Convention provides comprehensive measures against drug trafficking, including provisions against money laundering. ** It urges for international cooperation to counter drug trafficking through, for example, extradition of drug traffickers, mutual assistance, controlled deliveries and transfer of proceeds from drug trafficking.
Although the Convention does not particularly use the term ‘money laundering’, it is the first international convention that obliges states to criminalize money laundering. **The Vienna Convention has, however, limited the scope of offences that could result into money laundering to the offence to drug trafficking only and does not address the preventive aspects of money laundering. **
** The Palermo Convention** The United Nations Convention against Transnational Organized Crime (The Palermo Convention) was adopted by the General Assembly resolution 55/25 of 15 November 2000.
The Palermo Convention has a similar function to the ____.
**1998 Political Declaration and Action Plan Against Money Laundering ** The United Nations General Assembly approved the Political Declaration and Action Plan against Money Laundering in its twentieth special session in New York on 10 June, 1998.
The General Assembly recognized that the problem of money laundering has become a global problem with increased threat to the integrity, reliability and stability of financial institutions and government structures.
The Role of International Organisations in Combating Money Laundering | Part 2
The Revised FATF Recommendations 2012 FATF has issued 40 recommendations to combat money laundering and 9 recommendations to fight against terrorist financing, which were revised in 2012.
What is the Non-Cooperative Countries and Territories (NCCT) Initiative? The main objective of the NCCT Initiative was to reduce the vulnerability of financial systems to money laundering by ensuring that all financial centers adopt and implement necessary measures to identify, prevent and punish the money laundering offences according to internationally recognised standards. The February 2000 NCCT report laid out the basic procedure for reviewing countries and territories as part of this initiative. In June 2009, the FATF adopted new procedures for identifying high-risk and non-cooperative jurisdictions and started the process of reviewing the AML/CFT regimes of a limited number of jurisdictions. As on 20 May 2020, the FATF identified 18 jurisdictions that have strategic deficiencies and works with them to address those deficiencies that pose a risk to the international financial system. The FATF closely monitors progress of these jurisdictions and the implementation of their action plans.
The Role of International Organisations in Combating Money Laundering | Part 3
How was the Methodology for AML/CFT Assessment developed?
What does AML/CFT stand for?
In 2001, both organisations recognised that the problem of money laundering has serious threats and risks to both major and small financial institutions and began to work together to combat money laundering and terrorist financing.
Additional BCBS Guidelines for AML
Customer Due Diligence for Banks (CDD) The BCBS issued its paper on Customer Due Diligence for Banks (CDD) in October 2001 to provide prudential guidance to banks to develop appropriate policies and procedures for CDD which are applicable to anti-money laundering and financing of terrorism. It recommends the banks to develop proper policies and procedures in key areas including customer acceptance, customer identification, on-going monitoring of high risk accounts and risk management. It provides for enhanced due diligence measures to be taken in cases where there is a high risk of money laundering; for example, when establishing business relationship with ‘Politically Exposed Persons’(PEPS).
Due Diligence and Transparency regarding Cover Payment Messages related to Cross-Border Wire Transfers In May 2009, the BCBS issued its paper on Due Diligence and Transparency regarding Cover Payment Messages related to Cross-Border Wire Transfers. The paper mainly describes the supervisory expectations for the information received in cross payment messages when one bank (intermediary bank) is acting as an intermediary of other banks (the bank of the originator and the bank of the beneficiary) which are located in two different jurisdictions.
Sound Management of Risks related to Money Laundering and Financing of terrorism In January 2014, the BCBS issued its guidelines on Sound Management of Risks related to Money Laundering and Financing of Terrorism. These guidelines embody both the Revised FATF Recommendations 2012 and the Basel Core Principles for Banks operating cross-borders and fits into the overall framework of banking supervision by describing how banks should include money laundering and financing of terrorism within their overall risk management.
The IAIS was established in 1994 to represent the insurance regulators and supervisors from more than 100 countries.
Currently, the IAIS has 214 members and more than 120 observers representing industry associations, professional associations, consultants, insurers and re-insurers, and international financial institutions.
The main objective of the IAIS is to issue insurance standards, principles and guidance papers to train and support the insurance sector on various issues relating to supervision and encourage an exchange of information between them by organizing meeting and seminars.
The main objective of the BCBS has been to ...
Regional Organisations and Relevant Groups Against Money Laundering
There are various regional organizations and relevant groups that are playing a crucial role in the fight against money laundering. These bodies are either organized according to their geographical region or by the specific purpose of the organization.
In this lesson we will briefly look at the role of a number of regional organizations in combating money laundering. ASIA/PACIFIC GROUP ON MONEY LAUNDERING (APGML) CARIBBEAN FINANCIAL ACTION TASK FORCE (CFATF) THE COUNCIL OF EUROPE - MONEYVAL THE FINANCIAL ACTION TASK FORCE ON MONEY LAUNDERING IN SOUTH AMERICA MIDDLE EAST AND NORTH AFRICA FINANCIAL ACTION TASK FORCE (MENAFATF) THE EURASIAN GROUP ON COMBATTING MONEY LAUNDERING AND FINANCING OF TERRORISM (EAG) THE INTER-GOVERNMENTAL ACTION GROUP AGAINST MONEY LAUNDERING IN WEST AFRICA (GIABA) THE TASK FORCE ON MONEY LAUNDERING IN CENTRAL AFRICA (Groupe d’Action contre le blanchiment d’Argent en Afrique Centrale (GABAC) EASTERN AND SOUTHERN AFRICA ANTI-MONEY LAUNDERING GROUP (ESAAMLG)
MONEYVAL The Council of Europe – the Committee of Experts on the Evaluation of Anti-Money laundering Measures and the Financing of Terrorism – MONEYVAL (formerly PC-R-EV) was established in 1997.
The Financial Action Task Force on Money Laundering in South America (GAFILAT)
OTHER RELEVANT GROUPS
What does FIU stand for?
United Nations Instruments On Combating Terrorist Financing
Between 1963 and 1999, the UN has issued 12 legal instruments/Conventions relating to prevention and suppression of terrorism.
In 1972, the General Assembly established the first Ad Hoc Committee on International Terrorism.
In 1996, it established another Committee on Terrorism as a supplement to a Declaration on Measures to Eliminate International Terrorism, adopted in 1994. Since the adoption of this declaration, the General Assembly has been addressing the terrorism issue consistently.
The UN Security Council Resolutions Since early 1990, the UN Security Council has been concerned with the issue of terrorism. In 1990s, its actions took the form of sanctions against States considered to have links to certain acts of terrorism – Libya (1992) Sudan (1996) Taliban (1999) expanded to include Al-Qaida in 2000 by Resolution 1333
Summary and Glossary of Terms
There is no single definition of money laundering. In general, money laundering means hiding the existence, origin, use, movement or disposition of illegally obtained funds to make them appear legitimate.
There are three stages of money laundering i.e., placement, layering and integration. The laundered proceeds of crime pass through these stages to finally enter the financial system of a country as legitimate money.
Money laundering mainly occurs because of the intention of money launderers to commit predicate offences and accumulate large amounts of wealth that would enable them to lead a luxurious life.
It is very difficult to state or generalize any schemes or typologies that are used by money launderers to wash off their dirty money and get it converted into clean money because they are always evolving.
It is highly significant for countries to develop appropriate anti-money laundering mechanisms to protect their countries from being exploited by criminals.
Money laundering can have devastating effects on the social and economic development of a country. It will undermine the integrity of financial institutions of a country, increases crime and corruption, results in economic instability, and adversely effects the country’s international reputation which in turn reduces the flow of foreign investment in a particular country.
Countries that have a high index of corruption, ineffective or outdated anti-money laundering systems, and weak law enforcement agencies together with other system deficiencies are more vulnerable to money laundering.
It is therefore necessary that countries should take effective steps to undermine crime and criminal organizations and make sure that the “crime should not pay”.
It is also necessary for countries to combat money laundering to protect court investigations and to ensure the proper administration of justice within a country.
The FATF Recommendations 2012 has been globally recognized as international standards to fight against money laundering and compliance with these standards is ensured by different regional and international organizations through conducting assessments and mutual evaluations of various jurisdictions.
Both regional and international bodies are also performing the major task of keeping a constant watch on the emerging money laundering trends and techniques. Most organisations develop and publish annual typology reports from the information gathered during the assessment and other relevant sources and publish these reports to spread worldwide awareness about evolving money laundering methods.
Organisations assist governments to develop policies and procedures for effective detection, investigation and prosecution of money laundering offences. The main aim of all these organisations, both regional and international, is to develop and promote international cooperation to combat money laundering and terrorist financing.
Fundamentals of Anti-Money Laundering: Quiz
Very comprehensive intro to anti-money laundering.