The Concerns Over Money Laundering

Money Laundering is a serious crime that affects the economy as a whole, hampering the social, economic, political, and cultural of developed countries of the world. World is driven by money and money is the root key for all businesses and trade activities around the world. In fact, Money is what money does. Its laundering through illegal practices becomes an evil for the economies. Criminal activities as drug trafficking, human trafficking, migrant smuggling, traffic in body organs and firearms, as well as prostitution and racketeering, have generated immense profits that boost demand for money laundering. Money laundering is an economic threat as well as it becomes terrorist threat after the September 11 attacks on U.S. . . . Since then United States of America strengthen their legislation in preventing the money laundering and United Kingdom criminalizes the money laundering. U.S. and U.K. both have been fighting against money laundering and making their every effort in reducing the process of drug trafficking, illegal trade, human trafficking etc. But, after all of their effort U.K. is the major consumer of Cocaine in the world as the percentage of cocaine takers in U.K. is more than in any other country of the world. [1] The question is where all the money gone which comes from the selling of cocaine. How it launders? Financial Institution have already adopted the idea of customer due diligence, no one can easily open bank account easily. Money laundering ways are different and the launderers find new ways to launder their illegal money and cheat the financial system. In the past if we seen we found the major banks played their role in money laundering for example the collapse of BCCI, which has foundation only for the process of money laundering and that bank shackle the financial system prevalence in the world. If we look at the world we would find that every country has got abuse of money laundering. A major factor contributing to increased activity against the laundering of the proceeds of the crime has been the enhanced appreciation of the negative impact which significant flows of ‘dirty money’ can have on the credit and financial institutions through which they pass or in which they are deposited or invested in the course of laundering operation. As the Basle Committee on Banking Regulations and Supervisory Practices (the Basle Committee) stated in December 1988:

‘Public confidence in banks, and hence their stability, can be undermined by adverse publicity as a result of inadvertent association by banks with criminals. In addition, banks may lay themselves open to direct losses from fraud, either through negligence in screening undesirable customers or where the integrity of their own officers has been undermined through association with criminals.’ [2]

The concerns over money laundering had been increased and in response to that the ‘Financial Action Task Force’ on money laundering was established by the G-7 Summit in Paris in 1989 to develop a coordinated international response. [3] To stop or counterfeiting money laundering world has adopted the anti money laundering strategies. United States-focused work locates the AML movement largely in the anti-drugs strategies of the mid 1980s, with terrorist financing issues emerging only in the mid to late 1990s, when American institutions were attacked. The UK Prevention of Terrorism (Temporary Provisions) Act 1989 included several measures intended to clamp down on terrorist finance (and Northern Ireland legislation gave greater powers in the province than in the mainland). This was part of a broader strategy of cutting paramilitary–especially Republican–income from control over taxi cabs, gaming machines and donations. [4] This research paper examine the bit part of endless arena of money laundering which is present in the world’s greatest economies and how they counterfeit it with their law. The most explicit pre – 9/11 links for US policy came in June 1995, when president Clinton wrapped up terrorist threats with international organized crime and told the united nations that ‘the threat to our security is not an enemy silo, but in the briefcase or the car bomb of a terrorist. Our enemies are also international criminals and drug traffickers who threaten the stability of new democracies.

Money Laundering

Section 340(11) defines ‘Money Laundering’ as conduct which contravenes one of the money laundering offences, or which constitutes an attempt, conspiracy or incitement to commit one of these offences, or which constitutes aiding, abetting, counseling or procuring the commission of one of these offences. The offences were explained later in this research paper. As per the definition of money laundering all the illegal ways of transferring dirty money which is gained from illegal activities were constitute an offence. By its nature, money laundering occurs outside the normal sphere of economic statistics. Over the last 25 years or so, the international community has devoted increasing effort to combating money laundering. The most attention was concentrated on the proceeds of drug trafficking. In the UK, the National Criminal Investigation Services (NCIS) estimates that drug money could account for as much as 1% of GDP, or around £8.5 billion a year. [5]

Stages of Money Laundering

It has been described as three stage process in which ‘Dirty’ money has been transformed into ‘Clean’ money.

Placement

It is the first stage of Money Laundering procedure which has adopted by the criminals or white color criminal which refers to the placement of illegally earned money into the financial sector by means of banks. Banks from previous times regarded as place where people can make their deposits and earn interest over their amount deposited and it also allows people to take money from banks over the interest rate of them. Banks were genuine system which has changed the world of finance but since its strength was dignified makes them vulnerable for the criminal to place their illegal money in them and transferred to their like place in the world. But since those activities were notified by the banks after the series of banking failure due to the result of illegal activities perfect example of that is collapse of BCCCI. Banks had changed their rules and regulation so that criminal can no longer can use them to place their illegally earned money in any jurisdiction or country. At placement stage the launderer is most likely to be detected because of the provision of perfect banking regulations called KYC rule. Know your customer rule has been adopted by all the banking system and it helps to prevent the money laundering at first stage of its placement by the bankers.

Layering

It is defined as the second stage in money laundering procedure which is done by setting up multiple transactions that confuse the audit trail and separate the money from its criminal origin. It means that in banking rule and regulation huge sums specified have a record at their transaction. But these criminal in an attempt to escape do the transaction at a lower rate than those specified transaction. Specified amount in US whose notification is required for the audit trial is $10000. In UK it might be at less than £10000. But criminals in attempt to fool the banking audit authority make transaction at lower rate and transferred lower amounts regularly to escape from liability of their illegal act.

Integration and Repatriation

It is the movement of previously laundered money into the financial system. This is mainly done through banking system. Its main objective is to show money as legal as related to business activities. This activity mainly done through following ways:-

Buying and selling of property: – smugglers or criminals use shell companies to buy and sell properties for their dummy companies and they purchase huge assets on the account of companies. It is done in way that it seems legitimate.

Invoices shown import and export:- it refers to the use of false invoices of overvalued amount which goes out of the economy and comes in by way of import and export. It does not involve any illegal activity of any kind and the money is integrated into the system.

Role of United Kingdom

United Kingdom has always been attractive to money launderers because of its size and sophistication of its financial markets. The proceeds of financial fraud and smuggling of goods have become increasingly important. In laundering funds, criminals continue to use bureaux de exchange (small tourist type currency exchanges); cash smuggling in out of the UK; professional money launderers (including solicitors and accountants); and the purchase of high value assets as disguise for illegally obtained money. The United Kingdom has implemented the provisions of the European Union’s Anti-Money Laundering Directive and the Financial Action Task Force Forty Recommendations. Drug-related money laundering has been a criminal offense in the UK since 1986. Subsequent legislation criminalized the laundering of proceeds from all other crimes. The UK has a requirement for the reporting of suspicious transactions that applies to banks and non-bank financial institutions.

The Financial Services Authority (FSA) plays an important part in the fight against money laundering through its continued involvement in the authorization of banks and investigations of money laundering activities in banks. Where appropriate, the FSA even assembles small teams of investigators to follow-up leads in newspapers and other public sources. The Financial Services and Markets Act were implemented in December 2001. The FSA administers a new civil-fines regime and prosecution powers. The FSA has the power to make regulatory rules in relation to money laundering, and enforce those rules with a range of disciplinary measures (including fines) if the institutions fail to comply.

The UK cooperates with foreign law enforcement agencies of other countries investigating narcotics-related financial crimes. The UK is a party to the 1988 UN Drug Convention and a member of the Financial Action Task Force and the European Union. The UK signed the United Nations Convention against Transnational Organized Crime in December 2000. The Mutual Legal Assistance Treaty (MLAT) between the UK and the U.S. has been in force since 1996. The UK also has an MLAT with the Bahamas. Additionally, there is an MOU between the U.S. Customs Service and Her Majesty’s Customs and Excise. [6]

Identifying Your Client

This is probably the most important aspect of the rules and regulations and underpins all anti money laundering procedures. The FSA recently fined Royal bank of Scotland about £750,000 for failing KYC Know your client procedures. RBS plc failing its money laundering regime certainly has to pay a fine. FSA acquired this power on 1st Dec 2001.

Carol Sergeant, Managing director of the FSA said,” This fine demonstrates that the FSA takes anti-money laundering compliance very seriously indeed. The steps RBS took to satisfy it that their clients really were who they claimed to be were inadequate. We have made clear that we expect all financial firms to have strong and effective anti-money laundering procedures in place and – equally importantly – to ensure that they are properly implemented. This requires firms to monitor the effectiveness of those procedures to ensure an appropriate standard of compliance. Firms that fail to do this lay themselves open to increased risks of being used for money laundering.”

“The good news in this case is the prompt and effective way in which the shortcomings were addressed once senior management became aware of them. As a result of this, and RBS’s open and constructive approach to the FSA’s investigation, the fine imposed is very substantially lower than it otherwise would have been. The other good news is that there is no evidence of actual money laundering having taken place.” [7]

In a Final Notice to the RBS the FSA noted;

‘The high level of breaches between January and March 2002;

That ‘in spite of the system which RBS had in place, there was a failure adequately to monitor compliance with regulatory requirements;

‘the size of the RBS and the retail banking market in which it operates presents a serious risk to the FSA’s statutory objective to reduce financial crime’. [8]

The Role of the Financial Sector

While it is generally accepted that efforts to combat money laundering and the broader financial aspects of serious forms of transnational criminality must place particular reliance on criminal justice mechanisms of the orthodox kind, the nature and extent of the problem are such as to require the imposition of internationally co-ordinate measures to avoid the use of the financial system by criminals for their criminal activities. The prevailing philosophy in this regard was well captured by Sherman in 1993 in these words: ‘The fight against money laundering cannot be the sole responsibility of government and law enforcement agencies if these activities are to be suppressed and hopefully, in the long term, substantially eliminated it will require the collective will and commitment of the public and private sector working together’.

The first major initiative to give substantive expression to this approach was the December 1988 Statement on Prevention of Criminal Use of the Banking System for the Purpose of Money Laundering issued by the Basle Committee on Banking Regulations and Supervisory Practices (the Basle Committee). Its basic purpose is to encourage the banking sector, through ‘a general statement of ethical principles’, to adopt a common position in order to ensure that banks are not used to hide or launder funds acquired through criminal activities and, in particular, through drug trafficking. The central principles which it enunciates were recently summarized by a senior official of the Bank of England as follows:

–     Know your customer: Banks have responsibility upon themselves in identifying their customer before opening up their accounts. They should have to make reasonable efforts to verify the customer’s true distinctiveness, and they should have effective procedures for verifying the bona fides of new customers (whether on the asset or liability side of the balance sheet).

–     Compliance with laws: Bank management should have to ensure that the business is conducted in compliance with high ethical standards, that laws and regulations are followed up properly and that a service should not provided where there is good reason to believe that transactions are related with laundering activities.

–     Co-operation with law enforcement agencies: Within any constraints imposed by rules of agencies in relation to the customer confidentiality, banks should have to co-operate fully with the national law enforcement agencies. In addition to that where there are reasonable grounds for suspecting money laundering, banks should have to take appropriate measures which are reliable with the law.

–     Policies, procedures and training: All banks should properly adopt policies reliable with the principles set out in the Statement and should have to ensure that all members of their staff anxious, wherever positioned, are informed of the bank’s policy. Concentration should be given to staff training in matters which were covered by the Statement. To promote obedience to these principles banks should implement specific procedures for customer classification and for retaining internal records of transactions. Arrangements for internal audit may need to be comprehensive in order to set up an effectual means of testing for general conformity with the Statement. [9]

By then till today in this modern era of advanced technological world were the banking has reached to superb heights. Banking regulation has been controlled by the Financial Services Authority FSA who gave its time to time modifications but the basic practices in banking generally based on KYC (Know your customer) rule.

In 1988 Basle Committee on Banking Regulation and Supervisory Practices has revisited money laundering several times to further reflect and elaborate current supervisory thinking. Customer due diligence for banks was published in October 2001 and has had a significant impact, designed as it was to provide guidance as to minimum standards for worldwide implementation by all banks. While harmonious with the FATF Recommendations the guidance provided on the KYC principle is much more detailed. [10]

Financial Action Task Force ‘FATF’

The International Monetary Fund executive board has called Money Laundering “ a problem of global concern’’ that threatens to undermine the stability and integrity of financial markets. The changing way through which Money Laundering can threaten the banking system is demonstrated by the use of alternative payments systems, such as smart cards and internet banking. The increasing use of electronic money and other banking payment networks by economic criminals to transfer the proceeds of their ill gotten gains poses a major regulatory concern. Offshore financial centers also pose a major regulatory concern because they often lack adequate regulation and present numerous obstacles to customer identification. In the wake of all these problems the Financial Action Task Force (FATF) is only international body dedicated solely to attacking financial crime. It was established in 1989 by the leaders of G7 states, in recognition of the threats posed to financial stability by Money Laundering. It focused its anti money laundering efforts not only on drug traffickers and economic criminals but also on financial institutions and third party professionals because of the ease with which criminal groups have used them to facilitate and transmit the proceed of their illicit activities.

Focus on three priorities

Monitoring the implementation by FATF members of the Forty Recommendations for combating money laundering set out in its first report;

Keeping track of developments in money laundering methods and examining appropriate counter-measures; and

Carrying out its external relations programme to promote world-wide action against Money Laundering [11]

Proceed of Crime Act 2002

According to this act money laundering is a criminal offence if it is done or comes in the category of this act. The sections of this act defines and describes the particular category of the nominated offences comes under the money laundering in UK. Category of offence divided into three parts. The first category of offence is money laundering and facilitating money laundering. Offences are contained in Sc 327-329, PCA 2002. Money Laundering could be done by solicitor and if it is done by solicitor it would fall under the sc 327 if he/she found guilty of offence without prior disclosure which could be useful in their defense.

Tipping off Amendment

On the subject of lawyers, the exception from reporting duties remains. There has been an important change to the ‘tipping off’ provision, now mainly in Article 28. The controversial reference to the possibility of Member States exempting lawyers from this obligation, inserted in 2001, has been deleted. The reason behind this amendment was discussed in the 2004 Commission proposal as follows:

‘The Member State option to allow members of the professions acting as legal advisors to inform their client that a report is being made has been dropped as it is not in conformity with the revised FATF 40 Recommendations.’

Instead, Article 28(6) now states that where lawyers seek to deter a client from dealing in illegal activity, this will not constitute tipping off within the meaning of the Directive, an exemption specifically contemplated by the interpretative note to FATF Recommendation 14. In this context, therefore, the protection of lawyers has been watered down substantially in comparison with the 2001 Directive. [12]

U.S. Patriot Act

After the September 11 attack on U.S. all the anti money laundering regulation were in question and argued over for many months. All the anti money laundering proposals were passed in keeping view as to uniting and strengthening America act by providing appropriate tools required to intercept and obstruct terrorism act, otherwise known as US Patriot Act. It contains provision on money laundering and counterfeiting, investigations and information sharing, criminal laws, transporting hazardous materials, federal grants, victims, immigration, and US domestic security. The purpose of the act is to prevent and penalize terrorist acts in the US and around the globe, to improve the law enforcement system. It has unique characteristics which include

To reinforce US measures to avoid, distinguish and impeach international money laundering and financing of terrorism.

To keep a contact with the foreign jurisdictions, foreign financial system and the banking financial system or nature of accounts which were used by the suspects to launder money?

To require all appropriate elements of financial services industry to report potential money laundering.

Section 320 Proceeds of Foreign Crimes- Section 981(a) (1)(B) of title 18, United States Code, is amended to read as follows’’(B) Any property, real or personal, within the jurisdiction of the US, constituting ,derived from, or traceable to, any proceeds obtained directly or indirectly from an offence against a foreign nation, or any property used to facilitate such an offence-

involves the manufacture, importation, sale, or distribution of a controlled substance (as that term is defined for purposes of the Controlled Substances Act), or any other conduct described in section 1956(c)(7)(B);

would be punishable within the jurisdiction of the foreign nation by death or imprisonment for a term exceeding 1 year; and

Would be punishable under the laws of the US by imprisonment for a term exceeding 1 year, if the act or activity constituting the offence has occurred within the jurisdiction of US. [13]

Section 326 Verification of Identification- It says about the verification of identification of Accountholders

In General-the secretary of the treasury shall prescribe regulations setting forth the minimum standards for financial institutions and their customers regarding the identity of the customer that shall apply in connection with the opening of an account at a financial institution.

Minimum Requirements- The regulation shall, at a minimum, require financial institutions to implement, and customers to comply with reasonable procedures for- (a) verifying the identity of any person seeking to open an account to the extent reasonable and practicable. (b) maintaining records of the information used to verify a person’s identity, including name, address and other identifying information’s; and (c) consulting list of known or suspected terrorists or terrorist organizations provided to the financial institution by any government agency to determine whether a person seeking to open an account appears on any such list. [14]

The customer due diligence has appeared in the world’s financial system because of the major banking failure like BCCI. In UK ‘Know your Customer” is widely accepted as an obligation upon banks. The Financial Action Task Force on Money Laundering, established by the G7 submit in 1989 and based in Paris, has done much to promote the idea as a prerequisite to effective Money Laundering controls and it has been given legal force in many jurisdiction. Although the Basle committee on banking supervision regards ‘know your customer’ as part of the minimum standards which bank should have been in place to enable them to manage risk. [15]

Drug Enforcement Administration US

In America the FBI has advanced the effectiveness of policing and law enforcement, while at the same time serving as the nation’s homeland security agency. The United States commission on the advancement of Federal Law enforcement (Webster Commission) was charged with examining the idea of consolidating federal law enforcement administration efforts in 2000. According to the Webster the Drug Enforcement Administration and Bureau of Alcohol, Tobacco, and Firearms (BATF) become one mega law enforcement agency under the control of FBI. The Drug Enforcement Agency (DEA) was established in 1973 by the president Richard M. Nixon. Its main purpose is to:-

Enforce the controlled substance laws and regulation of the United States.

Bring to the criminal and civil justice system those organization and principle members organizations who are involved in the growing, manufacture or distribution of controlled substances in United States.

It has also the sole responsibility for coordinating, commissioning and pursuing drug investigations abroad.

It also works with various law agencies like Federal, State, Local, and International Law enforcement agencies. In order to address drug and drug related crimes. [16]

In its latest achievement Drug Enforcement Administration seized drug money worth $207 millions in Mexico City. It is the ever seized drug money by any anti money laundering agency of the world. [17]