Money Laundering…

A Global Problem
The reason for selection of this topic is “ Terrorism
Financing & Money Laundering has become a
global problem and being a student of the world’s
premier accounting body-ICAI, this topic appealed
to me since we as Future Accounting & Finance
Professionals would help & assist the businesses
in the prevention of ML & financing towards
terrorist activities by creating awareness through
preparation of AML manuals & white papers AND
Compliance Audits”.
“There’s no question that globalization has been a
principal vehicle that has allowed terrorists to
finance and support their activities all over the
world.”

-Assistant Attorney General, U.S. Department of Justice,

Michael Chertoff, addressing a joint conference of the
American Bankers Association and the American Bar
Association.
Introduction to ‘Money Laundering’

• What is Money Laundering???

Money laundering is the process by

which criminals attempt to hide and
disguise the true origin and ownership
of the proceeds of their criminal
activities. The term “Money
Laundering” is also used in relation to
the financing of terrorist activity
(where the funds may, or may not,
originate from crime).
 Origin of The ‘Money Laundering’
Expression
• ‘Money laundering’ as an expression is one
of fairly recent origin.

• The original sighting was in newspapers

reporting the Watergate scandal in the
United States in 1973.

• The expression first appeared in a judicial or

legal context in 1982 in America in the case
US v $4,255,625.39 (1982) 551 F Supp.314
 Need for Money Laundering

• Every year, huge amounts of funds are

generated from illegal activities. These
funds are mostly in the form of cash.

• The criminals who generate these funds

need to bring them into the legitimate
financial system.

• Resultantly, Over $1.5 trillion of illegal

funds are laundered each year.
 Causes Of Money Laundering
Drug Trafficking
Kidnapping Bribery / Corruption
Gambling
Counterfeiting and Forgery

Robbery Tax Evasion

and Fraud Serious Crime or All Crimes?
White Collar
Crimes
(including
Insider Trading
and Securities
Prostitution
offences)
Organised Smuggling
Extortion Crime (arms, people, goods)

7
 What is Terrorist Financing?
• Terrorist financing provides funds for terrorist activity.
• The main purpose of terrorist activity is to intimidate a
population or compel a government to do something.
• Terrorist activity is undertaken for political, religious or
ideological purposes.
• After the terrorist attacks of September 11, 2001, the
United States and its allies launched a global war on
terror focused on five fronts: diplomatic, financial,
military, intelligence, and law enforcement.
 Money Laundering and Terrorist Financing:
Differences and Similarities
• Terrorist financing funds are used for a “purpose”, to further a cause or send a
message while money laundering crimes help conceal the profits of illicit activities.
• Money laundering crimes typically derive from criminal activity such as drug
trafficking, fraud or arms smuggling but Terrorist funds are sometimes not derived
through illegal means. Generally, they are used for mundane expenses such as food
and rent. Hence, funds are not only for the terrorist act, themselves.
• Both terrorists and money launderers use the same methods to move their money,
such as structuring payments to avoid reporting requirements, underground banking,
such as the ancient system of Hawala. The table below gives a quick synopsis:
 What are the key stages of the
Money Laundering Cycle?
 Placement
– This stage refers to physical disposal of criminal
proceeds into the financial system

 Layering
– This stage involves layering Of transactions to confuse
the audit trail and distance the original source of
funds (e.g. successive transactions, international
transfers, early termination products, tax haven ‘A criminal’s
companies, genuine businesses). objective in
laundering illicit
proceeds is to : Get
 Integration
it out; cover it up;
– This refers to re-injection of funds back into the real bring it back.’
economy as “clean and respectable money”
Stages Of Money Laundering
Cycle-A Graphical Illustration

Placement Integration

Layering
 Techniques Of Money Laundering
Placement Layering Integration
• Smurfing • Tax Havens & Offshore • Use of haven bank
Banks credit cards
• Shipping Money
• Receiving as consulting
Abroad • Bank Secrecy Law as a
or directors fee
• Placement through layering tool
• Arrangement of
Banks • Corporations & Shell corporate loans
• Use of “Pass Through” Companies as a layering • Proceeds of gambling
or “Payable Through” tool
• Real estate
Accounts • Use of trusts transactions
• Electronic Wire • Use of walking accounts • Stock Purchase
Transfers • Establishing self owned • Use of business
• Insurance Products bank • International
• Investment Related • Use of intermediaries importing and
exporting
Transactions
• Use of free trade zones
 Possible warning signs of
money laundering activity
• Unusually large deposits of cash made by an individual or
company whose affairs would normally generate deposits by
cheque or bankers’ draft

• Substantial increases in cash deposits without apparent

cause

• Customers depositing large numbers of smaller cash amounts

which together make up a substantial sum

• Reluctance by a customer to provide routine information

when opening an account; providing information which is
difficult or expensive to verify

• Large cash withdrawals from a hitherto dormant/inactive

account
The global scale of money
laundering estimates
• World-wide money laundering could
amount to 2 – 5% global GDP ($590 billion -
$1.5 trillion)
(IMF)

• £25 billion of criminal assets are laundered

through the UK financial system every year
(UK Govt estimate)

• $3.5 billion is laundered though the

Australian financial system each year
(AUSTRAC estimate)
 Consequences Of Money Laundering
• Finances Terrorism:
Money laundering provides terrorists with funds to
carry out their activities.
• Undermines rule of law and governance:
Rule of Law is a precondition for economic
development – Clear and certain rules applicable for all
• Affects macro economy:
Money launderers put money into unproductive assets
to avoid detection.
• Affects the integrity of the financial system:
Financial system advancing criminal purposes
undermines the function and integrity of the financial
system.
• Reduces Revenue and Control:
Money laundering diminishes government tax revenue
and weakens government control over the economy.
Why is it a Problem for Countries?

• Money laundering may look like a polite form of white collar

crime, but it is the companion of brutality, deceit and
corruption.
• Money laundering deprives governments of some tax
revenues, thereby raising the relative burden of honest
citizens.
• Because of rapid movements of large amounts of money,
normally stable financial institutions become destabilized,
threatening savings accounts and retirement funds of
innocent citizens.
 What are the risks for banks???
• Reputational Risk - potential that adverse publicity regarding
a bank's business practices and associations, whether
accurate or not, will cause a loss of confidence in the
integrity of the institution.
• Operational Risk - potential for loss resulting from
inadequate or failed internal processes, people and systems
or external events.
• Legal Risk - potential for lawsuits, adverse judgments,
unenforceable contracts, fines and penalties, increased
expenses (attorney fees) or closure of the institution.
• Concentration Risk - potential for loss resulting from too
much credit exposure to a single borrower or group of
borrowers.
 Money Laundering Offences

• Primary Offence – Laundering the proceeds of

crime or assisting in that process. Conviction is
maximum 14 years’ imprisonment and/or fine
• Secondary Offences
– Failing to report a knowledge or suspicion of
money laundering
– Tipping off

Conviction is maximum of 5 years’ imprisonment

and/or fine.
AML-Anti Money Laundering
The Objective of AML control

• To discourage criminal activity by ensuring

that criminals who try to use the financial
system for laundering the financial proceeds
of their crimes can be identified and their
funds confiscated
 Need for AML control
• Most national governments have signed up to international AML
conventions so are obliged to implement international norms

• If lenders feel that a country’s AML controls are defective this could
affect availability and cost of lending to that country

• Countries do not want to give out the message that crime pays

• National financial infrastructures have a direct interest in preserving

their reputation for sound finances
 Preventing Money Laundering-
USA

• Preventing Money Laundering is a huge

challenge for everyone. Three bodies who
have taken up this challenge are:

1. FATF-The Financial Action Task Force

2. OFAC- Office of Foreign Assets Control
3. BSA-Bank Secrecy Act
FATF-The Financial Action Task Force

The Financial Action Task Force (FATF) is an inter-

governmental body whose purpose is the development
and promotion of national and international policies to
combat money laundering and terrorist financing. The
FATF is therefore a 'policy-making body' created in
1989 that works to generate the necessary political will
to bring about legislative and regulatory reforms in these
areas. The FATF has published 40 + 9 Recommendations
in order to meet this objective.
 OFAC- Office of Foreign Assets Control
The Office of Foreign Assets Control ("OFAC") of the
U.S. Department of the Treasury administers and
enforces economic and trade sanctions based on US
foreign policy and national security goals against
targeted foreign countries, terrorists, international
narcotics traffickers, and those engaged in activities
related to the proliferation of weapons of mass
destruction. OFAC acts under Presidential wartime
and national emergency powers, as well as authority
granted by specific legislation, to impose controls on
transactions and freeze foreign assets under US
jurisdiction. Many of the sanctions are based on
United Nations and other international mandates,
are multilateral in scope, and involve close
cooperation with allied governments.
 Bank Secrecy Act-BSA as
amended by the USA Patriot Act
The Currency and Foreign Transactions Reporting Act also known as the
Bank Secrecy Act (BSA), is a tool the U.S. government uses to fight drug
trafficking, money laundering, and other crimes. Congress enacted the
BSA to prevent financial institutions from being used as intermediaries
for criminal activity, namely to being used for hiding the transfer or
deposit of money from illicit activity.
The fundamental purpose of the BSA is to provide a paper trail of
financial activities which may be derived from illegal activities. These
illegal activities generate large amounts of currency, often in small bills
that may be exchanged for larger bills or converted to other monetary
instruments, like money orders and traveler’s checks.
Failure to comply with the provisions of the BSA can result in criminal or
civil penalties.
 How can a business prevent money
laundering???
Relevant business must establish procedures on the basis of their assessment of the risk
addressing:

ID-Identity
• verifying the customer’s identity
• determining exactly who the customer is, whose identity needs to be verified; and
• appropriately verifying that customer’s identity

KYC-Know Your Customer

• obtaining appropriate additional information
• understanding the customer’s circumstances and business; and
• keeping such information current and valid

Identification should be established

1. At start of a new business relationship

2. Re single ad hoc transactions where the firm knows or suspects money laundering.
3. Re two or more ad hoc transactions which appear to be linked.
What if you don’t follow AML policies

• Failure to report a suspicious transaction or to

make a terrorist property report - up to five years
imprisonment and/or a fine of $2,000,000;
• Failure to report a large cash transaction or an
electronic funds transfer - a fine of $500,000 for a
first offence and $1,000,000 for each subsequent
offence;
• Failure to retain records - up to five years
imprisonment and/or a fine of $500,000; and
• Failure to implement a compliance regime - up to
five years imprisonment and/or a fine of
$500,000.
 CONCLUSION
With vigilance, proper controls and guidance any business can reach
heights.

The time is now, it’s still not too late to change the old ways.

Who is responsible for preventing money laundering practices?

It’s not only me

But most importantly, it is also ……….

“YOU” 