''Money Laundering''
The word “laundry” literally means “cleaning”
Metaphorically; Money laundering refers to “cleaning on money”.
'Money laundering' is the
name given to the process by which illegally obtained funds are given the
appearance of having been legitimately obtained.
According to Swiss Bank:
Money laundering is a process whereby the
origin of funds generated by illegal means is concealed (drug trafficking, gun
smuggling, corruption, etc.)
''Explanation of definition''
Every year, huge amounts of funds are generated from illegal
activities such as drug trafficking, tax evasion, people smuggling, theft, arms
trafficking and corrupt practices. These funds are mostly in the form of cash.
The criminals who generate these funds need to bring them into the
legitimate financial system without raising suspicion. The conversion of cash
into other forms makes it more use able. It also puts a distance between the
criminal activities and the funds.
''Stages of Money Laundering''
The
money laundering process is typically segmented into three stages:
- Placement
- Layering
- Integration.
Placement:
At this stage, illegal funds or assets are
first brought into the financial system. This 'placement' makes the funds more
liquid. For example, if cash is converted into a bank deposit, it becomes
easier to transfer and manipulate. Money launderers place illegal funds using a
variety of techniques, which include depositing cash into bank accounts and
using cash to purchase assets.
Layering:
To conceal the illegal origin of the placed funds and thereby make
them more useful, the funds must be moved, dispersed and disguised. The process
of distancing the placed funds from their illegal origins is known as
'layering'. At this stage, money launderers use many different techniques to
layer the funds. These include using multiple banks and accounts, having
professionals act as intermediaries and transacting through corporations and
trusts. Funds may be shuttled through a web of many accounts, companies and
countries in order to disguise their origins.
Integration:
Once the funds are layered and distanced from their origins, they are
made available to criminals to use and control as apparently legitimate funds.
This final stage in the money laundering process is called 'integration'. The
laundered funds are made available for activities such as investment in
legitimate or illegitimate businesses, or spent to promote the criminal's
lifestyle. At this stage, the illegal money has achieved the appearance of
legitimacy.
''Money Laundering & Globalization''
The 20th Century was characterized by a number of structural
changes in the World economy. In the last decade of this century, Globalization
became the buzz word bringing together nation states to make the world a
“Global village”. The main pillars of this process were Liberalization and Deregulation
of national economies. Some of the prominent changes in this century were rapid
developments in financial information, exponential growth of technology and
communication which allowed money to move anywhere in the world with speed and
ease.
These developments combined, created both opportunities and
risks for the society. One of these risks is the increase crime and
criminality. The phenomenon of money laundering is an aspect of organized crime.
The society witnessed the proliferation of organized criminal groups, operating
across national boundaries and sovereignty.
''Estimated Amount of Money Laundered''
By some estimates, more than AUD 1.5
trillion of illegal funds are laundered worldwide each year!
This is more than the total output of an economy the size of the
United Kingdom. Of the world-wide total, an estimated AUD 200 billion is
laundered in the Asia-Pacific region.
The International Monetary Fund, had stated in 1996 that the
aggregate size of money laundering in the world could be somewhere between 2-
5% of the world’s gross domestic product. This is $800 billion - $2 trillion in
current US dollars.
''OBJECTIVES OF MONEY LAUNDERING''
- The main objectives of money launderers are thus to place their funds in the financial system without arousing suspicion, to move them around, often after a series of complex transactions crossing multiple jurisdictions so that it becomes difficult to identify their original sources, and finally to move the funds back into the financial and business systems so that they appear legitimate.
- Money laundering is performed systematically and clandestinely, making it difficult to identify exactly how much money is involved, what methods are employed and what the magnitude of the problem is.
- Hide: to reflect the fact that cash is often introduced to the economy via commercial concerns which may knowingly or not knowingly be part of the laundering scheme, and it is these which ultimately prove to be the interface between the criminal and the financial sector.
- Move: clearly explains that the money launderer uses transfers, sales and purchase of assets, and changes the shape and size of the lump of money so as to obfuscate the trail between money and crime or money and criminal.
- Invest: the criminal spends the money ; he/she may invest it in assets, or in his/her lifestyles.
''CAUSES OF MONEY LAUNDERING''
- Absence of legislation.
- Evasion of tax.
- Increase in profits.
- To make black money appear white money.
- Limited risks of exposure.
Absence of legislation against money laundering:
Absence of legislation against money
laundering gives a free hand to criminals. Sometimes governments itself is
involved they do this to win political rivals, to please their allies and to
strengthen their rule. Also CBR (Central Board of Revenue) has never bothered
to unearth laundered money, rather always joined hands with the money
launderers.
Evasion of tax:
Tax evaders launder money so
that they can lie about where money and assets came from in order to evade tax.
And sometimes they simply operate outside that part of the economy where
records are kept.
Increase profits:
When people have incentive
for more profit in any particular area, such as in production and trading of
drugs, arms, and across the borders trade, they start taking risk to earn
higher profits.
To appear black money legitimate:
In money
laundering, black money usually becomes legitimate after a series of process.
And less risk is involved of being caught. This doesn’t happen in other
economic crimes. So in order to appear their money more legitimate they go for
money laundering.
Limited risks:
The availability of multiple
opportunities for personal enrichment without the risk of being exposed is
another cause of money laundering. Such economic environments are much more
conducive to make black money.
''There are severe economic and social consequences of money laundering''
These include:
1. Undermine Financial Systems:
Money laundering expands the black economy, undermines the financial system and raises questions of credibility and transparency.
2. Expand Crime:
Money laundering encourages crime because it enables criminals to effectively use and deploy their illegal funds.
3. Criminalize Society:
Criminals can increase profits by reinvesting the illegal funds in businesses.
4. Reduce Revenue and Control:
Money laundering diminishes government tax revenue and weakens government control over the economy.
''Effects of Money Laundering On Economy''
- Economic Distortion and Instability:
Money
launders "invest" their funds in activities that are not necessarily
economically beneficial to the country. They redirect funds from sound
investments to low-quality investments that hide their proceeds, economic
growth can suffer.
- Money laundering facilitates corruption and crime:
Money laundering reduces
criminal’s cost of crime, thereby increasing the level of crime. Lax anti-
money-laundering policies encourage the criminal activities and corruption.
- Loss of Control of Economic Policy:
Some phases
of money laundering transactions are "underground" or in the informal
sector of the economy, such transactions do not appear in official monetary and
financial statistics, thus giving misleading information to policymakers and
leads to misallocation of resources.
- Undermining the integrity of financial markets:
Large
sums of laundered money may arrive at a financial institution but then
disappear suddenly, without notice, This can result in liquidity problems to
financial institutions. Indeed, criminal activity has been associated with a
number of bank failures around the globe.
- Risks to Privatization Efforts:
Privatization
can also serve as a vehicle to launder funds. Criminal organizations have funds
to purchase formerly state-owned enterprises and use them for their own
interests.
- Reputation at stake:
The reputation of country
and its financial institutions can be tarnished by an association with money
laundering. The negative reputation that results from these activities
diminishes legitimate global opportunities and sustainable growth while
attracting international criminal organizations with undesirable reputations
and short-term goals. This can result in diminished development and economic
growth.
- Money Laundering distorts capital and trade flows:
Laundering of outbound illicit funds constitutes the facilitation of illicit
capital flight, which drains resources from developing economies, and extensive
money laundering of all forms can deter legitimate inward Foreign direct
investment (FDI). The obvious effect of illicit capital flight is to worsen the
scarcity of capital in developing countries.
- Evasion of tax:
Laundered money is usually
untaxed, meaning the rest of us ultimately have to make up the loss in tax
revenue. People who indulge into money laundering do not declare the funds to
the tax authorities. As a result taxes are not paid for the ill-gotten funds.
This effectively reduces tax revenues for the governments and ends up damaging
economic development.
''EFFECTS OF MONEY LAUNDERING ON SOCIETY''
- Increase In Criminal Activities:
Money Laundering allows drug traffickers, smugglers, and other criminals to expand their operations. This drives up the cost of government due to the need for increased law enforcement and health care expenditures (for example, for treatment of drug addicts) to combat the serious consequences that result.
- Concentration Of Power To Criminals:
Among its other negative socioeconomic effects, money laundering transfers economic power from the market, government, and citizens to criminals. As the economic power is in the hands of criminals so they have a corrupting effect on all elements of society. In extreme cases, it can lead to the virtual take-over of legitimate government.
- Undermines Democracy:
The economic and political influence of criminal organizations can weaken the social fabric, collective ethical standards, and ultimately the democratic institutions of society.
''EFFECTS OF MONEY LAUNDERING ON BUSINESS''
If funds from criminal activity can be easily processed
through a particular business – either because its employees or director shave
been bribed or because the institution turns a blind eye to the criminal nature
of such funds – the institution could be drawn into active complicity with
criminals and become part of the criminal network itself. Evidence of such
complicity will have a damaging effect on the attitudes all stakeholders of
company i.e. shareholders, suppliers, customers, employees etc.
''Money Laundering Cases Over the Globe''
''Pablo Escobar''
The most successful criminal ever known, it has been said that at one point Pablo Escobar was so rich he spent $1,000 a week on rubber bands in order to wrap his bundles of cash. Escobar’s business was drugs — at one time his cartel controlled 80% of the world’s cocaine trade. Laundering money was central to Escobar’s empire, and his recipe for success was relatively simple: “[Y]ou bribe someone here, you bribe someone there, and you pay a friendly banker to help you bring the money back.” In 1989, Escobar’s personal fortune was estimated at $9 billion, making him the seventh richest man in the world. His criminal career — and life — ended in 1993 following a gun fight with Colombian authorities.
''President Suharto''
Coming in at number one on Transparency International’s most corrupt leaders list, Suharto was President of Indonesia from 1967 to 1998. After his forced resignation, Time Asia magazine estimated the Suharto family’s wealth at $15 billion, and of this $9 billion was alleged to have been deposited in an Austrian bank. Allegations were also made that up to $73 billion had passed through the family’s coffers during Suharto’s presidency. He died in 2008, aged 86, and escaped trial due to his advanced age.
''The Douglas case''
Bob Douglas laundered close to $50 million for an Adelaide drug
syndicate. In the first stage, he would arrange for cash in different amounts
to be deposited into bank accounts.
The initial deposit of cash into the banking system (placement) is
the riskiest part of the process because the money is in cash form and still
close to its illegal origins.
Over three years, Douglas coordinated the transfer of funds from
the banks into more than 100 accounts in 68 banks in nine countries - Austria,
Denmark, the United Kingdom, France, Germany, Hungary, Italy, Luxembourg and
Monaco. The amount of each transfer ranged from $50,000 to $1 million.
In this stage (layering), the funds were moved deeper into the
banking system and spread across many banks, accounts and countries. Douglas
transferred large amounts into accounts in countries which he perceived as
having lax anti-money laundering rules - in particular, Austria, France,
Hungary and the UK's Channel Islands.
In the next stage, the funds were transferred into the accounts of
European individuals. In many cases, fictitious names, such as Tim Jones and
Mohammed Rosa, were used to open accounts.
By using European individuals and names in this layering stage,
Douglas managed to avoid the extra scrutiny imposed on account openings by
individuals with Australian or European names. Had account opening and
monitoring policies been stricter, perhaps the fictitious individuals could
have been detected.
In the next stage, the funds were transferred into the accounts of
European front companies. These companies then invested the funds into
apparently legitimate businesses, such as restaurants, construction companies,
pharmaceutical enterprises and real estate.
In this layering and integration process, Douglas assessed that
transfers of money to and from European front companies would not arouse
suspicion. These companies provided no immediate reason, such as geographic,
legal or cultural, for bankers to investigate the assets or underlying
transactions.
The scheme was interrupted when a bank failure in Monaco exposed several
accounts linked to Douglas. While in Luxembourg, endless noise from a
money-counting machine in Douglas's house prompted a neighbour to alert the
local police! Douglas was arrested in 1990, convicted of money laundering in a
Luxembourg court in 1992 and extradited to face charges a few years later.
It is instructive that it
took a bank failure and a chance occurrence to expose the scheme. Douglas was
able to manipulate the normal banking processes of account opening, monitoring,
deposits, transfers and payments without arousing suspicion!
''Some other famous Money Laundering Cases''
- In 2012, HSBC Holdings, a London-based company, paid nearly $2 billion in fines after it was discovered that the financial institution laundered money for drug traffickers, terrorists, and other organized crime groups throughout Iran. The laundering went on for many years before the activity was detected.
- In 2014, BNP Paribas, a French bank with global headquarters in London, pled guilty to falsifying business records after it was discovered the institution violated U.S. sanctions against Cuba, Sudan, and Iran. As a result, BNP was forced to pay a fine of $8.9 billion which is the largest fine ever imposed for violating those sanctions.
- In the 1980's, the Bank of Credit and Commerce International, a bank registered in Luxembourg and with offices in London, was found guilty of laundering an amount of money estimated to be in the billions for drug traffickers.
Percentage of suspected ML drug-related cases involving main reporting sectors:
Percentage of suspected ML fraud-related cases involving main reporting sectors:
Percentage of all cases related to investigations of different drug offences:
''Money Laundering In Pakistan''
- Brothers-Money Laundering Case:
Mian Nawaz Sharif and Mian Shahbaz Sharif were alleged of money laundering and used the Hudaibiya Paper Mills as cover for money laundering during the late1990s. The Hudaibiya Paper Mills case is still pending in the National Accountability Bureau.
- President Zardari Money Laundering Case:
President Zardari is alleged of misappropriated as much as $1.5 billion.
NAB opened a fresh case against him: the so-called BMW car reference (a BMW was imported in 1993 allegedly for Zardari and allegedly while evading customs duties). Fast forward to March 2008 and Zardari was cleared of all charges in the BMW case, without recourse to the NRO.
In 1994 Ms Bhutto, Asif Zardari and their agent Jens Schlegelmilch were alleged to have received $60 million in kickbacks from SGS in exchange for the award of a pre-shipment inspection contract to the Swiss company.
In 2003, Ms Bhutto and Mr. Zardari were convicted of simple money laundering by a Geneva investigating judge who handed down a six-month suspended sentence.¨ The case was pending in the Swiss court when then President Pervez Musharraf promulgated the National Reconciliation Ordinance and the government dropped the case in April 2008.
- Altaf Hussain Money Laundering Case:
Altaf Hussain was having 3576 cases and charges of
corruption against him. But in November 2009 all the cases were dropped under National
Reconciliation Ordinance, a legal act which granted amnesty to
politicians, political workers and bureaucrats who were accused of crimes between
1986 and October 1999, the time between two occurrences of Martial law.However, MQM officials
maintain that all these charges were wrong and were put up only to disparage
the popularity of Altaf Hussain and MQM and that they are ready to
face any of these false accusations at the Supreme Court of Pakistan.
According to the BBC, London's Metropolitan Police
started a money-laundering probe against Hussain after they recovered money
whose source could not be ascertained from his house in searches in December
2012 and June 2013. He was arrested on 3 June 2014 on suspicion of
money-laundering by the police force, which has prompted fears of violence in
Karachi and other MQM strongholds.
- Ayan Ali Money Laundering Case:
Pakistan's Money Laundering Cases.
''Recommendations''
- Financial institutions should maintain, for at least five years, all necessary records on transactions, both domestic or international, to enable them to comply swiftly with information.
- Financial institutions should pay special attention to all complex, unusual large transactions, and all unusual patterns of transactions, which have no apparent economic or visible lawful purpose¨.
- If a financial institution suspects or has reasonable grounds to suspect that funds are the proceeds of a criminal activity, or are related to terrorist financing, it should be required, directly by law or regulation, to report promptly its suspicions to the financial intelligence unit (FIU).
- Other global organizations fighting money laundering include:
- The United Nations.
- The International Monetary Fund.
- The World Bank.
A brief video for understanding Money Laundering and it's process
