Money laundering

Modern development of money laundering
The act of “money laundering” was not invented during the Prohibition era in the United States, but many techniques were developed and refined then. Many methods were devised to disguise the origins of money generated by the sale of then illegal alcoholic beverages. Following Al Capone’s 1931 conviction for tax evasion, mobster Meyer Lansky transferred funds from New Orleans slot machines to accounts overseas. After the 1934 Swiss Banking Act which created the principle of bank secrecy, Meyer Lansky bought a Swiss bank where he would transfer his illegal funds through a complex system of shell companies, holding companies and offshore accounts [1]..

The term of “money laundering” itself does not derive, as is often said, from the story that Al Capone used laundromats to hide ill-gotten gains. It was Meyer Lansky that perfected money laundering’s older brother, “capital flight”, transferring his funds to Switzerland and other offshore places. The first reference to the term “money laundering” itself actually appears during the Watergate scandal. US President Richard Nixon’s “Committee to Re-elect the President” moved illegal campaign contributions to Mexico, then brought the money back through a company in Miami. It was Britain’s Guardian newspaper that coined the term, referring to the process as “laundering.” [2]
International initiatives against money laundering
The 1980s witnessed the international trend for the criminalization of money laundering as a discrete crime. The US and the UK have done so in 1986, and the 1988 Vienna Convention has required State Parties to introduce this crime in their domestic legal systems. In 1989, the FATF was created. Its first report, issued in 1990, recommended the criminalization of money laundering. In 1991, the European Union required its Member States to ‘prohibit’ the laundering of funds derived from drug offences; the original Directive was revised in 2001 and replaced by another in 2005.
September 11, 2001 and the international response to the underground economy

After September 11, 2001, money laundering become a major concern of the US Bush administration’s war on terror, although critics argue that it has become less and less an important matter for the White House. Based in Luxembourg, Clearstream a clearing house or “a bank of banks” which practice “financial clearing”, centralizing debit and credit operations for hundreds of banks, has been accused of being a major operator of the underground economy via a system of un-published accounts; Bahrain International Bank, owned by Osama bin Laden, would have profited from these transfer facilities [1]. The scandal prompted André Lussi, Clearstream CEO, to resign on December 31, 2001; several judicial investigations were opened; and the European Commission was interpelled by Members of the European Parliament (MEPs) Harlem Désir, Glyn Ford and Francis Wurtz, who asked the Commission to investigate the accusations and to ensure that the 10 June 1990 directive (91/308 CE) on control of financial establishment was applied in all member states, including Luxembourg, in an effective way [3].

The international response to the underground economy has been co-ordinated by the Financial Action Task Force on Money Laundering (“FATF”, also known by its French acronym of “GAFI”), whose original 40 principles form the basis of most international responses to money laundering activity. A further 8 principles, designed to counteract funding to terrorist organisations, were added on June 30, 2003 in response to the September 11, 2001, with another added 22 October 2004, to form what are now known as the “40 + 9” principles of anti-money laundering and counter-terrorism funding (AML/CTF). Compliance with, or a movement towards compliance with, these principles is now seen as a requirement of an internationally active bank or other financial service entity.

Several FATF-style regional bodies exist, such as the Asia/Pacific Group on Money Laundering.
Process
Money laundering is often described as occurring in three stages: placement, layering, and integration.[4]

Placement: refers to the initial point of entry for funds derived from criminal activities.
Layering: refers to the creation of complex networks of transactions which attempt to obscure the link between the initial entry point and the end of the laundering cycle.
Integration: refers to the return of funds to the legitimate economy for later extraction.

Examples

If a person is making thousands of dollars in small change a week from a business (not unusual for a store owner), and wishes to deposit that money in a bank, it cannot be done without possibly drawing suspicion. In the United States, for example, cash transactions and deposits of more than $10,000 are required to be reported as “significant cash transactions” to the Financial Crimes Enforcement Network (FinCEN), along with any other suspicious financial activity as “suspicious activity reports”. In other jurisdictions suspicion based requirements are placed on financial services employees and firms to report suspicious activity to the authorities. Methods to conceal the source are therefore required.
Irregular Funding
One method of keeping this small change private would be for an individual to give money to an intermediary who is already legitimately taking in large amounts of cash. The intermediary would then deposit that money into an account, take a premium, and write a check to the individual. Thus, the individual draws no attention to himself, and can deposit his check into a bank account without drawing suspicion. This works well for one-off transactions, but if it occurs on a regular basis then the check deposits themselves will form a paper trail and could raise suspicions.
Captive business
Another method involves establishing a business whose cash inflow cannot be monitored, and funneling the small change into this business and paying taxes on it. All bank employees however are trained to be constantly on the lookout for any transactions which appear to be an attempt to get around the currency reporting requirements. Such shell companies should deal directly with the public, perform some service related activity as opposed to providing physical goods, and reasonably accept cash as a matter of business. Dealing directly with the public ensures plausible anonymity of source. An example of a legitimate business displaying plausable anonymity of source would be a hairdresser. Since it would be unreasonable for them to keep track of the identity of their customers, a record of their transaction amounts must be ostensibly accepted as primae facia evidence of actual financial activity. Service related businesses have the advantage of anonymity of resources. A business that sells computers has to account for where it actually got the computers, whereas a plumbing company merely has to account for fictitious labor. Reasonably accepting cash means the business must regularly perform services that total less than $500 on average, since above that amount most people pay with a check, credit card, or other traceable payment method. The company should actually function on a legitimate level. In the plumbing company example, it is perfectly reasonable for a lot of the business to involve only labor (no parts), and for some business to be paid for in cash, but it is unreasonable for all of their business to involve no parts and only cash payment. Therefore the legitimate business will generate a legitimate level of parts usage, as well as enough traceable transactions to mask the illegitimate ones. Each of the above examples is flawed in one or more ways and serves only to illustrate the specific feature being discussed. Hairdressers are flawed because they would have to account for their employees, plumbers usually provide warranties on their work, which necessarily includes the names and addresses of the customers.

Corrupt politicians and lobbyists also launder money by setting up personal non-profits to move money between trusted organizations so that donations from inappropriate sources may be illegally used for personal gain.

Legal considerations

By the strictest definition of the term, anyone who assists in concealing the proceeds from his transactions is considered a money launderer. An individual therefore may be unwittingly employed by money launderers, and may still be criminally liable in many jurisdictions. However, the act of concealing money is different from that of laundering it, though many make the mistake of putting both actions under the term of laundering

Agencies involved in countering money-laundering
AUSTRAC (Australia)
FinCEN (United States)
FINTRAC (Canada)
Serious Organised Crime Agency (United Kingdom)
Tracfin (France)
Unidad de Inteligencia Financiera (Argentina)
Italian Guardia di Finanza
{http://www.geocities.com/dbdoggle Tech Dot Com Money Launderign]

Notes

1) Lucy Komisar. “Tracking Terrorist Money – ‘Too Hot for US to handle?'”, Pacific News Service, October 4, 2001. Retrieved on February 2006.
2) (See Jeffrey Robinson’s three books on money laundering, The Laundrymen, The Merger and The Sink.)
3)(French) Official March 2000 French Parliamentary Report on the obstacles on the control and repression of financial criminal activity and of money-laundering in Europe by French MPs Vincent Peillon and Arnaud Montebourg, third section on “Luxembourg’s political dependency toward the financial sector: the Clearstream affair” (pp.83-111 on PDF version)
4) See for example, “2. Stages of the Money Laundering Process”, A report in accordance with § 356(c) of the USA PATRIOT Act
Source: English Wikipedia

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