Essay/Term paper: Money laundering

Essay, term paper, research paper:  Management

Money Laundering

The word money laundering, according to the myth, is derived from Al Capone's
practice of using a string of coin-operated launderettes in Chicago to disguise
his revenues from gambling, prostitution and protection rackets. It's a nice
story but not true, money laundering is so called because it perfectly describes
the process of removing the stains and smells which money acquires when
criminals earn it.

In this report I will go on to discuss the topic of money laundering in the
following order; firstly, I will begin by explaining what is money laundering?,
why it is done?, and how it is done? I will then go on to explain the effects
of money laundering and the institutions/organisations that are at risk from
these activities. I will also be discussing the current situation in the UK
regarding money laundering and whether anything can be done to prevent or
restrict laundering activities, and will then go on to conclude my findings.

Money laundering is the process by which criminals attempt to conceal the true
origin and ownership of the proceeds of their criminal activities. If they are
successful they can then maintain control over the proceeds and, so, provide a
legitimate cover for their source of income. J.D. Mclean defined money
laundering in the International Judicial Assistance as:

"Although the proceeds of crime will be kept as capital for further criminal
ventures, the sophisticated offender will wish to use the rest for other
purposes. If this is to done without running a risk of detection, the money
which represents the proceeds of the original crime must be "laundered"; put
into a state in which it appears to have an entirely respectable provenance"

It is important to bear in mind that money laundering is a process (often a
highly complex one) rather than a single act. In an effort to expose and
analyse this phenomenon it has become common to use a three-stage model which
encompasses an ideal money laundering scheme. The three stages are as follows:

* Placement Stage

This is where cash derived directly from criminal activity (e.g. from
sales of drugs) is first placed either
in a financial institution or used to purchase an asset.

* Layering Stage

The stage at which there is the first attempt at concealment or disguise
of the source of the ownership of funds.

* Integration Stage

The stage at which the money is integrated into the legitimate economic and
financial system and is camouflaged with all other assets in the system.

Money launderers try to prevent authorities from tracing the source of their
ill-gotten gains by moving their funds around financial and economic system.
The funds are then spent as if they were legitimate money. The more blatant by
the money launderer will directly involve a person or a business in the crime.
i.e. A launderer could simply ask someone for permission to use their account
for deposits in return for a fee. Another scenario is for the money launderer
to approach a business and ask them to set up transactions in which a sum of
money is regularly deposited in the company's account. The business will then
send the money back as a fictitious payment for non-existent goods. Although
this method is very popular amongst the criminal underworld, there are other
ways of laundering money without a business becoming aware of being involved in
a crime. e.g. The money launderer could place an order for an industrial
machine/robot to be manufactured to a specific standard. The company may ask
for a 60% deposit with the understanding that the order won't be put through for
three months. Before the three months are up the money launderer cancels the
order and gets the deposit refunded minus a penalty. The money launderer will
always be willing to pay the penalty because although he/she will want to get as
much back as possible, what he/she really wants is the money back clean.

Money Laundering is said to be the third biggest industry by value world-wide.
Research in the USA has shown that 90% of currency bills in circulation are
contaminated with narcotics. In the UK, similar research showed 40% to be
contaminated. In 1994, about 15,000 suspicious transactions were reported to
the National Criminal Intelligence Service's (NCIS) economic crimes unit. About
one in five was found to have some criminal connection.

In the UK the following organisations are most vulnerable to fall prey to the
money launderers:

* Deposit-taking institutions

Because of the money launderers need to get rid of cash, deposit taking
institutions are particularly vulnerable to being used. i.e. Banks,
Building Societies, Post offices etc. Hence, many of the efforts to combat
money laundering have concentrated on the procedures adopted by deposit takers.

* Non-bank financial institutions

The introduction of measures to prevent banks being readily used for purposes of
money laundering has, without doubt, made life more difficult by increasing the
costs and the risks for those involved. These are businesses that provide bank-
like services, but are historically less closely supervised than traditional
financial institutions. i.e. Bureau de Change, cheque cashers, money
transmission services, commodities brokers etc.

The law is, as in so many areas, complex and set out in various different
statutes and regulations. It deals with the proceeds of drugs trafficking,
terrorist crime and non-terrorist crime slightly differently, but the thrust of
the law for each is similar. Offences are created for those who launder the
money and those who assist them in any way. It also obliges those in the
financial community to take preventative measures. The Criminal Justice Act 1993
widened the law by extending the expression "criminal conduct" to any indictable
offence committed in the UK. The preventative measures are contained in the
Money Laundering Regulations 1993 ("the Regulations") which implement the EC
Money Laundering Directive.

There are five money laundering offences. These are: assistance, concealment,
acquisition, failure to disclose and tipping off. Assistance occurs where a
person is involved in an arrangement with another person and knows or suspects
that the other person is or has been involved in or has benefited from drug
trafficking or criminal conduct if the arrangement helps the other person to
retain or control proceeds directly or indirectly or enables the other person to
use the proceeds or to invest them for his benefit.

Concealment is disguising, removing or transferring proceeds (direct or indirect
of drug trafficking or criminal conduct) in order to avoid or help someone else
to avoid prosecution. The offence is committed by a person who assisted in the
offence if he/she knows or has reasonable grounds to suspect the nature of the
property. Acquisition is the offence of use or possession of assets which you
know or have reasonable grounds to suspect to be the proceeds of drug
trafficking or criminal conduct and have acquired at less than full value.

The Act now makes it a specific and separate offence in cases involving drugs or
terrorism not to report a suspicion if the information came to the person's
attention in the course of his trade, profession, business or employment.
Effectively the duty to report is extended to employees of business institutions
where it is the institutions who may become involved in the arrangements and not
the employees themselves. The question arises as to whether disclosure is a
waiver of professional privilege or a breach of any express or implied duty of
confidentiality owed to a customer or client. It is clear that disclosure to the
police (although not third parties) will not constitute a waiver of professional
privilege nor will it give actionable grounds for a claim for breach of
confidence.

Reporting to the police is not much help if the suspect is tipped off about the
investigation. Tipping off, therefore, constitutes an offence when information
or any other matter which might prejudice an investigation is disclosed to the
subject of the investigation (or anyone else) by someone who knows or suspects
(or, in the case of terrorism, has reasonable cause to suspect) that: a police
investigation into money laundering has begun or is about to begin, or the
police have been informed of suspicious activities, or a disclosure has been
made to another employee under internal reporting procedures.

The Regulations require any person who carries out relevant financial business
in a business relationship or a one-off transaction with an applicant for
business to maintain certain administrative and training procedures designed to
prevent money laundering occurring. It is a criminal offence not to maintain
the necessary procedures although it is a defence if the person concerned took
all reasonable steps and exercised all due diligence to avoid committing this
offence. This applies to banks and building societies, investment businesses and
insurance business.

Clearly some of this laundering will be assisted by people who know what they
are doing but may not know of the penalties they are risking if they are caught.
Some of it will be helped by people who are not sure what is going on but are
prepared to turn a blind eye for the commission they will earn. Many advisers
will be representing clients who appear to be running perfectly respectable
businesses but are not.

The dirty proceeds of drugs trafficking alone throughout the world are estimated
to be around £500bn annually. £2bn each year is thought to be laundered through
Britain. Businesses must know their legal obligations and in particular
providers of financial services must be aware of the new rules they must obey.

Even though you can take effective steps to prevent hackers breaking into your
computers, financial crime often involves insiders. Even using the unique
features of a computer security system, you can only prevent fraud where a
person acts outside his authority. No system prevents a senior officer with
full system access walking off with money or records in his custody. But now a
threat is posed not only by the staff member setting out to steal from you but
also to staff members being susceptible to third party pressure to use your bank
to launder money - by doing nothing outside their normal authority.

Another major problem with the prevention of money laundering is that it is now
spread over an international network and this makes it very difficult to control
or regulate. One countries regulation may prevent/decrease money laundering but
will just drive it towards unregulated territories or economies that have a vary
relaxed attitude towards money laundering. E.g. In exchange for a minimum $10m
"subscription", the Seychelle islands will grant diplomatic status to
"investors", making them invulnerable to action by international law enforcers.
This clearly becomes a haven for drug barons and crime bosses, where they can
launder millions and escape prosecution.

The world's third largest industry continues to grow rapidly and uncontrollably.
Factors that affect this growth are the increasing emerging technologies,
international barriers being removed, improved communications networks and last
but not least individual/organisational greed that allows blind eyes to be
turned in order to keep revenue coming in.

Bibliography

Dirty Money William C. Gilmore

Money Laundering - A practical guide to the new legislation Rowan Bosworth-
Davies and Graham Saltmarsh

Crooks paradise Frank Kane, Adrian Levy, and Steve Haynes Sunday Times, 14th
January 1996.

Steps against cash crime Jimmy Burns The Times, 5th June 1996.

Governments gunning for money launderers Oliver August The Times, 1st October
1996.