Anti-Money Laundering/Combating the Financing of Terrorism

The motive of AML/CFT are:-

1.   To protect the integrity and stability of the  financial system

2.   To cut off the resources available to terrorists

3.   To make it more difficult for those engaged in crime to profit from their criminal activities

What is Money Laundering

Criminal activities, such as drug trafficking, smuggling, human trafficking, corruption and others, tend to generate large amounts of profits for the persons carrying out the criminal act.

 However, by using funds from such illicit sources, criminals risk drawing the authorities' attention to the underlying criminal activity and exposing themselves to criminal prosecution. In order to benefit freely from the proceeds of their crime, they must therefore conceal the illicit origin of these funds.

Money laundering" is the process by which proceeds from a criminal activity are disguised to conceal their illicit origin. Terrorist financing is the collection of funds for terrorist purposes. In the case of money laundering, the funds are always of illicit origin, whereas in the case of terrorist financing, funds can stem from both legal and illicit sources.

In both cases, the perpetrators of crime  make an illegitimate use of the financial sector.

Methodology of Money Laundering

Criminals are very creative in developing methods to launder money.

·         Structuring: Often known as smurfing, this is a method of placement whereby cash is broken into smaller deposits of money, used to defeat suspicion of money laundering and to avoid anti-money laundering reporting requirements.

·         Bulk cash smuggling: This involves physically smuggling cash to another country and depositing it in a financial institution with greater bank secrecy or less rigorous money laundering enforcement.

·         Cash-intensive businesses: In this method, a business typically expected to receive a large proportion of its revenue as cash uses its accounts to deposit criminally derived cash. Examples are parking structures, strip clubs, tanning salons, car washes, arcades, bars, restaurants, and casinos.

·         Trade-based laundering: This involves under- or over-valuing invoices to disguise the movement of money.

·         Shell companies : Money is routed through the bank accounts of companies which are only on papers and doing no business.

·         Round-tripping: The money is routed through different countries to be received back as Foreign Direct Investment.

·         Bank capture: In this case, money launderers or criminals buy a controlling interest in a bank, preferably in a jurisdiction with weak money laundering controls, and then move money through the bank without scrutiny.

·         Casinos:  in casinos, winners are paid through cheques. The illicit money is converted and shown as proceeds of win.

·         Real estate: Someone purchases real estate with illegal proceeds and then sells the property. To outsiders, the proceeds from the sale look like legitimate income.

·         Black salaries: A company may have unregistered employees without written contracts and pay them cash salaries. Dirty money might be used to pay them.

How, banks are used by money launderers

Money Launderers generally use three stages  to clean their dirty money through banking channel:-

Placement is the first stage in money laundering where the cash proceeds of criminal activity enter into the financial system.

This is most critical stage for any money launderer as the criminal can effectively mask his ‘dirty’ funds by  mixing with  his ‘clean’ funds and create an impression of legitimacy.

Examples of Placement include:

·         Depositing cash  below threshold reporting limits for AML purposes into multiple bank accounts

·         Purchasing demand drafts for cash and depositing the same into bank account.

Layering is the second stage in money laundering where attempts are made to distance the money from its illegal source through layers of financial transactions.

Examples of Layering include:

·         Sending funds to different onshore and offshore bank accounts

·         Creating complex financial transactions

·         Loans and borrowing against financial and non-financial assets

Integration is the third stage of money laundering. This stage involves the re-introduction of the illegal proceeds into legitimate commerce by providing a legitimate-appearing explanation for the funds.

Examples of Integration include:

·         Buying businesses

·         Investing in luxury goods

·         Buying commercial property

·         Buying residential property

It is clear from above that banking institutions are required by money launderers to conceal their illegal funds and that is why it is important that Know-Your-Customer (KYC) checks are done on customers. In certain cases there may be a need for Enhanced Due Diligence (EDD) on clients.

Money laundering can’t happen without banks being involved somewhere within the three stages. Since they are our first line of defence against criminals, by having robust controls and access to accurate KYC data, banks will prevent many money laundering attempts. 

Tilak Gulati

Executive Trainer & Blogger

Author: www.itstrgulati.blogspot.in