Money Laundering

Presented by:

H.B Hamad BBA-ZU In

trod

uctio

n to

M

on

ey laun

derin

g

1 [email protected]

Introduction

• Money laundering is a kind of financial crime

• Financial crime is fraudulent activities

• Fraud always attract the negative side of the laws

• Fraud is the intentional misrepresentation of financial information by one or more individual among the employees or third parties. (i.e financial fraud)

2 [email protected]

Introduction…

• Money laundering is very important business to criminal group (drag traffickers, terrorists)

• The term "money laundering" is said to originate from Mafia ownership of Laundromats in the United States. Gangsters there were earning huge sums in cash from extortion, prostitution, gambling and bootleg liquor. They needed to show a legitimate source for these monies.

• One of the ways in which they were able to do this was by purchasing outwardly legitimate businesses and to mix their illicit earnings with the legitimate earnings they received from these businesses.

3 [email protected]

Introduction….

• The two most significant areas of vulnerability to criminals, terrorists and terrorist organizations are communications and finance.

• These two areas consistently lead to the disruption and dismantlement of terrorist groups and activities.

• Although criminals and terrorists consistently change their methods of operations and demonstrate adaptability at avoiding detection, they must communicate, and raise and spend money to function.

4 [email protected]

Definitions

• Money Laundering refers to the conversion or "Laundering" of money which is illegally obtained, so as to make it appear to originate from a legitimate source.

• Money Laundering is being employed by launderers worldwide to conceal criminal activity associated with it such as drug / arms trafficking, terrorism and even white color staffs

5 [email protected]

Definitions

• Money laundering is the process by which criminals attempt to conceal the true origin and ownership of their criminal activities.

• If undertaken successfully, it also allows them to maintain control over those proceeds and ultimately to proved a legitimate cover for their source of funds.

• Their dirty money appear to be good ones

6 [email protected]

Definitions

• Money laundering, at its simplest, is the act of making money that comes from Source A look like it comes from Source B.

• In practice, criminals are trying to disguise the origins of money obtained through illegal activities so it looks like it was obtained from legal sources.

• Otherwise, they can't use the money because it would connect them to the criminal activity, and law-enforcement officials would seize it.

• The most common types of criminals who need to launder money are drug traffickers, embezzlers, corrupt politicians and public officials, mobsters, terrorists and con artists

7 [email protected]

Stages/steps or process of money laundering

• Basically money laundering involves three steps:

• Placement

• Layering

• Integration

8 [email protected]

Stages of money laundering (Placement)-1

• At this stage, the launderer inserts the dirty money into a legitimate financial institution.

• This is often in the form of cash bank deposits.

• This is the riskiest stage of the laundering process because large amounts of cash are pretty conspicuous, and banks are required to report high-value transactions.

9 [email protected]

Stages of money laundering (Placement)…

• It is other wise known as washing stage

• Mostly money received in small denomination but in significant amount.

• Money then deposited in bank, or put into retail economy or smuggled outside country.

• Aim is to avoid detection from authority and then transform into other forms of assets

10 [email protected]

Stages of money laundering (layering)-2

• This is the first step in attempt to concealment or disguise of the ownership

• Layering involves sending the money through various financial transactions to change its form and make it difficult to follow.

• This is the most complex step in any laundering scheme, and it's all about making the original dirty money as hard to trace as possible



• Layering may consist of:

1. several bank-to-bank transfers,

2. wire transfers between different accounts in different names in different countries,

3. making deposits and withdrawals to continually vary the amount of money in the accounts,

4. changing the money's currency, and

5. purchasing high-value items (boats, houses, cars, diamonds) to change the form of the money.



• The purpose of layering is avoid audit trail and provide anonymity

• If money launderer successes in the stage, then well in good


Stages of money laundering (Integration)-3

• At the integration stage, the money re-enters the mainstream economy in legitimate looking form, it appears to come from an legal transaction.

• This may involve a final bank transfer into the account of a local business in which the launderer is "investing" in exchange for a cut of the profits, the sale of a yacht bought during the layering stage .

• At this point, the criminal can use the money without getting caught.

• It's very difficult to catch a launderer during the integration stage if there is no documentation during the previous stages.


Stages of money laundering (Integration)-3

• This is final stage in the process

• It is integration of cleaned money into the economy

• Method used by launderer: Forming anonymous companies in countries whereby right to secret is

guaranteed

Grant them selves big loans out of the laundered money

To increase profit, raised an interest to loan

Also claim tax relief to boast their profit

Sending of false export-import invoices overvaluing goods allows the money to move from one company and country to another


Some danger signal of money laundering

1. Secretive client: the client who is reluctant to provide details of his identity and back ground.

2. Untypical instruction: the client who has no obvious reasons for using particular company.

3. Lack of economic purposes; The client’s transaction lacks or includes steps which lack any obvious economic purposes.


Some danger signal of money laundering

4. Nominees and trusts behind the fund management, transfer, deposition etc

5. Holding client asset without convincing reasons

6. Suspect terrorist i.e country where drug production or trafficking may be prevalent


Effects of money laundering (social effects)

• The global effect is great in social, economic and security terms.

1. On the socio-cultural end of the range, successfully laundering money means that criminal activity actually does pay off.

2. This success encourages criminals to continue their illicit schemes because they get to spend the profit with no repercussions


Effects of money laundering (social effects)

• Its 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.

• Furthermore, the sheer magnitude of the economic power that accrues to criminals from money laundering has a corrupting effect on all elements of society. In extreme cases, it can lead to the virtual take-over of legitimate government.


Effects of money laundering (economic effects)

• The economic effects are on a broader scale. • Developing countries often bear the impact of modern

money laundering because the governments are still in the process of establishing regulations for their newly privatized financial sectors.

• This makes them a prime target. In the 1990s, numerous banks in the developing Baltic states ended up with huge, widely rumored deposits of dirty money.

• Bank customers proceeded to withdraw their own clean money for fear of losing it if the banks came under investigation and lost their insurance. The banks collapsed as a result.


Effects of money laundering (economic effects)

• Reputation Risk:

• Risks to Privatization Efforts:

• Loss of Revenue:

• Economic Distortion and Instability:

• Loss of Control of Economic Policy:

• Undermining the Integrity of Financial Markets:


Effects of money laundering

• Other major issues facing the world's economies include errors in economic policy resulting from artificially inflated financial sectors.

• Massive influxes of dirty cash into particular areas of the economy that are desirable to money launderers create false demand, and officials act on this new demand by adjusting economic policy.

• When the laundering process reaches a certain point or if law-enforcement officials start to show interest, all of that money that will suddenly disappear without any predictable economic cause, and that financial sector falls apart.


Effects of money laundering (taxation effects)

• Some problems on a more local scale relate to taxation and small-business competition.

• Laundered money is usually untaxed, meaning the rest of us ultimately have to make up the loss in tax revenue.

• Also, legitimate small businesses can't compete with money-laundering front businesses that can afford to sell a product for cheaper because their primary purpose is to clean money, not turn a profit.

• They have so much cash coming in that they might even sell a product or service below cost.


Effects of money laundering (security effects)

• The majority of global investigations focus on two prime money-laundering industries:

• Drug trafficking and terrorist organizations. • The effect of successfully cleaning drug money is clear: More drugs, more

crime, more violence. • The connection between money laundering and terrorism may be a bit

more complex, but it plays a crucial role in the sustainability of terrorist organizations.

• Most people who financially support terrorist organizations do not simply write a personal check and hand it over to a member of the terrorist group.

• They send the money in roundabout ways that allow them to fund terrorism while maintaining anonymity. And on the other end, terrorists do not use credit cards and checks to purchase the weapons, plane tickets and civilian assistance they need to carry out a plot.


Fighting money laundering

• The Committee on Banking Regulations and Supervisory Practices of the G 10 at a meeting in Basle in Switzerland, in December 1988, evolved a set of principles to address the dangers posed by Money Launderers.

1. Customer Identification 2. Compliance with Laws 3. Cooperation with Law Enforcement agencies,

and, 4. Adherence to the Statement


Customer Identification

• This reemphasizes the adage "Know your Customer" (KYC).

• KYC requires that banks should make reasonable efforts to determine the customers true identity, and must introduce effective procedures for verifying the bonafides of new customers.


Compliance with Laws

• The laws and regulations pertaining to financial transactions as enacted in different Banking related statutes, must be observed.

• Banks should not offer services or provide active assistance in case of transactions where they have good reason to suppose that these are associated with Money Laundering activities.


Co-operation with Law Enforcement Authorities

• Banks should co-operate fully with national law enforcement authorities to the extent permitted by specific local regulations concerning customer confidentiality.


Adherence to the Statement

• Adhering to the Statement implies that banks need to adopt policies that are consistent with the Statement and ensure that all staff members are informed of the banks policy in this regard.

• Some key factors in promoting adherence to the Statement of Principles are staff training and implementing specific procedures for customer identification and retaining internal records of transactions.


How big is the money laundering problem?

• Global money laundering volume—high estimate $1.46 trillion ( compare to)

• Gross domestic product—United Kingdom $1.28 trillion

• Global money laundering volume—low estimate $584 billion ( compare to)

• Gross domestic product—Spain$531 billion


2007 photo showing $207 million seized in Mexico ($205.6 was in US currency)


Business Areas Prone To Money Laundering

• ANTIQUE DEALERS/JEWELLER’S/DESIGNER GOODS SUPPLIERS

• CASINOS

• FINANCIAL TRANSMITTERS

• FINANCE HOUSES/BUILDING SOCIETIES

• Accountants/Solicitors/Stockbrokers

• PROFESSIONAL ADVISORS

• UNDERGROUND BANKING

• BANKING.


money-laundering offences: There are now five basic money-laundering offences:

• assisting another to retain the benefit of crime;

• acquiring, possession and use of criminal proceeds;

• concealing or transferring proceeds to avoid prosecution

• failure to disclose knowledge or suspicion of money laundering;

• tipping off.


How to control • to strengthen international co-operation on information

exchange and law enforcement;

• proper mechanisms for handling suspicious reports;

• a compliance culture among financial institutions; and to ensure that they put proper systems and procedures in place;

• to encourage financial supervisors to apply bank licensing procedures strictly, exchange information, and train practitioners;

• to increase public awareness of the threat from money laundering;

• increasing co-ordination between the multiple agencies (national and international) involved and to improve the limited intelligence sharing;


How to control

• to increase the limited human resources involved in the labour intensive and time consuming work of investigating suspected violations;

• implementation on a world-wide basis of a consistent set of policies.

• to focus on new technologies and increase countermeasures to combat their use for money laundering;

• to share forfeited proceeds with law enforcement agencies. (a particular police gripe);

• Introduce measures that make the movement of money more visible.


SWIFT CODEs

• The registrations of SWIFT Codes are handled by Society for Worldwide Interbank Financial Telecommunication (“SWIFT”) and their headquarters is located in La Hulpe, Belgium

• These codes are used when transferring money between banks, particularly for international wire transfers.

• Banks also used the codes for exchanging other messages between them


SWIFT CODEs • The SWIFT code consists of 8 or 11 characters.

When 8-digits code is given, it refers to the primary office.

First 4 characters - bank code (only letters)

Next 2 characters - ISO 3166-1 alpha-2 country code (only letters)

Next 2 characters - location code (letters and digits) (passive participant will have "1" in the second character)

Last 3 characters - branch code, optional ('XXX' for primary office) (letters and digits)


Money laundering indicator for individual (Red Flags)

• Unusual income No income or low income compared to normal cost of living

Taxpayer appears to be living beyond their means

• Unusual rise in net worth Inheritance from a criminal family member

Fictitious inheritance

Voluntary disclosure by known criminals or their relatives

Gambling and lottery gains


Money laundering indicator for individual (Red Flags)….

• Unusual possession or use of assets A person with low income owns or uses expensive assets (car,

boat, real estate)

A person owns assets located abroad, not declared in their tax return

• Unusual debt Obtaining a mortgage on a relatively low income

Obtaining a loan from unidentified parties


WHAT AUDITORS NEED TO KNOW

• Generally, businesses are most useful to money launderers as conduits for tainted funds.

• So, since money launderers usually don’t expropriate assets, they seldom leave evidence of their activity on financial statements, making it difficult to detect their illegitimate activities during conventional audits



• Nevertheless, independent auditors have a responsibility detect Illegal Acts by Clients, to be aware of the possibility that illegal acts may have occurred, indirectly affecting amounts recorded in an entity’s financial statements.

• In addition, if specific information comes to the auditor’s attention indicating possible illegal acts that could have a material indirect effect (for example, the entity’s contingent liability resulting from illegal acts committed as part of the money laundering process) on the entity’s financial statements, the auditor must apply auditing procedures specifically designed to ascertain whether such activity has occurred



• When an auditor becomes aware of information concerning a possible illegal act, RULE requires him or her to obtain from management—at a higher level than those employees potentially involved—information on the act’s nature, the circumstances in which it occurred and its possible effect on the client’s financial statements.

• If management does not provide conclusive evidence that an illegal act has not occurred, the standard requires the auditor to consult with the client’s legal counsel or other specialists about how relevant laws apply to the situation and the impact it may have on the financial statements.


Silence Is (Not Always) Golden • In March 2000, an insurance company executive embezzled

$90 million by faking the purchase of bonds as an investment for his employer.

• To conceal the funds’ movement, he arranged for them to be passed first through two companies an accounting firm had set up for him in a Caribbean nation and then to his personal account in a third jurisdiction.

• Six months later, the accounting firm detected the executive’s fraud and its inadvertent role in laundering the proceeds.

• Nevertheless, the firm’s management committee did not report its findings to the authorities and later both they and the executive were apprehended and charged for their offenses.

• Source: FATF Report on Money Laundering Typologies, 2000-2001.


Your questions please


Money Laundering

Documents

Transcript of Money Laundering