Financial Accounting For Financial Services Assignment

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.


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.

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