ANTI-MONEY LAUNDERING The Controllability of Money Laundering: A Global Perspective Table of Contents Abstract3 1. 0 Introduction4 2. 0 Background6 3. 0 Literature Review 3. 1 A study of Country size and the incentive to tolerate money laundering8 3. 2 Outsourcing and Insourcing Crime: The Political Economy of Globalized Crime10 3. 3 Crackdown on Money Laundering: A Comparative Analysis of the Feasibility and Effectiveness of Domestic and Multilateral Policy Reforms12 3. 4 The UN Anti Corruption Convention and Money Laundering14 4. 0Analysis14 5. 0Conclusion17 6. Reference List 19 Abstract In an every changing global economy, crime is increasing. Money laundering is the tool which criminals use to obtain their proceeds. With increased globalization, the lack of consistent worldwide regulations disallows anti-money laundering to be controlled effectively. In this paper, various research articles will be examined to determine the impact international measures and the UN has on anti-corruption measures, the impact of the political economy on crime, and the findings on correlations between country size and tolerating money laundering.
It concludes by addressing the lack of synchronization of regulations and makes recommendations to help control it. 1. 0 Introduction The terrorist attack in the US on Sept 11, 2001 was one of the most horrifying and shocking events in the US. Not only did it bring awareness to a greater need for legislation to combat terrorism, but it also brought the realization that terrorism needs to be stopped at its financial root. The legislation that was brought in is more commonly known as the Patriot Act. The US proclaimed a global war on terrorism. There was no way to punish the terrorists for their actions as they had already died.
The focus then shifted to those who funded the crimes and financially supported the terrorists. This led to an increased focus on money laundering. Within 2 weeks of the terrorist attacks, President Bush signed an executive order freezing assets of 27 organizations and individuals that appeared to be in connection with terrorists. Banks were further required to conform to the requirements of the Patriot Act or were suspected of assisting terrorist activities. Thereafter additional assets of those believed to be in connection to Osama Bin Laden including most of the cabinet in Afghanistan were frozen. Bosworth-Davies, 2007, pg 70). It can be seen here, that the money used and laundered was on an international scale. As the total amount of money laundering globally on a yearly basis ranges from $500 billion to $1 Trillion (Lacey & George, 2009, pg 2) it is apparent now that with the globalization of business and interdependence of economies, the globalization of crime has also grown. Money laundering begins once a crime is committed, so that the individuals who have committed the crime are able to enjoy the proceeds from the crime.
There is no incentive to commit crimes if the profits cannot be obtained thus money laundering becomes a key step. Criminal proceeds are laundered for two additional reasons. Firstly, not all individuals responsible for the crime reside within the respective country and therefore do not have access to their respective proceeds and more importantly, many individuals and businesses refuse to deal with criminals and their proceeds. This results in illegal money being valued at less than what legal money is worth which in turn results in the crime being less valuable than it was originally assumed to be.
This unintentionally creates a demand for money launderers that are able to maintain the value of the criminal proceeds throughout the three-step process of placement, layering and integration. Through money laundering, crime and its various facets (bribery, sex crimes, gambling, drugs, and terrorism) have been able to multiply. As will be discussed in greater detail below, various policies, and international regulations have had an impact on money laundering. The USA has developed the Patriot Act, the UN has implemented measures against money laundering and of greatest impact have been the FATF’s 40 recommendations.
Based on these recommendations, 25 criteria have been established to determine if countries are in compliance with the recommendations. This paper discusses that due to the lack of global consistency over anti-money laundering policies, money laundering cannot be controlled effectively. This will be discussed through studying the relations between country size and ability to tolerate laundering, the political economy of globalized criminal activity, various international measures against money laundering and finally the UN anti-corruption measures. 2. 0 Background
Money laundering is the process in which one conceals the existence, illegal source, or illegal application of income and then disguises the income to make it appear legitimate in the open economic market (Lacey & George, 2009, pg 4). The three stages of the money laundering process are as follows: 1. Placement: This involves placing the black money into a domestic or international bank or institution. It is often difficult to verify if the deposit or proceeds come from illegal sources at this stage and encompasses considerate monitoring on the part of the institutions. . Layering: The illegal proceeds are then transferred to a number of different accounts and locations, to ensure the audit trail is too difficult to follow. It involves a number of complex transactions. 3. Integration: The final step in this process is to assimilate the black money into the legitimate economy whereby the original money launderers or criminals once again have access to their money. The completion of the above process is not restricted to any particular time frame but must be followed in the stated particular order.
Money Laundering is a tool that criminals use to obtain access to the proceeds of their criminal activities. It has a number of negative consequences and there a number of methods(Lacey & George, 2009, pg 4). The act of money laundering can be detrimental to an economy or country as it allows/encourages and multiplies other crimes that include bribery, sex trade, drug trafficking and terrorism. Consequently human rights and laws are violated. Money laundering may corrupt government officials and challenge government authority.
Crime can negate significant foreign investment into countries and at the very extreme question the stability of the government, and economy. It must be stated that lax regulations on money laundering can also signify a lack of regulations on the crimes for which money must be laundered. In the past, more traditional methods of laundering were used (Kennedy, 2005, pg 305). Cash couriers were used to get physical cash across borders. Methods include using Federal Express packages, cars, suitcases, jewelry shipments and packaged gifts.
These methods, while still prevalent, are more susceptible to being intercepted due to increased regulations. Art and antiques were used and precious metals and gems could be bought with black money to avoid any tax implications. Criminals can be known to have expensive and lavish lifestyles that consist of expensive clothing and luxurious holidays. They also make loans and avoid placing the cash in any institutions altogether. When appropriate, launderers would then demand payments and integrate it with their wealth to make it appear as if the money is credible.
Additional means include fictitious loans, trusts, foreign bank accounts, wire transfers and prepaid credit cards. The more recent methods of money laundering are more difficult to detect. The advances in technology that include electronic money and the accessibility of transferring money have made it such that one could also question the importance of the 3 stages within the laundering process. Electronic money is not a physical asset and therefore does not require any physical movement. The movement of the money to global destinations can be accomplished online in a very quick manner (Ping, 2004, pg 49).
Lastly, electronic money does not involve personal interaction and can be done anonymously online. This electronic approach, not only simplifies the process and procedures for money launderers drastically, but also makes it hard for banks in various countries with differing regulations to monitor and identify such types of transactions. Internet Bank accounts and online casinos have similar issues that disable the regulatory environment to identify laundering transactions. 3. 0 Literature Review 3. 1 A study of Country size and the incentive to tolerate money laundering
In the study, Dancing with the Devil: A study of Country size and Incentive to Tolerate Money Laundering, considers whether the size of the countries affects each of their tolerance levels for money laundering. The question arises on the basis and assumption that smaller countries bear only a relatively low percentage of the total costs of money laundering when compared to the benefit of money laundering. In the study, it is questioned why money laundering actually occurs, as it would be much easier to use crime-related profits or ‘black money’ in the country in which it was earned thus lessening the probability of the criminal being caught.
The article, goes on further to argue that there is a direct relation between the size of the country and incentives associated with financial transparency through the perspective of the policy maker in an open and closed economy. Within a closed economy, the benefits of revenue are matched with that of the social cost of crime. This closed economy, represents a world without the prevalence of globalization. In an open economy, the crime and the effects of the crime can be separated.
The costs of the crimes will be allocated to the country in which the crime has occurred and the benefits of the crime will be enjoyed in the country to which the funds flow. Therefore because of globalization, there is an opportunity for countries to benefit at the expense of each other by lowering the respective regulatory standards. Looking at this in absolute terms, larger populated countries with lax regulations will suffer greater harm (and face more crime) than smaller countries. In deciding where to launder the proceeds, criminals will direct their black money to smaller countries.
Smaller countries have more to gain than larger countries with regards to benefits and this accounts for the reason why anti-money laundering regulations are pursued to different lengths by different countries. It must also be noted that “with lax financial regulations, countries are also prone to increased crime, international sanctions and a loss of reputation. ” Furthermore, through quantitative analysis, the article suggests that “the existence of small countries does not necessarily change the amount of world laundering, but merely its distribution between countries. The article goes on further to state that in order for anti-crime and anti-money laundering policies to have any effect, they have to be consistently applied on a multinational scale. “One weak link is that all criminals need to lauder their money to provide for themselves a safe haven. ” The article also talks about the Financial Action Task Force which is an inter-governmental body that has a mandate to evaluate procedures and measures currently in place to control money laundering and also recommend procedures to input to reduce money laundering.
A list of 40 recommendations were made in 1990, and updated in 1996 that served to be a general framework to address money laundering. It was more formally put into practice by countries when the FATF released the ‘Non-Cooperative Countries and Territories’ list in 2001 and every year thereafter. This was the FATF’s means of publicly naming and shaming countries that did not abide to the 25 criteria based on the 40 recommendations. Soon after, 9 additional recommendations were made, to total 49 recommendations.
It was seen that the smaller countries were mostly on the NCCT list. 3. 2 Outsourcing and Insourcing Crime: The Political Economy of Globalized Crime The article discusses three overlying topics in addressing crime. This is relevant to money laundering because as discussed above, money laundering is the tool used to obtain the proceeds of crime. Studying the different natures of crime will enable regulators to determine how to best use anti money laundering regulations to stop it.
The article first sets out to determine why crime occurs across national borders. The authors propose that crime is very similar to other types of economic activity and that like business men, criminals will go to the places that are profitable. The article then addresses how governments react to international mobility of criminal activity by examining the two types of transnational crimes. The first type of crime is that which is viewed as ‘desirable’. The government benefits from this type of crime in its jurisdictions.
Governments may benefit economically, and are therefore persuaded to adopt a more lenient approach to enforcing rules and regulations on illegal activities, not only to allow the current crime to continue but also to attract more crime from other countries and states. Government officials may be receiving bribes or kickbacks for illegal activities or the crime may be tied to the local economy and subsequently the government’s revenue. This approach is more commonly known as insourcing crime. In countries that insource crime, it is not unreasonable to suspect or assume “that the government is involved with criminal activity. Outsourcing crime is where the costs exceed the benefits of crime. If there are net costs of the crime, then criminal activity will be viewed as ‘undesirable’. “Crime results in loss of lives, bodily injury and destroys property. ” A study conducted in the US estimated that the total cost of crime to victims was $92. 6B in 1988. As this being an older study, one can only imagine the total cost of crime to victims today given the increase in crime. Additionally, governments may look to outsourcing crime as it decreases foreign input and economic growth.
To deter criminal activity, a government or country adopts harsher standards and regulations to displace that criminal activity. When a number of countries are simultaneously trying to deter criminal activity within their borders, it results in a race or competition as criminal activity will become more prevalent in the country with the least regulations. This results in countries expending a lot of financial resources to prevent crime. Many would agree with this approach, as crime is unanimously agreed to be detrimental to society, however this approach does result in an inefficient allocation of resources.
A strong indicator of whether governments choose to insource or outsource crime is the banks. Banks may choose to have lax regulations because of the loss of revenues and the increased reporting requirements that need to be made to demonstrate that anti-money laundering policies exist. In smaller countries, the banking industry contributes to a larger part of the GDP, and therefore governments may be tempted to follow through with the banks motivations. Finally, this discussion leads into the last issue of how global crime control should be designed so that it enhances global welfare and not simply displacing crime to another country.
The article discusses a few issues. The cooperation of all countries is required so that crime can be punished regardless of where it is conducted, and therefore criminals cannot simply game the system and conduct crime in selected countries. Furthermore, cooperation can only be obtained from countries that want to maintain the same type of sourcing of crime. There would be a lack of cooperation, if most countries wanted to outsource crime with the exception of a few that wanted to insource crime because of the perceived financial benefits.
The article outlines the advantages and disadvantages of having a centralized regulatory environment versus a decentralized regulatory environment. A decentralized regulatory environment allows each of the respective governments to adopt policies that best eliminate the loopholes depending on the structure of the economy. Secondly, a decentralized environment will bring increased competition among differing countries as “each will try to have better regulatory environments to avoid crime rate increases due to income displacement. A centralized environment will however be very difficult to apply practically as the application of sanctions, regulations and convictions would have to take place at a very consistent level. Additionally, the article suggests options for regulatory standards be a minimum standards approach or maximum standards approach for maximum effectiveness. Each of the standards requires enforcement from the various governments who have varying degrees of financial capacity. 3. 3 Crackdown on Money Laundering: A Comparative Analysis of the Feasibility and Effectiveness of Domestic and Multilateral Policy Reforms
This article identifies the challenges to the eradication of money laundering, lists the proposed initiatives taken by the governmental and nongovernmental entities, evaluates the effectiveness of them and concludes by making recommendations. While all the respective national and international initiatives are in various stages of development or have been completed, all have faced various setbacks in establishing anti-money laundering regulations. Bank secrecy is by far the most prominent challenge facing the anti-money laundering initiative.
The individual right of financial privacy was a key success factor in the banking system in granting customers the confidentiality that they required. Switzerland currently still has the numbered banking system; this and tax havens allow bank accounts to remain anonymous. Using this system banks are not even able to report suspicious account activity because they do not know what the transactions are regarding and the nature of the account holders business and life. Privacy protection is a second setback as there is a “grey area as to where the account holder’s right of privacy ends. This is a subjective decision and transparency would allow banks to ‘spy’ on their customers. There are also individuals within financial institutions who assist in money laundering or are involved in it altogether. This immediately renders any controls in place to identify suspicious transactions as individuals are able to override the controls. Accountants and attorneys also contribute to the difficulties identified in anti-money laundering policies as it allows for them to find ways to disguise black money.
They are exposed to this illegal act as their respective professions require client confidentiality, more so for attorneys than accountants. The bank is the more commonly used method of laundering funds and has been made easier due to online banking where physical cash does not need to be moved. However, there are many ways to avoid using the financial institutions through means such as casinos, real estate agents and check cashers as these are loopholes within the regulating system.
Shell and private banks are also used to launder money as shell banks have no physical offices and are used primarily for the purposes of hiding money from investigators. Private Banks raise the same secrecy issues as stated above because wealthy individuals use these types of banks and demand privacy regarding their account transactions. This makes it all too easy for criminals to launder black money. 3. 4 The UN Anti Corruption Convention and Money Laundering The article addresses the link between the international measures to address the corruption versus the UN Convention against Corruption.
It goes on to find that the “UNCAC is not the only organization that addresses issues relating to the proceeds of corruption. ” It states that in particular the UNCAC rules apply the double criminality rule that “in both the location of the corrupt activity and the location to where the money is laundered must be criminalized. ” The article goes on to focus the limitations of AML as a fighting tool for corruption. The article differentiates between petty corruption and grand corruption. Petty corruption involves bribery in third world countries such as getting a passport or birth certificate.
Grand corruption involves large sums of money that usually has to be laundered. In cases such as these, individuals may find ways around the anti-money laundering controls in place and agents used to assist in the laundering are often hard to apprehend. The article suggests that petty corruption is far too small for money laundering regulations to tackle. The article concludes by reasoning that money laundering cannot be stopped but can be controlled and noted that anti-money laundering plays a role in tracing and recovering proceeds from corruption. . 0 Analysis The FATF appears to be the most effective control or measure to control money laundering. Of the 47 countries monitored as of 2001, 23 countries did not pass the 25 criteria. An annual report of the NCCT was prepared and it was noted that the countries that were not in compliance slowly made changes to their regulations and monitoring to be onside with all 25 criteria. As of October 13, 2006 there were no NCCTS, indicating that all countries are on onside with the criteria. Why then is money laundering still prevalent today?
If all countries meet the criteria, then the international regulations and standards should provide a worldwide barrier against laundering. There are a few issues with the FATF protocol that allows for money laundering’s continual existence today. Firstly, the 47 countries that were initially reviewed were the only ones who were assessed and monitored in the years thereafter. There were no additional countries added to the 47 in the list. The 47 were chosen based on their significance as financial centers and their history of international cooperation.
The bias here is that countries that are presumed to be already in compliance or willing to comply are being chosen as part of the 47. The countries for which the costs of money laundering exceed the benefits are the larger financial centers that have been chosen. The implication is that the smaller countries are not being reprimanded for choosing not to abide with the 25 criteria and are actually benefitting from money laundering at the costs of the larger countries (due to globalization, the location of the crime differs from where the benefits are enjoyed).
With 195 countries in the world, less than 25% are abiding by the FATF’s regulations that have really dealt with and monitored progress of the countries. A second concern is the determination of compliance to the 25 criteria. The NCCT has received criticism of being “politically dead” (Gnutzmann, McCarthy & Unger, 2008, pg 9) Countries have been removed from this list because they are deemed to be ‘apparently’ in compliance and no assurance has been obtained that they are in ‘actual’ compliance (Gnutzmann, McCarthy & Unger, 2008, pg 9). This contributes to the ‘lack of sufficient monitoring’ issue.
Governments can legislate regulations that are in compliance with FATF, but may not be in actual compliance. This can be especially noticeable for third world countries where bribery is prevalent and a way of life, and in countries where the government does not have enough resources to monitor the actions of the people. Furthermore, FATF does periodically check up on the countries to ensure compliance and requires supporting documentation of testing and monitoring done, but cannot monitor all the complex transactions and dealings that occur within a country.
The government has to impose a method of self regulation. The goal of FATF is to control money laundering as governments do not have enough capital and monitoring personnel to eliminate it. Should governments have the required capacity to eliminate it completely, it would be unwise as the costs would greatly outweigh the benefits and other government funded divisions would be underfunded such as health care and education. Furthermore, the regulations appear to be slightly subjective as the prescribed procedures for Standards 21 for Nigeria were withdrawn in 2006.
Standard 21 relates directly to measures and procedures to take with countries that do not comply with FATF’s recommendations. “Financial institutions should give special attention to business relationships and transactions with persons, including companies and financial institutions. ” As per the FATF Annual Review of Non-Cooperative Countries and Territories 2005-2006, Nigeria has made considerable progress in complying with the criteria, and therefore standard 21 was withdrawn.
If the 25 criteria were crucial in controlling money laundering then withdrawing a criterion would give money launderers more scope and freedom. This can be tied in to A study of Country size and the incentive to tolerate money laundering, where only one weak link in the chain or one country with gaps in their regulations is needed to allow money launderers to thrive. 5. 0 Conclusion There have been a number of governments worldwide that have imposed legislation and regulations to curb money laundering from the ‘Money Laundering Controls Act of 1986’ to the ‘Bank Secrecy Act’ of 1994 to the ‘Patriot Act’ of 2001.
The European Union Initiatives, the Council of Europe, the UN, and FATF have all become active groups in controlling money laundering. However, they still appear to be one step behind and are not able to control money laundering effectively as launderers are constantly finding new ways to continue and grow their operations. The terrorist acts of 9/11 have reaffirmed the importance of controlling money laundering but the prevalence of globalization and the internet has limited the various organizations in accomplishing their respective mandates.
The following recommendations relate to the weaknesses noted in the article: Crackdown on Money Laundering: A Comparative Analysis of the Feasibility and Effectiveness of Domestic and Multilateral Policy Reforms * To reduce the use of tax havens and the concern of Bank secrecy, the FATF issues a NCCT list, noting all the companies that are not in compliance with the above discussed 25 criteria. This ‘name and shame’ criteria is effective as currently, there are no countries on the list indicating that they have all met the criteria.
However, only 47 of the total 195 countries in the world were originally listed and therefore a recommendation should be given to include all the countries as that would further put pressure on non-participating countries to comply. * Privacy concerns was another important issue as individuals may feel that their privacy is being violated, however if it is for the benefit of identifying criminals and terrorists, then it would be deemed appropriate to lift the veil of privacy. Over the past few years, upper management of large public corporations have been held personally liable for fraud and misstating financial statements, resulting in fines and jail sentences. A similar approach should be used for the Bank’s executives and those working in the bank who assist in money laundering or who are part of it altogether. This recommendation is simply putting responsibility on the executives to take a look more closely at their customers to ensure they are not helping or supporting criminals and terrorists. The client confidentiality issue has been often abused by accountants and attorneys alike. The US and Canada have brought in legislation making it mandatory to report suspicious activity. This legislation should be brought in worldwide and the various professions should have greater punishments for those that violate the codes of conduct. Additionally, a recommendation of a centralized regulatory system should be made as consistent standards and regulations need to be active to close any loopholes that allow money laundering to occur.
One can comprehend that the costs and level of monitoring would be great, so the level of monitoring of regulations should be done to the extent of where the costs exceed the benefits as that will result in the highest utility and best use of resources. Controlling global money laundering on a centralized scale can be a daunting task, however it must be commenced because the more recent technologically advanced methods of money laundering are becoming more difficult to detect and monitor, and will be increasingly more challenging in the future. . 0 Reference List Johnson, Jackie. "Australia's Response to the FATF's 2003 40 Recommendations. " Journal of Money Laundering Control 8(2005): 297-304. Baldwin, Fletcher N.. "Money Laundering Countermeasures with Primary Focus upon Terrorism and the USA Patriot Act 2001. " Journal of Money Laundering Control 6(2002): 105-136. Leong, Angela Veng Mei. "Chasing dirty money: domestic and international measures against money laundering . " Journal of Money Laundering Control 10(2007): 140-156. Ping, He. "Banking Secrecy and Money Laundering. Journal of Money Laundering Control 7(2004): 376-382. Ping, He. "New Trends in Money Laundering- From the Real World to Cyberspace. " Journal of Money Laundering Control 8(2004): 48-56. Bosworth-Davies, Rowan. "Money Laundering - Chapter 4. " Journal of Money Laundering Control 10(2007): 66-90. Kennedy, Anthony. "Dead Fish across the Trail: Illustrations of Money Laundering Methods. " Journal of Money Laundering Control 8(2005): 305-319. Simser, Jeffrey. "Money laundering and asset cloaking techniques. " Journal of Money Laundering Control 11(2008): 15-24. What is money laundering? " Financial Transactions and Reports Analysis Centre of Canada. 23-08-2007. 17 Jul 2009 <http://www. fintrac. gc. ca/fintrac-canafe/definitions/money-argent-eng. asp>. Carr, Indira, and Miriam Goldby. "The United Nations Anti-Corruption Convention and Money Laundering. " 26 May 2009: Gnutzmann, Hinnerk, and Killian McCarthy, Brigitte Unger. "Dancing with the devil: A study of country size and the incentive to tolerate money laundering. " 02 Sept 2008: Broude, Tomer, and Doron Teichman. Outsourcing and Insourcing Crime: The Political Economy of Globalized Criminal Activity. " Vanderbilt Law Review 62(2008): Crutchfield George, Barbara, and Kathleen A. Lacey. "Crackdown on Money Laundering: A Comparative Analysis of the Feasibility and Effectiveness of Domestic and Multilateral Policy Reforms. " Northwestern Journal of International Law & Business 23(2009): Non-Cooperative Countries and Territories (NCCTs) FAQ. " FATF GAFI. 17 Jul 2009 <http://www. fatf-gafi. org/document/57/0,3343,en_32250379_32236992_35168377_1_1_1_1,00. html>.