Conceptual Development of Money Laundering

Introduction

Money laundering is an inevitable extension of organized crime and an essential aspect of any profit –generating criminal activity. Broadly stated the term money-laundering means any process or activity connected with the conversion of proceeds of crime to project proceeds of crime as untainted property. Money laundering can also be explained as a process which transforms illegal inputs into supposedly legitimate outputs. In this chapter researcher is focusing on various methods of money laundering and law money is being laundered.

Origin of Money Laundering:

More than 3000 years ago, merchants of China hid their assets and profits of trade, fearing forfeiture of the same from the Rulers The traders did so by converting their profits into readily movable assets, moved cash to outside jurisdictions, and did trade at inflated price to expatriate funds.[1] The logic behind chasing money trail is that the drug sales mostly in cash has to be converted into utilizable financials resources appearing to have legitimate origin.[2] Money laundering is an inherent characteristic of organized crime, because without money laundering there would be no organized crime.[3] Money Laundering is as old as old as money itself, though prior to 1970s none looked it as a crime as such. It is reported that during the period of Prohibition in U.S.A, especially during 1920-1933, huge sums of money were laundered. Incidentally Al Capone the notorious gangster of USA who was indicted for first time in 1931 on a Prohibition charge (transportation of beverages with more than 0.5% alcohol content) rather than numerous crimes committed by him and his gang. It was a time when law enforcement (US Attorney) came closer to indicting one for the first time in money laundering offence. It was a time when police forces with guns endlessly chased these criminal gangs without success, the people behind desks without guns who were successful in getting the gangsters indicated and charged.[4] The period of 1980s were often called as decennium of ‘total greed’, and 1990s the decennium of ‘clearing up’, while the new millennium has really emerged cleaning up financial world.[5] Clean money is worthy than dirty money, as untainted money can be invested in profitable and legitimate activities, conspicuously without risk of recrimination.[6] If drug dealers even think of retaining property value whether or not related to crime, they would be unable to justify it by declaring officially earned income, more so in civil forfeiture regimes.[7] It is may be extremely difficult to find out the origin of illicit money which is legally not accounted for, as in most instances it is camouflaged in propagating and nurturing global criminal activities.[8]

The concept of criminal finance is much broader as it centers on profiting from or financing criminal activity.[9] Far from a byzantine mystery, criminal laundering is an open secret.[10] The most important aspect of money laundering is disguising the link between the money and its (illegal) source.[11] The proceeds of drug trafficking cannot be accounted for normally like legitimate other legitimate business, and, therefore, need to be disguised.[12] Most criminal and terrorist organizations use laundering to funnel funds into legitimate businesses through illegal enterprises. These businesses act as a smokescreen to conceal the identity as well as destination of the money.[13] Money per se has to be laundered for two reasons. Firstly the money trail itself can become evidence against the perpetrators of offence and secondly illicit money with criminals can be the target of investigation and action.[14] The sophisticated money launderer is like water running down hill; both seek out the line of least resistance.[15] Money laundering is as old as money generating crime itself. Successful criminals from age immemorial always have to find out a way to make their proceeds from crime look like legally obtained money.[16]

A vast majority of illegal acts are perpetrated to achieve one common goal – money. If money is generated by crime, it is useless until the tainted source of funds can be disguised or preferably obliterated.[17] Crime can be successful only if the funds generated can be utilized without their true source being known. Laundering expands criminal activity because the washed funds are at times again reinvested in the businesses.[18]The three elements- conversion, concealment and false legitimacy – form the quintessence of money laundering”.[19] Money laundering, by definition, relates to acquisitive crimes, to say, the offences which produce a financial benefit.[20] “Cleanliness is next to Godliness” is what the old adage, but laundering dirty money by cleansing it has rather the opposite tendency.

Meaning of money laundering

The term ‘money laundering’ arose in the US in 1920s, when it was apparently used by the American police officers with reference to ownership and use of launderettes by mafia who were able to declare their illicit proceeds as profits gained through launderettes, and hence the term ‘laundering’ was first coined. The term was apparently first used with a legal meaning in an American judgment in 1982 concerning the confiscation of laundered Columbian drug proceeds[21] (US Vs $ 4,255,625.39, Federal supplement Vol.551, South District of Florida (1982) 314). The widespread acceptance of this unofficial popular meaning often leads the public to assume that ‘money laundering’ has an official, juridical, definition, which is rarely the case. The term is a used as a shorthand phrase to define a complex process.[22]

Money laundering is an inevitable extension of organized crime and an essential aspect of any profit –generating criminal activity.[23] Broadly stated the term money-laundering means any process or activity connected with the conversion of proceeds of crime to project proceeds of crime as untainted property.[24] Money laundering can also be explained as a process which transforms illegal inputs into supposedly legitimate outputs. Illicit proceeds gained by criminals are made to look as if they were the fruits of honest hard labor—transformed, for instance, into legitimate-looking bank accounts, real estate, or luxury goods. This process allows criminals to prosper from their crimes and allow them to lead normal life with others without looking like criminals.[25] Laundering is usually defined to take into account any dealing with property that is produced by crime, but an important point is that the money is dealt with in such a way, so as to present it as having been acquired otherwise than by crime.[26] The term laundering offences is so wide now that almost any financial transaction is capable of being laundering, if some of the money or other property in fact has its provenance in crime.[27] Originally, money laundering referred only to the laundering of drug money despite the fact that criminal codes differ in various countries, it is important to arrive at a common definition of money laundering. A clear definition that includes the types of crime is necessary for measuring money laundering.[28]

The Vienna Convention did not use the term ‘money laundering’ nor does it scope travel beyond drug relate offences. At that time some UN member states were reluctant to accept use of term which was then a colloquial one, in an international Convention.[29] The UN Convention against Transnational Organized Crime, which entered into force on 29 September 2003, widens the definition of money laundering to include the proceeds of all serious crime, and gives legal force to a number of issues addressed in the 1998 United Nations General Assembly Special Session’s (UNGASS) Political Declaration.[30]

Definition of Money Laundering

Legitimization of illegally obtained money to hide its true nature or source (typically the drug trade or terrorist activities). Money laundering is effected by passing it surreptitiously through legitimate business channels by means of bank deposits, investments, or transfers from one place (or person) to another.[31] The ​crime of ​moving ​money that has been ​obtained ​illegally through ​banks and other ​businesses to make it ​seem as if the ​money has been ​obtained ​legally.[32]

  • Section 3 in the Prevention of Money-Laundering Act, 2002

Offence of money-laundering.—Whosoever directly or indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually involved in any process or activity connected with the proceeds of crime and projecting it as untainted property shall be guilty of offence of money-laundering.[33]                                                                                                                             

  • 1.1.1- Definition of Money Laundering[34]

For the purpose of the law, the following shall be regarded as money laundering                                    

(a) The conversion or transfer of property for the purpose of concealing or disguising the illicit origin of such property or of assisting any person who is involved in the commission of the predicate offence to evade the legal consequence of his or her actions

(b) The concealment or disguise of the true nature, source, location, disposition, movement or ownership of property

(c) The acquisition, possession or use of property

By any person who knows/who should have known/who suspects that such property constitute proceeds of crime as defined herein:

“Money laundering” means

(i) Engaging directly or indirectly, in a transaction that involves property that is proceeds of crime; or

(iii) Receiving, possessing, concealing, disguising, transferring, converting, disposing of, removing from or bringing into the territory any property that is proceeds of crime; and

(a) (i) knowing or having reasonable grounds for suspecting that the property is derived or realized, directly or indirectly, from some form of unlawful activity; or

(ii) Where the conduct is the conduct of natural person, without reasonable excuse failing to take reasonable steps to ascertain whether or not the property is derived or realized directly or indirectly, from some form of unlawful activity

(iii) Where the conduct is the conduct of financial institution, failing to implement or apply procedures and control to combat money laundering

Any person who after the commencement of this law engages in money laundering is guilty of an offence.[35]

Process Of Money Laundering:

Money laundering is the single process but it can be broke down into three stages which includes placement stage, layering stage, and integration stage.

  • Placement stage:

It is the stage at which criminally derived funds are introduced in the
financial system. At this stage, the launderer inserts the “dirty” money into a legitimate
financial institution 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. To curb the risks, large amounts of cash is broken up into less conspicuous smaller sums that are then deposited directly into a bank account, or by purchasing a series of monetary instruments (cheques, money orders, etc.) that are then collected and deposited into accounts at another location.[36]The process of placement can be carried out through many processes including:

  1. Currency smuggling:

This is the physical illegal movement of currency and monetary instruments out of a country. The various methods of transport do not leave a discernible audit trail FATF 1996-1997 Report on Money Laundering Typologies.[37]

  1. Bank Complicity:

This is when a financial institution, such as banks, is owned or controlled by unscrupulous individuals suspected of conniving with drug dealers and other organized crime groups. This makes the process easy for launderers. The complete liberalization of the financial sector without adequate checks also provides leeway for laundering.[38]

  1. Currency Exchanges

In a number of transitional economies the liberalization of foreign exchange markets provides room for currency movements and as such laundering schemes can benefit from such policies.[39]

  1. Securities Brokers

Brokers can facilitate the process of money laundering through structuring large deposits of cash in a way that disguises the original source of the funds.[40]

  1. Blending of Funds

The best place to hide cash is with a lot of other cash. Therefore, financial institutions may be vehicles for laundering. The alternative is to use the money from illicit activities to set up front companies. This enables the funds from illicit activities to be obscured in legal transactions.[41]

  1. Asset Purchase

The purchase of assets with cash is a classic money laundering method. The major purpose is to change the form of the proceeds from conspicuous bulk cash to some equally valuable but less conspicuous form.[42]

 

  • Layering stage

In this stage complex financial transactions are carried out in order
to camouflage the illegal source in a series of
conversions or movements of the money in order to distant them from their source. In other words, the money is sent through various financial transactions so as to change its form and make it difficult to follow. Layering may consist of several bank-to-bank transfers, wire transfers between different accounts in different names in different countries, making deposits and withdrawals to continually vary the amount of money in the accounts, changing the money’s currency, and purchasing high-value items such as houses, boats, diamonds and cars to change the form of the money. In some instances, the launderer might disguise the transfers as payments for goods or services, thus giving them a legitimate appearance.[43] This method mainly includes;

  1. Cash converted into Monetary Instruments:

Once the placement is successful within the financial system by way of a bank or financial institution, the proceeds can then be converted into monetary instruments. This involves the use of banker’s drafts and money orders.

  1. Material assets bought with cash then sold:

Assets that are bought through illicit funds can be resold locally or abroad and in such a case the assets become more difficult to trace and thus seize.[44]

  • Integration stage

Integration is the final stage where the laundered money is re-introduced in the market. At this point, the launderer can use the money
without getting caught and choose to invest the funds into real
estate, luxury assets, or business ventures. It’s difficult to apprehend launderer during the integration stage if there is no documentation during the previous stages. The above three stages may not always follow each other. At, times, illegal money may be fixed with legitimate money, even prior to placement in the financial system. In certain cash rich businesses, like Casinos (gambling) and real estate, the proceeds of crime may be invested without entering the mainstream financial system at all.

At each of the three stages of money laundering various techniques can be utilized. Following are the various measures adopted all over the world for money laundering, even though it is not exhaustive but it encompasses some of the most widely used methods:

  1. Structuring Deposits:

This is also known as smurfing[45], this method entails breaking up large amounts of money into smaller, less-suspicious amounts. In the United States, this smaller amount has to be below $10,000 the dollar amount at which U.S banks have to report the transaction to the government. The money is then deposited into one or more bank accounts either by multiple people (smurfs) or by a single person over an extended period of time. This is a method of placement whereby cash is broken into smaller deposits of money, used to defeat suspicion of money laundering and avoid anti money laundering reporting requirements.[46]

  1. Shell companies:

These are fake companies that exist for no other reason than to launder money. They take in dirty money as “payment” for supposed goods or services but actually provide no goods or services; they simply create the appearance of legitimate transactions through fake invoices and balance sheets.[47]

  1. Third-Party Cheques:

Counter cheques or banker’s drafts drawn on different institutions are utilized and cleared via various third-party accounts. Third party cheques and traveller’s cheques are often purchased using proceeds of crime. Since these are negotiable in many countries, the nexus with the source money is difficult to establish.[48]

  1. Bulk cash smuggling:

This involves physically smuggling cash to another jurisdiction and depositing it in a financial institution, such as an offshore bank, with greater bank secrecy or less rigorous money laundering enforcement.[49]

  1. Investing in legitimate businesses

Launderers sometimes place dirty money in businesses as “front companies” that actually do provide a good or service but whose real purpose is to clean the launderer’s money. This method typically works in one of two ways: The launderer can combine his dirty money with the company’s clean revenues — in this case, the company reports higher revenues from its legitimate business than it’s really earning; or the launderer can simply hide his dirty money in the company’s legitimate bank accounts in the hopes that authorities won’t compare the bank balance to the company’s financial statements.

  1. Offshore Accounts (Shell Banks)

Offshore accounts are often used by criminals to avoid the audit trial as different countries offer bank secrecy to attract customers and it can also refuse to assist international authorities in revealing the information of customer. These kinds of banks, shell banks are generally developed in a financial haven country for providing the appearance of legitimacy. A costumer only needs a false name to open an account in these kinds of banks which provides the customer complete secrecy and protects the customer from investigation and possible prosecution and after establishing the shell bank the customer may gain the advantage of “payable through” or “pass through” accounts. The domestic bank offers these accounts to foreign institutions and they are used to shift the funds of foreign clients into the domestic country without giving any information to the domestic institution on the client.[50]

[1] Seagrave, Sterling, Historian in his book “Lords of Rims” quoted in Cotteril, Nigel Morris “Money Laundering” Foreign Policy No.12 May-June, 2001, http://www.jstor.org; Accessed May, 2018

[2] Levi, Michael (2002) “Money Laundering & Its Regulations”  American Academy of Political & Social Sciences, http://www.jstor.org; p15; Accessed May, 2018

[3] Perula, Johanna (2009) “European Union’s Anti-Money Laundering Crusade- A Critical Analysis of the response by EU/EC to Money Laundering” Police College of Finland; p15; Accessed May, 2018

[4] Wouter H Muller (2007) “Anti Money Laundering- A Short History” , John Wiley & sons Ltd, England; p3  Accessed May, 2018

[5]Supra Note 10; p7

[6] Alldrigde, Peter “The Moral Limits of Money Laundering”; p278  Accessed May, 2018

[7]Supra Note 8; p182

[8]Malhotra, Saurab (2007) “Money Laundering & Terrorism – An Overview”, ICFAI University Press, Hyderabad, India; p2; Accessed May, 2018

[9]Floerintino Mariano, Cuellar (2003) “The Tremendous Relationship between the Fight Against Money laundering and Disruption of Criminal Finance” Journal of Criminal Law and Criminology, Vol.93-No-2,

Available http://www.jstor.org; p325 Accessed May, 2018

[10]Serrano, Monica & Kenny Paul (2003) “The International Regulation of Money Laundering” Global Governance – Vol9 No-4  http://www.jstor.org/stable/27800495; p437  Accessed May, 2018

[11]Ferwarda, Joras “Criminals Save Our Banks- The Effect of Money Laundering During Financial Crisis”; p3 Accessed May, 2018

[12]Bantekay, Ilias & Nash, Susan (2003) “International Criminal Law” Cavendish Publishing; p54 Accessed May, 2018

[13]Masciandro, Donato (2004) “Combating Black Money- Money Laundering & Terrorist Finance – International Cooperation and G8 Role”; p3 Accessed May, 2018

[14]Blum A. Jack & et al. “Financial Havens, Banking Secrecy and Money Laundering” UNODC; p10 Accessed May, 2018

[15] “Combating Money Laundering & Terrorist Financing- A Model of Best Practice for the Financial Sector, the Professionals and Other Designated Businesses” (2005) Commonwealth Secretariat; p151 Accessed May, 2018

[16] Shcaap D. Cess (1998) “Fighting Money Laundering with comments on thee legislation of NetherlanddsAntiles and Aruba” Kluwer Law International; p9 Accessed May, 2018

[17] Liley, Peter (2006) “Dirty Dealing- The Untold Truth About Global Money Laundering, International Crime & Terrorism” Kogan Publishing; p-xii Accessed May, 2018

[18]Ibid; p-xiii

[19]Blickman, Tom (2007) “Money Laundering, Tax Evasion & Financial Regulation- An Introduction” ICFAI University Press, Hyderbad, India; p140 Accessed May, 2018

[20]Trehan, Jyoti (2008) “Crime and Money Laundering- The Indian Perspective” Oxford University Press, India; p191 Accessed May, 2018

[21] US Vs $ 4,255,625.39, Federal supplement Vol 551, South District of Florida (1982) 314) quoted in Stessens, Guy (2000) “Money Laundering – A New Law Enforcement Model” Accessed May, 2018

[22]Savona U. Ernesto (2000) “Responding to Money Laundering- An International Perspective” Harwood Academic Publishers; p10 Accessed May, 2018

[23] United Nations (1999) “Model Legislation on Money Laundering, Confiscation & International Cooperation in Relation to Proceeds of Crime”; p195 Accessed May, 2018

[24]Tushar V Shah (2009) “Commentary on PMLA” Current Publications, New Delhi, India; p81 Accessed May, 2018

[25]Ashin, Paul “Dirty Money- Real Pain” Journal of Finance & Development June 2012; p38 Accessed May, 2018

[26] Alldridge, Peter “Money Laundering & Globalization” Journal of Law & Society, Vol-35, No-4 http://www.jstor.org/stable/40206861 Accessed May, 2018

[27] Ibid;

[28] Unger, Brigitte & et al. (2006) “The Amounts & Effects of Money Laundering- Report for Ministry of Finance”: p5 Accessed May, 2018

[29]Joyce, Elizabeth, (2005) “Expanding the International Regime on Money Laundering in Response to
Transnational Organized Crime, Terrorism & Corruption” Sagar Publications; p86 Accessed May, 2018

[30] Rick McDonnel (2007) “Anti Money Laundering- Introduction” Ed Wouter H Muller, John Wiley &
Sons; p51 Accessed May, 2018

[31] Available http://www.businessdictionary.com/definition/money-laundering.html#ixzz47Kgq3b7p Accessed May, 2018

[32] Available  http://dictionary.cambridge.org/dictionary/english/money-laundering Accessed May, 2018

[33] Section 3, Prevention of Money-Laundering Act, 2002

[34] United Nations (1999), “Model Legislation on Money Laundering Confiscation and International Cooperation in Relation to the Proceeds of Crime” Accessed May, 2018

[35]supra note 39

[36] Sayyed Azhar Hussain Shah, Syed Akhter Hussain Shah and Sajawal Khan “Governance of Money Laundering: An Application of the Principal-agent Model” The Pakistan Development Review, Vol. 45, No. 4, Papers and Proceedings PARTS I and II Twenty-second Annual General Meeting and Conference of the Pakistan Society of Development Economists Lahore, December 19-22, 2006 (Winter 2006), pp. 1117-1133 available at http://www.jstor.org/stable/41260672. Accessed May, 2018

[37] Article on money laundering in EU available at  http://people.exeter.ac.uk/watupman/undergrad/ron/methods%20and%20stages.htm Accessed May, 2018

[38] Ibid

[39] Ibid

[40]Ibid

[41] Ibid

[42] Ibid

[43] Available at http://www.fatf-gafi.org/pages/faq/moneylaundering/ Accessed May, 2018

[44]Supra40

[45]Smurfs – A popular method used to launder cash in the placement stage. This technique involves the use of many individuals (the “smurfs”) who exchange illicit funds (in smaller, less conspicuous amounts) for highly liquid items such as traveller cheques, bank drafts, or deposited directly into savings accounts. These
instruments are then given to the launderer who then begins the layering stage. For example, ten smurfs could”place” $1 million into financial institutions using this technique in less than two weeks.

[46]National Drug Intelligence Center, Aug 2011, “National Drug Threat Assessment”(PDF). p.40. Accessed May, 2018

[47]Arvind Giriraj and Prashant Kumar Mishra, “Money Laundering: An Insight Into The Modus Operandi With Case Studies

Available http://www.skoch.in/images/stories/security_paper_knowledge/Arvind%20Giriraj%20and%20Prashant%20Kumar%20Mishra%20-%20Money%20Laundering.pdf Accessed May, 2018

[48]Kumar S. Vijay. (2009) “Controlling Money Laundering in India –Problems and Perspectives” Mumbai,
INDIA pg. 11 Accessed May, 2018

[49]National Money Laundering Threat Assessment” (PDF), Dec 2005. p. 33 Available http://www.dea.gov/pubs/pressrel/011106.pdf Accessed May, 2018

[50] Available at http://lawteacher.net-essays/commercial-law accessed 20 May 2016