Money laundering is the process of hiding the origins of money, obtained illegally. A commonly used method is to pass funds through a complex sequence of banking transfers and/or commercial transactions.
The overall purpose of this process is to return the money to the launderer or to another desired destination. Often, the process involves the conversion of larger amounts of cash money (obtained illegally) into the regulated financial system.
A major problem of criminal activities is accounting for the proceeds, without raising the suspicion of taxation and law enforcement agencies. Considerable cost, time and effort is put into evasion strategies. Implementing those strategies is often called money laundering.
Once money has been laundered, it can be used for legitimate purposes. Law enforcement agencies of many jurisdictions have set up intricate systems in an effort to detect suspicious transactions or activities. Some have set up international cooperative arrangements to assist in detection.
In various legal and regulatory systems, the term money laundering includes other forms of financial and business crime. It is often used more generally to include misuse of the financial system. Many jurisdictions include terrorism financing and evasion of international sanctions as money laundering.
Semantically, this is often a misnomer because in terrorism financing, legally obtained funds are usually obscured from the mainstream financial system. In that sense, financing of terrorism is often quite the opposite of money laundering in its purest definition.
To obscure sources of money is also considered money laundering, in some jurisdictions. When using international financial services, one could be faced with legal difficulties when the tracking of sources or destinations is not altogether clear.
Other countries define money laundering quite strictly as to include financial transaction from activity that would have been a crime in another country.
This is where cooperation between international enforcement agencies becomes crucial. complex and challenging
- To understand the principles of money laundering, we look at some tried-and-proven methods that are currently fairly well-known:
SMURFING - a method of placement whereby cash is broken into smaller deposits of money. The method is used to avoid anti-money laundering (and terrorism) reporting requirements. Fraud with money-orders and cash transfers also falls into this category.
SMUGGLING CASH - one moves cash amounts from one jurisdiction to another to make a bank deposit where reporting requirements are known to be less strict. Once deposited into an account, the funds are, at least partially, laundered.
THROUGH BUSINESSES - to top up (with illicit cash) bank deposits from regular cash-based businesses. Authorities generally can't tell the difference. One uses cash-based business such as currency exchangers, bars, casinos, clubs an corner stores.
THROUGH TRADE - it is relatively easy to under or over value items in certain trades (art, antiques, rare items) and then trade them at a different value. Often, auction houses can be used for this because of their secrecy rules surrounding clients' identities.
TRUSTS AND SHELL COMPANIES - in many jurisdictions, it's easy to hide sources of funds from the public eye through corporations, trusts and other legal entities. This may involve names of owners or operators who don't even exist.
INTERNATIONAL BACK AND FORTH - to deposit funds elsewhere and let the funds come back as a direct investment vehicle, possibly even exempt from taxation. May include funds transfers through law firms in various remote jurisdictions.
OWN THE FINANCIAL INSTITUTION - to become a prime holder of a foreign financial institution, usually in a country with lax money laundering controls; then use that financial institution to move funds around the world.
CASINO - to make larger bets in a casino until a return (a win) is achieved; or simply to purchase chips with cash and return them to the cashier for payment by cheque, which can also be legitimately deposited as being a formal gambling winning.
FALSE EMPLOYEES - to put employees on the payroll that sometimes don't even exist. Under certain circumstances, there are benefits to paying these ghost employees by cheque or in cash.
TAX AMNESTIES - various jurisdictions offer tax amnesties at certain times, offering a reduced penalty for reporting previously unreported "income". This is a very simple way to move cash into legality, where the cost of the tax penalty may be worth it to some.
FACTORING - could include payment of certain invoices through a third party or illicit credit card transactions, possibly using fake front websites or non-existing businesses. "Payment aggregation" funnels funds through another merchant's accounts.
Traditionally, Canada has hardly taken position against (international) money laundering. Only in 1991, the Proceeds of Crime (Money Laundering) Act was brought into force in Canada. It was to give legal effect to the former Forty Recommendations by establishing record keeping and client identification requirements in the financial sector.
This would facilitate the investigation and prosecution of money laundering offences under the Criminal Code and the Controlled Drugs and Substances Act. Note that this law was structured under the heading "Drugs and Substances" which was considered the major crime culprit then.
Finally in 2000, the Proceeds of Crime (Money Laundering) Act was amended to expand the scope of its application. The purpose was to establish a financial intelligence unit with national control over money laundering. It was named FINTRAC.
Soon, the scope of the Proceeds of Crime (Money Laundering) Act was again expanded by amendments enacted under the Anti-Terrorism Act. Of course, shortly after 9/11, this was considered the main crime culprit then. One sought to deter terrorist activity by cutting off sources and channels of funding. Hence the name: the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.
In 2006, the Act was further amended in order to tighten its money laundering and financing of terrorism legislation. The amendments expanded the client identification, record-keeping and reporting requirements for certain organisations.
It also included new obligations to report attempted suspicious transactions, even on outgoing and incoming international electronic fund transfers. Participants were to undertake risk assessments and implement written compliance procedures in respect of those risks.
The amendments of the act were aimed at enabling greater money laundering and terrorist financing intelligence-sharing among enforcement agencies within Canada and abroad.
To date, this intelligence-sharing is in its infancy, probably mainly due to the assumed arrogance of the various agencies and their unwillingness to give credit to others who may have assisted in certain apprehensions.
These days in Canada, many business have obligations under the law to report and record: casinos, money service businesses, notaries, accountants, banks, securities brokers, life insurance agencies, real estate brokers and dealers in precious metals and stones.
There are draconian penalties for non-compliance but enforcement is minimal. In recent years, various businesses have been embroiled in scandal for aiding and abetting money launderers, especially in the Vancouver and Toronto areas. Many have speculated that Billions are laundered in Canada's major centres, each year.
With its chopped-up national legislations in each member state, it was a blessing that the EU took over some of this burden. With the fourth version of the EU's anti-money laundering directive, declared on 5 June 2015, the matter was cleared at its last legislative stop at the European Parliament. The directive brought the EU's money laundering laws somewhat in line with the US's. Internationally operating financial institutions state that they are benefiting from this clarity.
The Fifth Money Laundering Directive comes into force on 10 January 2020. It will address a number of weaknesses in the European Union's system that became apparent after the last directive. Lack of harmonisation in Anti-Money Laundering requirements between the US and EU has complicated the compliance efforts of global institutions. They prefer standardised components of their programmes across key jurisdictions.
Some components of the new directive appear to go beyond current requirements in both the EU and US, imposing new implementation challenges on financial institutions. For instance, more public officials are retained to deal with the directive that requires the establishing of new registries of "beneficial owners" (referring to those who ultimately own or control a company).
It remains to be seen how European enforcement systems, quite distinctly different in various member states, can adopt to this premise.
Just a few months ago, the European Commission sent official warnings to ten member states as part of a crackdown on lax application of money laundering regulations. At issue is that some member states actually benefit from the operation of a lax enforcement system.
This is, obviously, not an exclusively European problem. Many countries around the world are dodging the reporting requirements. Where large amounts of money are being made, one tends to condone actions that normally wouldn't be permitted. It's also like that in certain member states.
For instance, the Commission sent Germany a letter of formal notice, the first step of the EU legal procedure against states. Belgium, Finland, France, Lithuania and Portugal were sent reasoned opinions, the second step of the procedure which could lead to fines. A second round of reasoned opinions was sent to Bulgaria, Cyprus, Poland, and Slovakia.
The ten countries have two months to respond or face court action. It is, however, quite obvious that the deadline set by the Commission for 26 June 2017, to apply all the new rules against money laundering and terrorist financing, has not been met. That matter is ongoing.
The blacklist of uncooperative nations outside the Union is huge and includes country names such as Saudi Arabia, Panama, Nigeria, Iran, North Korea, Yemen, Syria, Ethiopia, Kenya, Myanmar, Algeria, Ecuador, Indonesia - but this list is changed often.
Some countries take a step back, others become more cooperative. In all, about half of the world is on the internationally agreed tax standard and the other half is not. The differences are, and appear to remain, immense.
Sometimes this is a correct assumption - but quite often the movement of capital is not, in itself, of a criminal nature. It's not always clear-cut how to best move funds - to seek out which channels are trustworthy and legal.
Being mindful of all the rules and regulations, it would be prudent to seek established, competent advice.
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