MODULE 12 – Money Laundering
Introduction
In this Module, we will undertake a comprehensive examination of the money laundering issue. We will also touch upon a series of regulations by domestic and international enforcement agenciesthat prohibit money laundering activity. The role of offshore centers and sovereign regimes in relation to money laundering activities will be discussed. The laws concerning drug trafficking in connection with money laundering in the U.S. will be examined.
Objectives
Upon successful completion of this module, the student should be able to:
•Articulate the money laundering issue, including regulations and enforcement.
•Examine the role of governments in relation to money laundering activities worldwide.
•Elaborate upon anti-drug laws in the U.S. and the steps taken to limit this activity in relation to money laundering.
•Describe the role of the Financial Action Task Force (FATF), an agency of the G7, in combating money laundering activity.
The term money laundering refers to a situation when a person or organization profits from conducting an illegal economic transaction, or any other action by which assets can be accumulated, and tries to convert the said profit into legal funds by utilizing a financial intermediary. The money gained from illegal activity is historically known as hot money. When hot money assimilates into the financial market, it is very difficult to trace its origin; thus the illegal activity may continue unabated. For further information, please see Footnotes #1, #2 and #3.
International drug dealers, tax evaders, crime lords and gangsters conducting criminal activities worldwide create havoc for international bankers. These types of criminals target international bankers to legitimize their illegal proceeds by depositing them and making them legal. Historically, the laundering of money gained through criminal activity has evolved into a very sophisticated operation worldwide. Laws and regulations have been enacted to battle this sophisticated criminal activity by many nations, especially industrial nations such as the U.S. The difficult part is the enforcement of these laws because of jurisdictional limitations. The PATRIOT Act has made provisions and instituted checks and balances for the banking system,requiring it to report certain types of transactions that a bank officer suspects might stem from a criminal enterprise. In March 2008, a widely publicized instance of money laundering activity was discovered by Federal wire tapping – the case of the Governor of the state of New York, Eliot Spitzer, who established a phony account in a shell company offshore and transferred a large sum of money into that account. This unusual transfer caught the attention of Federal auditors and wire tapping activity ensued.
The main focus and orientation of a private bank’s operation is to provide secrecy and confidentiality for the account holders. This makes the detection of illegal activity difficult, unless there is a controversial episode that forces the sovereign regime where the private bank is located to cooperate with international regulatory and enforcement authorities. Obviously, the case of Governor Spitzer was indeed controversial, and in the course of a day or two, all illegal activity of the case was exposed and all information released to the public. For further information, please see Footnote #4.
Money laundering not only undermines and compromises the very foundation of our economic activity; it destroys the social fabric of a society as well. Concerned over the rise of the drug trade and its inevitable money laundering through the financial system, the industrial nations of the west, then known as the Group of Seven (G7),while meeting in Paris in 1989, established an agency known as the Financial Action Task Force (FATF)to combat money laundering activity. The main focus and responsibility given to this task force was to discover money laundering methods used by criminal entities and their future inclinations. It was also given a mandate to analyze previous money laundering methods used,and the actions taken by international enforcement authorities to combat this illicit enterprise. The activities of this agency have evolved as criminal activity becomes more sophisticated, and likewise its mandate has been continuously updated, and eventually led to creation of the article known as 40 Recommendations to combat and counter money laundering in association with the drug trade. Furthermore, the FATF established eight (8) principles, in light of an increase in terrorist activity that began on September 11, 2001, to counter terrorist cells that were rapidly expanding their activity in Europe and North America. For further information, please see Footnote #5, #6 and #7.
In order to know how the money laundering process has evolved, it is essential that we look briefly into the history of this criminal activity, and how it has grownfrom a very simple drug dealing operation into very sophisticated criminal activity having major economic enterprises as fronts. Criminals that ran money laundering enterprises would use legitimate businesses as a front to convert illegal money into legal money. Illegal money goes through a series of processes in order to be assimilated into legally circulated cash: firstly, illegal funds enter into a financial institution; secondly, certain types of enterprises are used as a front to hide the connection of the said enterprises with the illegal activity; and lastly the hot money is transformed into legal money and can be used as such. At that point, the money laundering activity is complete. For further information, please see Footnote #8.
The term money laundering began during the Prohibition era in the US. During this time, consumption of alcoholic beverages was prohibited by law. There were criminals, known as bootleggers, who were in the business of transporting and distributingalcoholic beverages. The money earned by selling alcoholic products was considered illegal, and the Chicago mafia, most notably Al Capone, established many Laundromats throughout the Chicago area to be used for conversion of this illegal gain. By mixing profits gained from their illicit alcoholic enterprise with money earned from the normal operation of these Laundromats, they were able to disguise the origin of the illicitly gained money. For further information, please see Footnote #9.
As mentioned before, a criminal enterprise’s number one target is the banking system, even though bank officers are now much more aware of their customers’ intentions than during the 70’s, 80’s and 90’s, since the deceptive operation of organized criminal activity has been an educational process for all financial entities and sovereign regimes. Criminals, however, are becoming much more innovative and using more sophisticated tools and tricks in order to accomplish what they have intended. Due to the high level of criminal activity flooding the financial institutions in the US, the Department of the Treasury established the Financial Crimes Enforcement Network (FinCEN) in order to protect the economic and financial welfare of the banking system. For example, any banking transaction of more than $10,000 is reported to this institution for auditing purposes. It is ironic that from the consumption and transaction behavior reflected in an individual’s account, a pattern of suspicious activity can be drawn, and therefore the account can be audited (remember Eliot Spitzer?). For further information, please see Footnotes #10 and #11.
Globalization and the Internet have helped the expansion of financial and investment activity worldwide, and they have also helped the expansion and sophistication of criminal enterprises through the same means by providing access to state of the art technology to aid their criminal operations. For further information, please see Footnote #12.
The U.S. is at the forefront of the fight to stem or limit money laundering activity by criminal enterprises, especially the South American drug cartel. Many well-known drug bosses and political figures are in the U.S. prison system as we speak. As far as the banking system is concerned, there are checks and balances that have been put in place by the US Treasury. Originally, any suspicious activity by criminal enterprises was reported to law enforcement entities by a bank officer. This action on the part of the bank created liability for disclosing personal financial information to law enforcement, which contradicted the Right to Financial Privacy Act. Later on, the decision by the Supreme Court removed liabilities from financial institutions for reporting suspicious activity, and the Currency Transaction Reporting Act, also known as the Bank Secrecy Act (BSA) was established in 1970. Furthermore, the federal government took over jurisdiction of some of the criminal activities from the states’ control and enacted the Comprehensive Crime Control Act of 1984 for the purpose of criminalizing money laundering as a federal crime, thus changing sentencing guidelines. Despite many efforts by local, state and federal agencies to combat criminal and money laundering activity, it is universally understood that the root and causes of the drug trade must be addressed both on the supply and demand side of the equation. This compelled lawmakers to enact laws that addressed the demand side, and the Anti-Drug Abuse Act of 1988 was enacted. For further information, please see Footnotes #13, #14, #15, #16 and #17.
Overall, political systems have difficulty rooting out money launderers and their activity, since their operations, as mentioned before, are camouflaged by a variety of legitimate enterprises that help criminals to transform bad money into good money. It is understood that the full cooperation of the banking system is needed in order to trace and find criminal entities and take action against them, such as confiscation of all properties that they own, through the proper channels of legal authority. The main reason for the lack of cooperation is the banks’ commitment to their customers to maintain financial secrecy and confidentiality.
In response to money laundering activity, many nations around the world have enacted anti-money laundering laws and regulations, such as the European Union, the United Kingdom, Canada, Australia, Japan, and the most notable one established by Caribbean nations in 1990 and 1992 to promote cooperation among Caribbean nations incombating money laundering activity that has financed terrorism. For further information, please see Footnote #18.
The collapse of communism and the introduction of capitalism into Eastern Europe and the Soviet Union resulted in economic freedom that was abused by the criminal element and precipitated the ongoing criminal activity and money laundering that was already rampant in many industrial nations. This event fortified the action taken by the then G7 industrial nations, as mentioned before, in establishing the FATF to combat money laundering activity,put certain checks and balances in place, and enhancecooperation amongst law enforcement agencies for dissemination of information on money laundering activities.
In order to effectively combat criminal enterprise activities such as money laundering and terrorism, certain attributes and conditions need to be in place, such as a legal regime with sound financial and economic systems, anti-money laundering laws and enforcement agencies. Also, cooperation among nations in this endeavor is necessary with maximum determination.
Conclusion
In this module, you have learned about money laundering activities worldwide, and the enforcement network for combating money laundering activities. Furthermore, you have learned about the role of governments in anti-money laundering activities. You gained understanding of the US laws and other international regulations in combating money laundering efforts by criminal elements worldwide.
FOOTNOTES
(1) Money Laundering – A Definition. (2012). Retrieved from
(2) Money laundering. (2009). Retrieved from
(3) Money Laundering – Examples. (2012). Retrieved from
(4) Spitzer Fall Began With Bank Reports. (2008). Retrieved from
(5) The 40 Recommendations. (2004). Retrieved from
(6) Overview - Money laundering.
(7) FinCen – The Financial Action Task Force. (2012). Retrieved from
(8) Money Laundering: A Three-Stage Process
(9) Money Laundering – A Brief History.
(10) Financial Crimes Enforcement Network. (2012). Retrieved from
(11) FDIC - Currency Transaction Report. (2004). Retrieved from
(12) Colombian Cartels Hum With High Tech.
(13) Right to Financial Privacy Act.
(14) IRS - Bank Secrecy Act.
(15) The Bank Secrecy Act. (2000-2003). Retrieved from
(16) NCJRS Anti-Drug Abuse Act of 1988
(17) The Anti-Drug Abuse Act of 1988. (2012). Retrieved from
(18) CFATF Overview. (2012). Retrieved from
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