Some Measures to Prevent Money Laundering

The primary purpose of organized crime is to make profits. Like any business, the purposes of profit are to enjoy it and re-invest it in future activity. For the organized criminal, however, profit close to the source of the crime represents a particular vulnerability and unless the criminal can effectively distance himself or herself from the crime which is the source of the profit they remain susceptible to detection and prosecution. Hence the need to launder their illicit profits to make them appear legitimate.

The biggest source of illicit profits comes from the drugs' trade and it was drug trafficking that provided the initial catalyst for concerted international efforts against money laundering. The drugs' industry is a highly cash intensive business and "in the case of cocaine and heroin the physical volume of notes received is much larger than the volume of drugs themselves". In order to rid themselves of this large burden it is necessary to use the financial services industry and in particular, deposit-taking institutions.

The Financial Action Task Force (FATF) on Money Laundering has identified certain ‘choke’ points in the money laundering process that the launderer finds difficult to avoid and where he is vulnerable to detection. The initial focus has to be on these areas if the war against the launderer is to proceed successfully.

The main identified points are:

a. entry of cash into the financial system;

b. transfers to and from the financial system; and

c. cross-border flows of cash.

The entry of cash into the financial system, known as the ‘placement’ stage is where the launderer is most vulnerable to detection. Because of the large amounts of cash involved it is extremely hard to place it into a bank account legitimately.

The UK’s system of reporting suspicious transactions to the authorities along with the procedures adopted by deposit-takers are powerful weapons against money launderers. In particular, the emphasis being placed on the importance of deposit-taking institutions ‘knowing their customer’ has severely curtailed this activity to such an extent that one of the favourite methods for money launderers to ‘place’ their money is to smuggle the money out of the country. There are penalties attached to the various money laundering offences for the deposit-taking institutions and these have provided for a powerful incentive for reporting suspicions to the National Criminal Intelligence Service (NCIS).

However, cross-border flows of cash is one of the areas mentioned above where the launderer is vulnerable to detection. In the UK, legislation provides the police and customs service with the power to seize cash they believe could be the proceeds of drug trafficking. Part III of the Criminal Justice (International Co-operation) Act 1990 (CJICA) introduced the powers for customs and police officers to seize cash being brought into or out of the United Kingdom, where they have reason to believe that such money represents the proceeds of drug trafficking or is intended to be used in drug trafficking. The power operates in respect of consignments of cash of £10,000 or more. Additionally, the courts are empowered to order the confiscation of such cash, where they are satisfied, on the balance of probabilities, of the alleged link with drug trafficking.

These measures overcome the difficulty of custom officers coming across large amounts of cash with no reasonable explanation for their export/import but, at the same time, with no hard evidence of links to drug trafficking it allows the detention of the cash pending an investigation. Due to this, couriers limit the amount they carry out of the country at any one time and the risk is seen as being less than passing the money into a financial institution.

The reporting of suspicious transactions is not limited to cash in the UK. Transfers to and from the financial system are also under the umbrella of ‘reporting of suspicious transactions’ and this can provide useful information on the ‘layering’ stage of the money laundering process. The keeping of comprehensive transaction records (part of the procedures) by financial organizations provides a useful audit trail and gives useful information on people and organizations involved in laundering schemes once discovered.

It is important, therefore, to ensure that complacency does not creep into our financial institutions at this stage, now that the measures are in place to deny money launderers open access to these same institutions.

TASK 4

Read the text ‘ If you want to steal…’ and give your judgment on the material. Discuss it with your classmates.

Write your opinion concerning the head line. Do you agree/disagree with Bertold Brecht ? (150 words)

“If you want to steal, then buy a bank.”

(by Bertold Brecht )

The best method of both stealing and laundering money is to own a bank. And though banks are an at risk group in relation to their main functions of deposit taker and opening of accounts, what can be done against this crime if the bank is international and in complicity with vast numbers of its depositors. When the CIA moved money via the BCCI it called it "facilitating the national interest". When the Mafia and the Libyans do it, it is called money laundering.

The BCCI affair was a major scandal involving allegations of corruption, bribery, money laundering, etc.. One investigator quotes in the Kerry Report:

"It had 3,000 criminal customers and every one of those 3,000 criminal customers is a page 1 story. So if you pick up any one of [BCCI’s] accounts you could find financing from nuclear weapons, gun running, narcotics dealing and you will find all manner and means of crime around the world in the records of this bank".

As Powis (1992) said, "money laundering becomes a relatively easy thing to do when a banking institution and a number of its key officials co-operate in the laundering activity".

UNDERGROUND BANKING

Sometimes called ‘parallel’ banking. These systems tend to mirror more conventional bank practices, but are highly efficient and wholly unauthorised methods of transferring money around the world. The best known among them are the Chop, Hundi, and Hawallah banking within various ethnic communities, which enables the avoidance of any conventional paper record of the financial transaction. Such methods do not require the actual movement of money but nonetheless facilitate the payment of funds to another party in another country in local currency, drawn on the reserves of the overseas partner(s) of the Hawallah banker. The system is dependant on considerable trust and considerable simplicity - the money launderer places an amount with the underground bank - the identifying receipt for a transaction being something as innocuous as a playing card or post-card torn in half, half being held by the customer and half being forwarded to the overseas Hawallah banker. The launderer then presents his receipt in the target country to obtain his money, thus avoiding exporting cash out of the country and limiting the risk of detection.

FUTURES

The UK experience showed that the futures market, through Capcom Commodities, a BCCI-related institution was another area that money launderers were taking advantage of for their money laundering schemes. Because of the ‘anonymous’ nature of the trading strategies, all brokers trading as principals and not in their client's name, the true identity of the beneficial owner is not known. Commodities therefore are a ‘zero sum’ game, which means you can only buy if someone is willing to sell, and vice versa. Launderers can take advantage by a strategy of buying and selling the same commodity, thereby taking a small hit for the commission charged by the broker. They pay the losing contract out of dirty money and receive a cheque that legitimizes their profits and creates a paper trail for any one who asks where the money came from.

PROFESSIONAL ADVISORS

Accountants/Solicitors/Stockbrokers

If involved in investment activity, this group is covered in the Regulations. For example, their clients’ account can be used as a bank account by clients and can put him at risk under s93 CJA93. See Michael Relton - Solicitor convicted in relation to money laundering proceeds from Brinks Mat robbery.

FINANCE HOUSES/BUILDING SOCIETIES

As with banks, any suspicious transactions must be reported. Money deposits in these institutions are where the placement stage usually takes place so vigilance is called for by staff. Any unusual change in regular customers depositing habits need to be investigated and lenders also have to be aware that money laundering techniques can also involve paying off a debt faster than income would support. You would already know a customer’s declared income on the loan application.

FINANCIAL TRANSMITTERS

Bureau de change/international money transmitters/travel agents.

All offer a wide range of services that can be used by the money launderer. Airline tickets, foreign currency exchanges in the form of cash and travelers cheques, are recognized as being widely used techniques. Money transmitting services in the form of wire, fax, draft, cheque or by courier exist for people unable to use traditional financial institutions. Customer anonymity is a primary feature of such transmissions which identifies the inherent level of risk. Covered under the Regulations if they offer currency exchange facilities.

CASINOS

Casinos and gambling establishments are particularly attractive to money launderers. Cash can be deposited with a casino in exchange for chips or tokens. After a few turns at the table the player can cash in the remainder for a cashier’s cheque which can be deposited in their account. Another method is to buy winning tickets from people in bookmakers and saying you have won making bookmakers vulnerable to being used.

ANTIQUE DEALERS/JEWELLER’S/DESIGNER GOODS SUPPLIERS

Any area that possesses the characteristics which represent high value goods that possess great portability and in many cases are used to being paid in cash is an attractive area for money launderers. All the above satisfy these criteria and owners and staff have to be aware of their obligations under the legislation if they are to avoid being unwittingly used in a money laundering scheme.

The above is not an exhaustive list of at risk institutions, however, some of the characteristics can be recognized in other groups not mentioned.

TASK 5

Read the text “ Offshore areas as a means ...”. Discuss it with your classmates.

Write the answer on the following question: What regions are suitable for offshore centers in Ukraine?

Offshore Areas as a Means of Saving

And Augmenting Capital

In international practice, the definition "offshore" is used to characterize financial centers which carry out financial and credit operations jointly with foreign entrepreneurs on terms that are preferential for the entrepreneurs. In a broader sense, "offshore areas" means countries or their territories where the government grants considerable taxation privileges to certain companies owned by foreigners. In such areas, which are called offshore, accounting and audit requirements are decreased or absent and trade and customs limits are entirely or partially removed.

What are the advantages of offshore areas? For countries where offshore areas are located, they are an excellent means of attracting foreign capital and developing their own industrial and social infrastructure.

For foreign entrepreneurs using offshore areas it is a method:

1/ to save capital since funds are on account at reliable banks where payment for banking services is not high;

2/ to effectively accrue capital. This is facilitated by the alleviation of taxes, as well as by the extent of a free capital flow.
For example, in many offshore areas, currency restrictions or currency controls are practically absent. Also, an additional advantage (in the entrepreneurs' opinion) is the presence of anonymity for businesses using offshore areas and confidentiality
of information about those businesses (hereafter – offshore companies). In other words, the real owners of an offshore company may remain unknown by registering the company through trust companies using documents where they indicate the last names of nominal shareholders and people responsible for performing corporate duties and instructions. At the same time, the real owners, through power of attorney, transfer shares into the nominal shareholders' control. The real owners also limit the scope of the security-related financial operations which may be carried out by the people mentioned above. We have already mentioned that offshore areas are only an advantage for certain kinds of companies. That is why, in off-shore areas it is expedient to register:

- insurance companies engaged in risk insurance or reinsurance;

- shipping (ship owning) companies using their own, as well as charted vessels during transportation;

- news agencies and companies rendering services in marketing, advertising, management, etc.;

- holding companies.

We would like to pay your attention that the Ukrainian legislation provides for protection against the influence on the national economy by off-shore areas. For instance, the Law of Ukraine "On the State Privatization Program" dated May 18, 2000 No. 1723-III forbidscompanies registered in off-shore areas from taking the role of an industrial investor while privatizing state property.

Ukrainian entrepreneurs have a real opportunity to become owners of offshore companies overseas. Especially because at present there exists a rather developed market of services in registering companies in offshore areas (having a low taxation level or complete tax exemption).

We should note that the list of offshore areas promulgated in accordance with the resolution of the Cabinet of Ministers of Ukraine of March 14, 2001 No. 79-p is not complete. Actually, the number of offshore areas is much greater but domestic entrepreneurs pay attention to such areas as Cyprus, the Bahamas Islands, the Isle of Man, etc.

GRAMMAR FOCUS II