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Money laundering and bribery (Criminal funds may arise fro the movement of…
Money laundering and bribery
Money laundering is generally defined as the process by which the proceeds of crime and the true ownership of those proceeds are changed so that proceeds appear to come from a legitimate source
Money laundering can arise from small profits and savings from relatively minor crimes such as regulatory breaches, minor tax evasion or benefit fraud. A deliberate attempt to obscure the ownership of illegitimate funds is not necessary
There are three acknowledged phases of money laundering: placement, layering and integration. However the broader definition of money laundering offences in PoCA2002 includes even passive possession of criminal property as money laundering
Money laundering is the process of turning money derived from criminal activities into money which appears to generate from legitimate origins. Increasingly anti-money laundering provisions are being seen as the from line against drug dealing, organised crime and the financing of terrorism
These provisions are aimed at identifying customers and reporting suspicions at the placement and layering stage and keeping adequate records which should prevent the integration stage being reached
It is the procedure of a criminal transferring the proceeds of criminal activities back into the financial system (usually the banking system) known as placement in an attempt to make dirty money look as though it has come from legitimate activities after a series of transactions aimed at concealing the true origins of the illegal funds. This can include transferring funds between different financial institutions and jurisdictions, known as layering
Once the layering stage has been successful, the illegal obtained funds will be now integrated into the financial system and will appear to be legitimate funds (clean funds). Funds can then be used for any legitimate purchase of assets. This is known as integration
OSPs are unlikely to be directly involved in the handling of 'cash' and focus their AML regimes on identifying transactions that could be seen at the layering stage as this could involve a complex layer of financial transactions used by beneficial owners and settlor to hide the true identity of the source of funds
When receiving a transfer of funds between accounts and between different jurisdictions, the UK Money Laundering Regulations 2007 requires that regulated and licensed financial institutions carry out certain procedures and initiatives to combat money laundering by
Enquiring into and knowing the identity and integrity of their clients
Being able to identify the source of their clients funds
Confirming the general purpose behind any particular transaction
Disclosing and filing a suspicious transaction report is a CSP suspects that a client is money laundering
Freezing any relevant funds that may be disclosed as a suspicious transaction
Many offshore jurisdictions have come to realise that the same strategies that are being used to combat money laundering can also be used o combat tax evasion and fiscal crimes
Criminal funds may arise fro the movement of proceeds derived from
illegal drug trafficking
terrorism (terrorist financing)
serious fraud
extortion
theft
kidnapping or people trafficking
tax offences in some offshore jurisdiction (tax evasion)
exchange control violations (for example moving cash illegally out of South Africa might constitute money laundering
Money laundering feeds off the vulnerable and weak, destroying society in its wake whilst allowing organised crime to flourish. Drug trafficking is still the single largest source of laundered money. In some countries the proceeds of money laundering is a significant proportion of the gross national product and allows the criminals to control the economy of that country
The Law also sets down institutional liability under the money laundering regulations. In order to comply with the Law, the OSP must ensure that internal proceeders are put into place in order to deter, detect and enable prosecution by the law enforcement agencies are he world. Such compliance procedures would ordinarily include the requirement to
Implement, monitor and review procedures for identifying new clients and new business
Implement, monitor and review procedures for record keeping
Implement, monitor and review internal reporting procedures
Establish procedures for external reporting to the regulatory body and law enforcement agencies as needed
Appoint a senior person within the organisation as the money laundering reporting officer. The MLRO must report required suspicious events to the regulatory authorities
Establish regular and varied education and training programs
It is likely that the law would consider the agents of the OSP and therefore the relevant senior managers and/or directors to be guilty of the offence. This would then call into question their ability to remain as directors and /or managers in the future as they would not have acted fit and proper
If an OSP is convicted of money laundering, its reputation may be tarnished beyond repair, its clients would not wish to be associated with the organisation and the reputation of the jurisdiction where the OSP is established may also be severely damaged. The regulator of the jurisdiction would probably enforce various sanctions including fines and possible prison sentences of the OSP and / or the employees of the OSP, the revoking of the licence of the OSP and / or restrictions of services
Reporting requirements
If an OSP, or one of its employees, suspects that a client is laundering money or is involved in any other form of serious crime as determined by local law, both the OSP and the employee will usually have a duty to report their suspicions
This may involve reporting the matter to the police, the local customs and excise department or to a particular regulatory authority (eg Financial Supervision Commission, Bankng Supervisor)
OSPs will usually have an internal reporting procedure and in most cases a senior officer will have the ultimate responsibility for reporting a suspicious transaction or a request which appears suspicious to the authorities
In some cases, the duty to report to the authorities may rest with the employee who has the suspicion and in those instances the employee's responsibility under the local law may not be fulfilled if they only report the matter internally and not directly to the designated authority
Any report which is made will usually be received and handled by the authority concerned in the strictest confidence and should not breach any of the confidentiality provisions which list either under statute or under the terms of the contract with the client These are often referred to as safe harbour provisions
Details of a report which is made will be passed to onshore law enforcement agencies and a combined effort made to try and achieve a conviction against those involved in the laundering process
How to determine what is and what is not a suspicious transaction is difficult and the laws in various jurisdictions rely to a great extent on the reasonable man test. If a reasonable man would be expected to consider a transaction to be suspicious, given the history of the relationship with the client and the nature of the transaction under review, the OSP should submit the appropriate report, if they fail to act they could be guilty of an offence
Perhaps a simple test as to whether or not a transaction is suspicious is to ask whether the transaction or arrangement had a business purpose. If there was no apparent business purpose in all likelihood the transaction should be reported.
Traditional model of money laundering
Placement
It is the physical disposal of cash proceeds that have been received from the illegal activity into the financial system in an attempt to conceal its true origin. This is the point when the proceeds of crime are most apparent and at risk of detection. Because banks and financial institutions have developed AML procedures, criminals look for other ways of placing cash within the financial system
Layering
Once proceeds of crime are in the financial system, layering obscures their origins by passing the money through a complex layer of financial transactions in order to hide the true identity of the source of funds (eg transfer of funds between different bank accounts and different financial jurisdictions). Trusts and companies located across jurisdictions could be used to achieve this
Intergration
Once the origin of the funds has been obscured and the layering stage has been successful the criminal is able to make the funds reappear as legitimate funds or assets. The illegally obtained funds will not be integrated into the financial system and will appear to be legitimate funds. The clean funds can be invested in legitimate businesses or investments. This is the most difficult stage of money laundering to detect