Contemporary organized and financial crime transcend international borders. Globalization of crime is reflected in the huge volume of money that moves across national borders during the laundering process. According to IMF estimates, laundered proceeds from criminal acts amount to 2-5% of the world’s GNP annually (as much as $1.5 trillion). This figure reflects the laundering of money where underlying acts are criminal and those which are legal, but are motivated by either a desire to evade taxes or to place one’s savings or profits in a more stable economic environment in violation of currency restrictions.
In combating transnational crime, irrespective of form or national origin, it is critical to have an understanding of how the financial proceeds of crime are disposed of — that is, it is critical that one can learn to “follow the money.” While a large share of funds are laundered through so-called “offshore” banks located in places like the Cook Islands, Dominica, St. Kitts and Nevis, Nauru, money is often laundered through such well-known financial centers as London, New York, and Zurich.
Conceptually, it is useful to think of money laundering as occurring in three distinct stages:
(i) initial or placement stage — this is often accomplished by overstating the value of export contracts or using fake import contracts. These transactions occur usually through banks by wire transfers. Since money is fungible, once funds are in the banking system, laundered funds are hard to detect. While sometimes cash is initially convertible into portable goods such as diamonds or narcotics, this is not the most common scenario, but is common with respect to terrorist financing.
(ii) layering stage — this involves a series of conversions or transactions usually moving funds to an offshore financial center (or even an “onshore” center with a loose regulatory regime or a stable financial-legal environment with a history of non-cooperation with foreign regulatory or law enforcement bodies). Often offshore centers have minimum requirements for opening a “bank.” Companies and individuals often commit fraud in the process of setting up front companies to facilitate the money laundering process.
(iii) integration stage — investment in the legitimate economy (e.g., real estate, luxury assets, cash-generating business ventures). This is often conducted through companies or trusts in the U.S., Cyprus, Ireland, U.K., or British Virgin Islands. There is a huge market for the services of registered agents for companies that exist only for the purposes of facilitating money laundering.
The struggle to control money laundering is intimately tied to the successful battle with organized crime and corruption.
Current U.S. Money Laundering Prevention Framework
The legal framework for combating money laundering in the U.S. originates from the Bank Secrecy Act, as amended (“BSA” 31 U.S.C. 5311-5314, 5316-5324 1996) which imposes extensive record keeping and reporting requirements on financial institutions, and the Money Laundering Control Act of 1986 (18 U.S.C. 1956, 1957), which creates criminal liability for individuals who conduct monetary transactions knowing, or with reason to know, that the proceeds involved were obtained from unlawful activity. Both laws have been significantly amended by Title III of the U.S.A. Patriot Act, adopted in October 2001. The Patriot Act expands the coverage of U.S. anti-money laundering laws to non-financial institutions. It also establishes demanding reporting requirements for foreign banks and foreign individuals with correspondent or pass-through banks that lack employees or are located in the U.S. or certain financial havens.
The BSA requires financial institutions to file Currency Transaction Reports (“CTRs”) with the U.S. Treasury reporting deposits, withdrawals, and exchanges of more that $10,000 of currency. These reporting requirements as well as the obligations for banks to “Know Your Customer” (“KYC”) have grown substantially over the last few years and the banking industry has consistently opposed them as unduly burdensome, expensive, and ineffective. Banks are now required to file Suspicious Activity Reports (“SARs”) covering any suspicious transactions relevant to possible violations of federal law or regulation independent of the amount of the transaction.
In order to prove a charge of money laundering under U.S. law, one of the elements prosecutors must allege and prove beyond a reasonable doubt is that at least one of the Specified Unlawful Activities (“SUAs”) listed in the money laundering statutes, 18 U.S.C. 1956 and 1957, gave rise to illegal proceeds. The money laundering statute lists dozens of federal crimes, which can serve as the predicate SUA and it a powerful tool for prosecuting organized crime activity in the U.S. The Patriot Act expanded the number of foreign offenses committed outside U.S. borders, which can be prosecuted under U.S. law.
International Conventions and Cooperation
There are numerous international conventions and organizations concerned with the problem of money laundering. With respect to treaties, the European Union’s Strasbourg Convention of 1990 and the UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (the “Vienna Convention), dated December 1988, are the more well known.
In 1988, the Basel Committee on Banking Regulation and Supervisory Practices was formed. The Basel Committee exchanges information and proposes international standards for banks. In 1989, the G-7 created the Financial Activity Task Force (“FATF”) to combat money laundering. FATF has issued standards contained in the form of 40 recommendations, which go beyond the standards contained in the Basel Committee Statement and in October 2001 adopted eight additional recommendations for combating money laundering. Among its various functions, FATF identifies “non-cooperating jurisdictions”, that is, countries or territories that lack an effective legal regime for combating money laundering.
International cooperation in the struggle against money laundering often occurs within the framework of the Egmont Group. This group facilitates cooperation among national Financial Intelligence Units (“FIU”), of which there are approximately 53 world-wide. In the U.S., this function is conducted by the Financial Crimes Enforcement Network (“FINCEN”) within the U.S. Department of Treasury. In addition, bilateral tax and law enforcement cooperation agreements provide a framework for international cooperation in this area.
Often there is a divergence between a country’s declaratory and action policy in the area of money laundering. A country may have a legal regime consistent with FATF’s recommendations, but does not devote adequate financial and personnel resources to effectively enforce the rules it has. This is often a question of political will as much as a reflection of limited resources.
TraCCC Initiatives – Money Laundering and Financial Crimes
TraCCC’s analysis of money laundering builds on its examination of transnational crime and corruption. TraCCC is researching money laundering in Georgia from a multidisciplinary perspective. Drawing on the expertise of leading scholars and distinguished practitioners from the legal, financial and social science communities, we are analyzing the problems of privatization, the banking sector, and Georgia’s legal framework and institutions for combating money laundering. In Russia and Ukraine, TraCCC-supported scholars are examining the implementation of new anti-money laundering laws along with the institutional environment that facilitates the establishment of front companies and offshore businesses and banks.
There have been several events hosted by TraCCC concerning financial crime. In 2006, Bilal Wahab, current TraCCC PhD student, spoke at an event on Governance in Iraq, on September 23. His discussion described Iraqi perspectives on the security situation in Iraq, focusing on insurgent financing. In 2010, TraCCC hosted the Turkish Institute for Security and Democracy with a conference entitled, “The Crime-Terror Nexus: Perspectives and Lessons Learned from International Researchers and Practicioners.” The conference presented analysis of terrorist financing and activity, based primarily on data made available from the Turkish National Police on the terrorist organization, PKK (Kurdistan Worker’s Party). Panels addressed diverse forms of terrorist financing and crime networks extending from Central Asia, through the Middle East and to Europe. In April of 2011, TraCCC hosted Grant Newsham, an executive director for corporate security at a prominent Western financial services firm in Japan, to discuss, “Yakuza Influence on the Japanese Financial Sector: Security and Solvency in Japan.”
Dr. Louise Shelley has spoken on money laundering and its connections with human trafficking. In October 2011, she presented at the OSCE’s Expert Seminar on Leveraging Anti-Money Laundering Regimes to Combat Human Trafficking. Her presentation focused on “The Business of Human Trafficking”. Prior to this she was the featured expert for a moneylaundering.com article entitled Human Trafficking, the Second Largest Crime in the World, is Aided by Laundering, Says Anti-Corruption Expert in September of 2008.