This module is a resource for lecturers

Money-laundering

Money-laundering is the processing of criminal proceeds to disguise their illegal origin. For instance, a drug trafficker might buy a restaurant to disguise drug profits with the legitimate profits of the restaurant. In this way, the drug profits are "laundered" through the restaurant to make the income look as if it was earned lawfully. Money-laundering is crucial to organized crime operations because offenders would be discovered easily if they could not "merge" their illegal cash into, for instance, a legal business, bank, or real estate (Soudijn, 2014; Malm and Bichler, 2013).

The crucial need to conceal organized crime activity was addressed by articles 6 and 7 of the Organized Crime Convention. Article 6 requires State parties to criminalize money-laundering, while article 7 refers to measures to combat money-laundering.

Article 6(1) of the Convention requires that each State party criminalize money-laundering. Criminalization not only allows national authorities to organize the detection, prosecution and repression of the offence, but also provides the legal basis for international cooperation among police, judicial and administrative authorities, including mutual legal assistance and extradition.

The Organized Crime Convention seeks to establish uniformity for the intolerance for money-laundering, which serves to conceal organized crime activity. In article 7, requirements for comprehensive domestic regulatory and supervisory schemes for banks and non-bank financial institutions are set forth, as is strong guidance for cooperation and the exchange of information at the national and international levels to investigate suspected money-laundering activity.

The money-laundering cycle can be broken down into three distinct stages; however, it is important to remember that money-laundering is a single process. The stages of money-laundering include:

• Placement (i.e. moving the funds from direct association with the crime)
• Layering (i.e. disguising the trail to foil pursuit)
• Integration (i.e. making the money available to the criminal, once again, from what seem to be legitimate sources)

The placement stage represents the initial entry of the proceeds of crime into the financial system. Generally, this stage serves two objectives: it relieves the criminal of holding large amounts of cash obtained illegally; and it inserts the money into the legitimate financial system. During this stage, money launderers are most vulnerable to being caught, because placing large amounts of cash into the legitimate financial system may raise suspicions.

The layering stage comes after the placement stage and it is sometimes referred to as "structuring." This is the most complex money-laundering stage and often entails moving the illicit funds internationally. The primary purpose of the placement stage is to separate the illicit money from its source. This is done through a sophisticated process involving layering financial transactions, whose final goal is to conceal the audit trail and break the link with the original criminal activity.

The final stage of the money-laundering process is termed "integration." During this stage the money is returned to the perpetrators from what seems to be a legitimate source. The criminal proceeds, that were initially placed as cash and layered through a number of financial transactions, are now fully integrated into the financial system and can be used for any legitimate purpose.

Anti-money laundering laws generally require the recipients of funds to exercise the reasonable care expected in a financial transaction. There have been many significant cases involving banks moving money internationally without exercising proper due diligence in knowing their customers or the source of the funds. Given the threats of transnational crime, corruption, and terrorism, many countries have expanded their money-laundering control efforts beyond banks, to include other businesses that might exchange or move large amounts of cash (e.g., check-cashing companies, money transmitters, jewellers, pawnbrokers, casinos, credit card companies, traveller's check and money order issuers).

The Financial Action Task Force (FATF) is an independent intergovernmental body that develops and promotes policies to protect the global financial system against money-laundering. In 2003, the FATF issued an updated set of 40 Recommendations for improving national legal systems, enhancing the role of the financial sector and intensifying cooperation in the fight against money-laundering (FATF, 2003).

The FATF's approach of identifying non-cooperating countries and territories proved successful in forcing improvements in the anti-money laundering and counter-terrorist financing systems of a number of countries. Through financial incentives, sanctions, and monitoring, the FATF has successfully encouraged countries to create and enforce money-laundering laws and to cooperate in international investigations.

According to the FATF, common indicators of "red flags" of potential money-laundering activity include:

• Frequent high-dollar cash transactions.
• Use of large amounts of cash when checks would be expected and would be more convenient.
• Many wire transfers to or from known bank secrecy havens around the world.
• Immediate check or debit card withdrawals of large and frequent sums received by wire transfer.
• An account holder who pays undue attention to secrecy regarding personal or business identity.
• Lack of general knowledge about the customer's stated business.

These are the kinds of indicators that financial institutions and businesses dealing in cash transactions are expected to act on when unusual financial transactions occur. Besides the above mentioned 40 Recommendations, the FATF has also developed 9 Special Recommendations to set out the basic framework to detect, prevent and suppress the financing of terrorism and terrorist acts. These 9 Special Recommendations together with the 40 previously adopted provide a comprehensive set of measures for an effective legal and institutional regime against money-laundering and the financing of terrorism.

Next: Liability of legal persons

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