Money-laundering and its prevention

Money-laundering

• The process of making ‘dirty money’ look like ‘clean money’ is referred to as money laundering.
• The process of creating the appearance that large amounts of money obtained from serious crimes, such as drug trafficking or terrorist activity, is from a legitimate source is called money laundering.
• Money laundering is a crucial step in the success of drug trafficking and terrorist activities. The connection between money laundering and terrorism may be a bit more complex, but it plays a crucial role in the sustainability of terrorist organisations.
  • Most people who financially support terrorist organisations do not simply write a personal cheque and hand it over to a member of the terrorist group. They send the money in roundabout ways that allow them to fund terrorism while maintaining anonymity.
  • On the other end, terrorists do not use credit cards and cheques to purchase the weapons, plane tickets and civilian assistance; they need to carry out a plot. They launder the money so that authorities cannot trace it back to them and foil their planned attack.
  • Interrupting the laundering process can cut off funding and resources to terrorist groups.
• The basic money laundering process has three steps:
  • Placement:
    • At this stage, the launderer inserts the dirty money into a legitimate financial institution. This is often in the form of cash bank deposits.
    • This is the riskiest stage of the laundering process because large amounts of cash are pretty conspicuous, and banks are required to report high-value transactions.
  • Layering:
    • Layering involves sending the money through various financial transactions to change its form and make it difficult to follow.
    • Layering may consist of several bank-to-bank transfers, wire transfers between different accounts in different names in different countries, making deposits and withdrawals to continually vary the amount of money in the accounts, changing the money’s currency, and purchasing high-value items (boats, houses, cars and diamonds) to change the form of the money.
    • This is the most complex step in any laundering scheme, and it’s all about making the original dirty money as hard to trace as possible.
  • Integration:
    • At the integration stage, the money re-enters the mainstream economy in a legitimate-looking form-it appears to come from a legal transaction.
    • This may involve a final bank transfer into the account of a local business in which the launderer is ‘investing’ in exchange for a cut of the profits. At this point, the criminal can use the money without getting caught.
    • It’s very difficult to catch a launderer during the integration stage if there is no documentation during the previous stages.
• The Effects of Money Laundering:
  • Criminals launder anywhere between $500 billion and $1 trillion worldwide every year. The global effect is staggering in social, economic and security terms.
  • Social Effects
    • On the socio-cultural end of the spectrum, successfully laundering money means that criminal activity actually does pay off.
    • This success encourages criminals to continue their illicit schemes because they get to spend the profit with no repercussions.
      • This means more fraud, more corporate embezzling (which means more workers losing their pensions when the corporation collapses), more drugs on the streets, more drug-related crime, law-enforcement resources stretched beyond their means and a general loss of morale on the part of legitimate business people who do not break the law and do not make nearly the profits that the criminals do.
  • Economic Effects
    • The economic effects are on a broader scale. Developing countries often bear the brunt of modern money laundering because the governments are still in the process of establishing regulations for their newly privatised financial sectors. This makes them prime target.
    • Other major issues facing the world’s economies include errors in economic policy resulting from artificially inflated financial sectors.
      • Massive influx of dirty cash into particular areas of the economy that are desirable to money launderers create false demand, and officials act on this new demand by adjusting economic policy.
    • When the laundering processes reaches a certain point or if law-enforcement officials start to show interest, that money suddenly disappears without any predictable economic cause and that financial sector falls apart.
    • Some problems on a more local scale relate to taxation and small-business competition.
      • Laundered money is usually untaxed, meaning the rest of ultimately have to make up the loss in tax revenue.
      • Also, legitimate small businesses cannot compete with money laundering front businesses that can afford to sell a product far cheaper because their primary purpose is to get clean money, not earn profit.
      • They have so much cash coming in that they might even sell a product or service below cost. 
• Trade-based Money Laundering (TBML)
  • Financial Action Task Force (FATF) defines Trade Based Money Laundering (TBML) as the process of disguising the proceeds of crime and moving value through the use of trade transactions in an attempt to legitimise their illicit origins.
    • In simpler terms, TBML is the process of transferring/moving money through trade transactions.
    • In practice, this can be achieved through the misrepresentation of the price, quantity or quality of imports or export.
  • The basic techniques of trade-based money laundering include:
    • Over-invoicing and ‘Under-invoicing’ of goods and services:
      • Money laundering through the over-invoicing and under-invoicing of goods and services, which is one of the oldest methods of fraudulently transferring value across borders, remains a common practice today.
      • The key element of this technique is the misrepresentation of the price of the good or service in order to transfer additional value between the importer and the exporter.
      • Over-invoicing of exports is one of the most common trade-based money laundering techniques used to move money.
      • This reflects the fact that the primary focus of most customs agencies is to stop the import of contraband and ensure that appropriate import duties are collected.
    • Multiple-invoicing of goods and services:
      • Another technique used to launder funds involves issuing more than one invoice for the same trade transaction.
      • By invoicing the same good or service more than once, a money launderer or terrorist financier is able to justify multiple payments for the same shipment of goods or delivery of services.
      • Unlike over-invoicing and under-invoicing, it should be noted that there is no need for the exporter or importer to misrepresent the price of the good or service on the commercial invoice.
    • Over-shipment and under-shipment of goods and services:
      • In addition to manipulating export and import prices, a money launderer can overstate or understate the quantity of goods being shipped or services being provided.
      • In the extreme case, an exporter may not ship any goods at all, but simply collude with an importer to ensure that all shipping and customs documents associated with this so called ‘phantom shipment’ are routinely processed.
      • Banks and other financial institutions may unknowingly be involved in the provision of trade financing for these phantom shipments.
    • Falsely described goods and services:
      • In addition to manipulating export and import prices, a money launderer can misrepresent the quality or type of a good or service.
      • For example, an exporter may ship a relatively inexpensive good and falsely invoice it as a more expensive item or an entirely different item.
      • This creates a discrepancy between what appears on the shipping and customs documents and what is actually shipped.
      • The use of false descriptions can also be used in the trade in services, such as financial advice, consulting services and market research.
      • Generally, cases of over-invoicing or under-invoicing primarily designed to gain a tax advantage are considered customs fraud as also other manifestations as above.