Friday, April 22, 2011


By K P C Rao.,

Money laundering allows crime to pay by permitting criminals to hide and legitimize proceeds derived from illegal activities. According to one recent estimate, worldwide money laundering activity amounts to roughly $1 trillion a year. These illicit funds allow criminals to finance a range of additional criminal activities. Moreover, money laundering abets corruption, distorts economic decision-making, aggravates social ills, and threatens the integrity of financial institutions.

Money launderers now have access to the speed and ease of modern electronic finance. Given the staggering volume of this crime, broad international cooperation between law enforcement and regulatory agencies is essential in order to identify the source of illegal proceeds, trace the funds to specific criminal activities, and confiscate criminals’ financial assets.

Money laundering means different things in different places. This is because only proceeds of crime (or criminal conduct) can be laundered. Many countries have restricted the classification of crimes that are regarded as underlying crimes for money laundering purposes such as drug trafficking. In some countries any conduct which, if a person were convicted, would lead to a sentence of imprisonment will be regarded as a predicate crime. The final point here is that in most countries having countermoney laundering laws, a person can be guilty of the offence of laundering the proceeds of someone else’s criminal conduct.

There are various definitions available which describe the phrase ‘money laundering’. The conversion or transfer of property, knowing that such property is derived from serious crime, for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in committing such an offence or offences to evade the legal consequences of his action and the concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property, knowing that such property is derived from serious crime. Powis (1992) asserts that money laundering is the use of money derived from illegal activity by concealing the identity of the individual who obtained the money and converted it to assets that appear to have been derived from the legitimate source. However, probably, the simplest definition is the washing of dirty money to make it appear to be legitimate.

Criminals commit three basic types of crime – crimes of passion or honour, crimes of violence or vandalism and economic crimes. Ignoring minor vandalism, most crime is economic crime – that is this crime is committed to make money. They commit crime for two reasons – one is for kicks – to prove that they can get away with it; the other is because they think they can make more money from the crime than they can make from the same amount of legitimate endeavour.

Simply stated, the process of money laundering basically implies cleansing of money earned through illegal activities like extortion, drug trafficking and gun running etc. The tainted money is projected as clean money through intricate processes of placement, layering and laundering. In Black’s Law of Lexicon the term ‘laundering’ is referred to as being used to describe investment or other transfer of money flowing from racketeering, drug transactions and other illegal sources into legitimate channels so that its original source cannot be traced.

When they make money from crime, criminals use it for one of three purposes – to invest in another crime, to hide to use later or to spend now.

One of the most tried, tested and successful methods of investigating crime is to follow the money. So criminals want to move the money further and faster than investigators can follow it – and from time to time they want to put it into a black hole so that investigators simply cannot follow it. Also, investigators who think that someone may have been involved in a crime may start with that person’s known finances and work backwards. So, the criminal needs to get the money out of the black hole in such a way that he can explain where he got it.

Tax evaders launder money so that they can lie about where money and assets came from in order to evade tax. Or they hide money in bank accounts that they think the revenue authorities think will not be found out sometimes in the names of children or elderly relatives. Or they simply operate outside that part of the economy where records are kept. How often have you been offered a discount for cash, provided you don’t want a receipt? According to some estimates, some 80% of property crime, for example, theft, is committed to fund drugs habits. But in financial crime, increasingly, there is no physical representation of the crime. The money is no more than information on a computer screen, or to be more precise it is bits and bytes stored in a computer’s memory. So, no one handles stolen goods because there is nothing to touch. The result of this is that criminal laws that were framed to address the physical holding of something that had been stolen did not apply (or courts found it did not apply) to non-physical money or other “dematerialized” assets. There is a phrase often used by those who draw up laws or have to enforce them – they say that one way of reducing crime is to “take the profit out of crime.” This means to identify assets that represent proceeds of crime and to seize them under a Court Order or administrative power.

All this means that if money laundering could be made an unrewarding or as risky as handling stolen goods, then there would be an impact upon financial crime. Financial crime affects everyone. It results in higher costs to businesses, which means a combination of less profits and higher prices to consumers and it means the vulnerable such as the elderly are at risk from frauds such as doorstep frauds. It means shopping on the Internet or even at your local supermarket is more risky because the trader may be fraudster and it means that money flows into the hands of corrupt politicians and businessmen, including those engaged in trafficking in drugs, arms and people. Money laundering also was developed in order to facilitate trade. Nigeria is the money-laundering centre of Africa and that Nigerians around the world are engaged in large-scale crime and laundering. Money laundering techniques are restricted only by the imagination of the criminals – and there are a lot of criminals trying to find ways to launder.

Who launders money?

Criminals launder money. Money launderers are to be found in all walks of life, many acting entirely innocently. However, anyone who helps a criminal to launder the proceeds of his crime is, in most jurisdictions, also a money launderer. This means bankers, lawyers, accountants, car dealers and others are money launderers if they allow their businesses to be used by someone else to launder the proceeds of a crime. Generally, the only defence is that the businessman was unaware of what was happening. This defence will not stand as the burden of proving innocence will be on the defendants.

Persons possessing assets out of the proceeds of crime are also money launderers. A girlfriend of a criminal who knows that her boyfriend used proceeds of criminal conduct to buy her a car is a striking example in this regard. So an accountant who recommends a tax evasion scheme is himself a money launderer. Tax evaders launder money and hide it in banks’ numbered and ‘benami’ accounts. Banks are regarded as safe hiding places for slush funds.

How does money laundering help to fight crime?

1)     Money laundering is anarchical in nature. Good governance is the death warrant of criminal activity.
2)     A close scrutiny of financial transaction records leads not only to the discovery of hidden assets but also unmasks the criminals and their groups.
3)     The criminally generated funds can be forfeited. This will hit the criminal hard and break the cycle of criminal activity.

The governments should:

1)     Enforce the money laundering Laws effectively.
2)      Enact laws for search, seizure and confiscation of criminally derived assets.
3)     Should share information about criminals.
4)     Bring the law enforcement and financial authorities together.

Money launderers are highly imaginative criminals and circumvent governments’ counter-measure. A dynamic detection system must be in place. Money laundering is the process by which large amount of illegally obtained money (from drug trafficking, terrorist activity or other serious crimes) is given the appearance of having originated from a legitimate source.

If done successfully, it allows the criminals to maintain control over their proceeds and ultimately to provide a legitimate cover for their source of income. Money laundering plays a fundamental role in facilitating the ambitions of the drug trafficker, the terrorist, the organized criminal, the insider dealer, the tax evader as well as many others who need to avoid the kind of attention from the authorities that sudden wealth brings from illegal activities. By engaging in this type of activity it is hoped to place the proceeds beyond the reach of any assets forfeiture laws. Attacking money laundering attacks the proceeds of crime; it also has the advantage of forcing those who are behind the trade in illicit drugs to fight in the open, on the same ground as the forces of law and order.

Money laundering is necessitated by the requirement for criminals, be they drug traffickers, organized criminals, terrorists, arms traffickers, blackmailers, or credit card swindlers, to disguise the origin of their criminal money so that they can use it more easily. Money laundering generally involves a series of multiple transactions used to disguise the source of financial assets so that those assets may be used without compromising the criminals who are seeking to use the funds. These transactions typically fall into three stages:

1)     Placement, the process of placing, through deposits, wire transfers, or other means, unlawful proceeds into financial institutions.
2)     Layering, the process of separating the proceeds of criminal activity from their origin through the use of layers of complex financial transactions
3)     Integration, the process of using an apparently legitimate transaction to disguise the illicit proceeds. Through this process the criminal tries to transform the monetary proceeds derived from illicit activities into funds with an apparently legal source.

Money laundering is the crime of the ‘90s. Money laundering is sleight of hand… a magic trick for wealth creation… the lifeblood of drug dealers, fraudsters, smugglers, arms dealers, terrorists, extortionists and taxevaders. It is also the world’s third largest business. Though a relatively new and in vogue subject, it (money laundering) has in fact been around for centuries. Criminals throughout history have had to hide the source of newly acquired wealth in order to escape prosecution for the predicate crime. However, the scale of the problem has escalated out of all proportion.

“Today’s criminals make the Al-Capone and the old Mafia look like small time crooks.” Money laundering is one of the major problems facing international economy. Technology has offered a very sophisticated and circuitous means to convert ill-gotten proceeds into legal tender and assets. Measures need to ensure that legislation keeps abreast of technology in order to understand and pick up on any new techniques that professional money launderers may come up with.

Money laundering is interlinked with crime. The allurement of huge profits from drug trafficking, international frauds, arms deals, trafficking in human organs, casinos and prostitution will facilitate the offence – leading to huge accumulation of wealth, prestige and respectability of those in control of criminal business. Drug trafficking is the largest single generator of illegal proceeds. Robinson (1994) stated that more money is spent worldwide on illicit drugs than on food.

The characteristics of organized crime are evident in money laundering. According to Billy Steel these characteristics are as below:
1)        It is a group activity, in that it is carried out often by more  than one person;
2)        It is a criminal activity which is long-term and continuing;
3)        It is a criminal activity which is carried out irrespective of national boundaries;
4)        It is large-scale; and
5)        It generates proceeds, which are often made available for licit use.

The serious criminal activity is highly complex and sophisticated. It is operated on a large scale and influences the legitimate business activity all over the world. A large number of conventions like the FATF have emerged to combat this growing menace.

          [Published in Circuit Magazine (Monthly), ICWAI, February & March, 2011]