Special Topics in Banking & Finance Ch 4

Special Topics In Banking & Finance

Dr. Karim KobeissiArts, Sciences and Technology University in Lebanon

Chapter IV: Money Laundering & Terrorist Financing

Money Laundering -Definition

Money laundering (ML) is the process by which earnings

from a criminal activity are masked to hide their illegal

origin (between $ 500 billion and $ 1.5 trillion annually). If

successful, the money can lose its criminal identity and

appear legitimate.

Terrorist Financing - Definition

Terrorist Financing (TF) is the act of providing financial

support to terrorists or terrorist organizations to enable

them to carry out terrorist acts.

LINK BETWEEN MONEY LAUNDERING AND TERRORISM FINANCING

• The techniques used to launder money are essentially

the same as those used to hide the sources of, and

uses for, terrorist financing.

• In contrast with money laundering where the funds

used are derived from criminal activities, funds used to

support terrorism may originate from legitimate

sources, criminal (illegal) activities, or both.

What are the sources of Terrorist Financing?

Legal Sources

CONTRIBUTIONS AND DONATIONS

SALE OF PUBLICATION

LEGITIMATE BUSINESS ACTIVITIES

Illegal Sources

DRUG TRAFFICKING

EXTORTION AND KIDNAPPING

ROBBERY

FRAUD

GAMBLING

SMUGGLING AND TRAFFICKING IN COUNTERFEIT GOODS

Fighting Money Laundering & Terrorist Financing

Over the years, countries have been struggling with the

issues relating to money laundering and terrorist financing

through prevention, detection and prosecution. The complexity in the fight against this menace is mainly

as a result of the sophisticated techniques adopted by

criminals. Such techniques involve the use of different

types of financing institutions, multiple financing

transactions, the use of intermediaries such as financial

advisers, accountants and other service providers,

transferring to and from different countries as well as the

use of different financial instruments and all kinds of

value-storing assets.

Simple Money Laundering Concept

• Is Mr A Laundering Money?• How about the Friend?

Mr A Friend

Works in a Bank injurisdiction X

with lax banking laws Jurisdiction B: confidentiality laws

illegal smuggling of weapons

A Typical ML Scheme

Three Stages of Money Laundering

Placement Stage

Layering Stage

Integration Stage

Initial injection of illegal funds into the financial system.

Multiple layers (covers) of transactions that further separate funds from their illegal origins.

Reintroduction of illegal funds into legitimate economy.

Purpose is to separate illegal funds from their illegal origins.

Purpose is to make it difficult to trace the funds to their illegal origins.

Purpose is to allow criminals to use the funds without raising any suspicion.

Placement Stage

This is the physical disposal of cash earnings derived from illegal activity.

Examples

• Depositing cash into an account or into several accounts in different

locations.

• Paying cash for bank drafts (cheques drawn by a bank on its own

funds), traveler's cheques, and other value instruments.

• Purchasing items of value for cash (such as works of art, antiques,

motor vehicles, and so on) for the purpose of selling them.

• Combining criminal cash with legitimate cash in a business account.

• Converting cash in one currency into another currency.

Layering Stage

This is the process of separating illegal earnings from their source by creating complex layers of financial transactions designed to disguise the audit trail and provide anonymity.

Examples• Wiring payments to and from various accounts (personal and

corporate) in different jurisdictions• Buying, then selling, an investment product• Buying and then giving way a single-premium insurance

contract• Engaging in international trade transactions• Making other types of payment where funds move from one

account to another

Integration Stage

This is provision of apparent legitimacy of criminally derived wealth. If the layering process has succeeded, integration schemes place the laundered earnings back into the economy in such a way that they re-enter the financial system and appear to be normal business funds.

Examples• Purchase of property (for personal use or investment)• Purchase of other high-value items, for example, jewelries, antiques, works of

art • Purchase of legitimate businesses• Purchase of investments for income• Any purchase for personal use with a cheque, credit card, or other payment

method

Where do ML/TF Operations Take Place?

• Money launderers and terrorism supporters INTERNATIONALIZE their operations to achieve various objectives.

Where do ML/TF Operations Take Place?

The Socio-economic Impact of Money Laundering

The Socio-economic Impact of Money Laundering (con)

Affecting macro economy…

• Rapid movement of large amount of money inconsistent with financially productive purposes destabilizes: – Proper interest rate movement– Proper exchange rate movement– Proper pricing of real estates

• Discourage long-term investment in legitimate activities• Deprives the country of legitimate tax paying business

Affecting the rule of law… – Undermine the rule of law in society.– Tend to induce corruption in the public sector.


Affecting the financial system…

– Reputational risk• Discourage people to put their money in banks because of lack of trust

– Operational risk• Institutions incur reduced, terminated, or increased costs for inter-bank or

correspondent banking services– Legitimate businesses and enterprises suffer from reduced access to

world markets or access at a higher cost due to extra scrutiny of their ownership, organization and control systems

– Tend to induce corruption in the financial sector


Affecting economic liberalization…

– By using front companies and other investments in legitimate companies money laundering proceeds can be utilized to control whole industries or sectors of the economy of certain countries

– Threaten the efforts of many countries to reform their economies through privatization. Criminal organizations are capable of outbidding legitimate purchasers of former state-owned enterprises

– Encourage governments to impose restrict capital controls– Encourage governments to impose restrict regulations on financial

transactions and trade with jurisdictions that do not have adequate money laundering control policies


International Consequence and Foreign Investment

- A reputation as a money laundering haven, alone, could cause significant adverse consequences for development in a country.

- Foreign Financial Institutions may decide to limit their transactions with institutions from money laundering havens.

- At times, legal businesses and enterprises from such a country may suffer from reduced access to world markets or are subjected to a higher cost due to extra inspection of their ownership, organization and control system.

- Any country known for Lax enforcement of ML/TF is less likely to receive foreign private investment. For developing nations, prerequisite for foreign governmental assistance is also likely to be severely limited.

- More importantly is the possibility of inclusion in the “non-co-operating countries and territories; list maintain by FATF (Financial Action Task Force ).


The FATF (Financial Action Task Force - is an inter-governmental body

established in 1989 by the Ministers of its Member jurisdictions. The

objectives of the FATF are to set standards and promote effective

implementation of legal, regulatory and operational measures for

combating money laundering, terrorist financing and other related

threats to the integrity of the international financial system) has

established a number of preventive measures for countries and

institutions to adopt in the fight against money laundering.

Preventative Measures

• Confidentiality Laws

Confidentiality laws should not conflict with or inhibit the

effectiveness of money laundering strategy.

• Appropriate Customer Identification & Diligence Procedures in Place

Customer identification requirements known as “Know Your

Customer” (KYC) assist in the detection, restriction and prevention

of money laundering and terrorist financing.

Preventative Measures (con)

Record Keeping Requirements

Institutions should keep customer identification and transaction

records for period of not less than five years. This information

should be detailed enough to permit the prosecution of criminal

elements and should be readily available to authorities upon

request.

Suspicious Transaction Reporting

To recognize the obligation to report if institution knows or suspect or

have reasonable grounds to suspect that funds involve were

derived from a criminal activity.


Cash Transaction Reporting

Reporting of transactions involving cash beyond the

threshold set by the regulatory authorities.

Awareness Raising and Training

- Create awareness (customers, counterparties and public); and

- Training and continuous training of staff.


• A well functioning anti-money laundering system:– Makes it difficult for corrupt officials to expatriate their ill-

gotten funds– Increases public confidence in the financial system – Increases investment in the legitimate private economy,

allowing for increase resources from taxes– Provide a disincentive for the criminal involvement in the

economy, promoting transparency and productivity


Special Topics in Banking & Finance Ch 4

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