The Money Laundering Process Finance Essay

Harmonizing to the Vienna and Palermo Convention commissariats on money laundering, it may embrace three distinguishable Actus Reus ;

1. The transition or transportation, cognizing that such belongings is the returns of offense,

2. The privacy or camouflage of the true nature, beginning, location, temperament, motion or ownership of or rights with regard to belongings, cognizing that such belongings is the returns of offense,

3. The acquisition, ownership or usage of belongings, cognizing that, at the clip of the reception, that such belongings is the returns of offense ( IMF, 2009 ) .

Since the last three decennaries, there has been an unbelievable addition in money laundering. Harmonizing to the statistics of International Monetary Fund, the planetary value of money laundered in a twelvemonth is about 2 or 5 per centum of the universe ‘s one-year gross domestic merchandise which is equal to $ 600 billion and $ 1.8 trillion ( Shields, 2005 ) . $ 600 billion is approximately tantamount to the value of the entire end product of an economic system the size of Spain ( FATF, 2009 ) . The Financial Crimes Enforcement Network of the US Department of Treasury estimations that about $ 300 billion is laundered in or through the US yearly ( Shields, 2005 ) . However it must be stated that it is impossible to bring forth a dependable estimation of the money laundered every twelvemonth.

There are many ways of money laundering but, it is typically done in three stairss ;

1. Placement ; the reprehensively derived money is placed into a legitimate endeavor ;

2. Layering ; the financess are layered through assorted minutess to befog the original beginning ;

3. Integration ; the freshly laundered financess are integrated into the legitimate fiscal universe in the signifier of bank notes, loans, letters of recognition, or other recognizable fiscal instruments ( Lahey, 2005 )

At the first phase, the money derived from the condemnable system is placed into the fiscal system. This is the hazardous phase of the laundering procedure, because in many of the capitalist states, Bankss and all other fiscal establishments are required to describe big hard currency minutess, sedimentations, and gap of histories in the signifier of currency dealing studies ( Shields, 2005 ) . For illustration in USA, $ 10,000 is the threshold figure. On the other manus, the Treasury Department has enacted regulations necessitating all concerns that wire money internationally to register with the authorities, register a study for all minutess transcending $ 750, study leery activities and supply the names of both transferor and the receiver ( Lahey, 2005 ) .

Smurfing is one of the ways used to besiege this demand ( Shields, 2005 ) . In smurfing, big Numberss of people are employed to do big Numberss of little sedimentations under $ 10,000. In this manner, big sums of hard currency are broke up into less conspicuous smaller amounts that are so deposited straight into a bank history, or by buying a series of pecuniary instruments such as cheques, money orders, etc. , that are so collected and deposited into histories at another location ( FATF, 2009 ) . Finally big measures of hard currency are injected into the banking system without triping the coverage system.

Non-banking fiscal establishments such as casinos and agency de alteration are besides suited topographic points to hard currency arrangement utilizing the smurfing method. Transporting hard currency to banking legal powers which do non hold compulsory coverage regulations like is Switzerland, is another tactic that is used.

Once the criminally derived money placed in the fiscal system, the following phase of money laundering is “ layering ” . Layering involves directing the money through assorted fiscal minutess to alter its signifier and do it hard to follow ( Layton, 2006 ) . The illicit financess are circulated through assorted fiscal establishments and across multiple legal powers to befog the ownership and beginning ( Shields, 2005 ) . Layering may dwell of several bank-to-bank transportations, wire transportations between different histories in different names in different states, doing sedimentations and backdowns to continually change the sum of money in the histories, altering the money ‘s currency ( Layton, 2006 ) . A In some cases, the launderer might mask the transportations as payments for goods or services, such as purchasing really expensive autos, house or jewelleries, therefore giving them a legitimate visual aspect ( FATF, 2009 ) . So, layering is the most complex measure in money laundering. Launderers use the shell corporations and seaward Bankss at this phase because of the trouble in obtaining information to place ownership involvements and geting necessary history information from them ( Schroeder, 2001 ) .

Electronic financess transfer ( EFT ) or wire transportations are by far the most common techniques of layering. This is largely due to the unregulated construction of wire minutess. In 2000, James Sloan, Director of the Financial Crimes Enforcement Network, observed: “ Electronic financess transfer systems are the cardinal edifice blocks for both the legitimate and illicit motion of money domestically and globally. The large-scale money laundering instances described by jurisprudence enforcement besides most universally involve a wire transportation constituent by which 1000000s of dollars in drug and non-drug condemnable fiscal activity are camouflaged ” ( Shields, 2005 ) .

The last phase of the money laundering is the “ integrating ” . After traveling through multiple minutess in the fiscal system, the laundered financess are so integrated into the legitimate fiscal universe ( Shields, 2005 ) . It appears to come from a legal dealing. Integration creates the semblance of a legitimate beginning for reprehensively derived financess and involves techniques as legion and originative as those used by legitimate concerns to increase net income and cut down revenue enhancement liability ( Schroeder, 2001 ) . In this phase there may be a concluding bank transportation into the history of a local concern in which the launderer is “ puting ” in exchange for a cut of the net incomes, the sale of a yacht which was bought during the layering phase ( Layton, 2006 ) .

Not all money washing minutess involve all three distinguishable stages and some may affect more than three stages ( Reuter & A ; Truman, 2004 ) . Nonetheless the three phase categorization is a utile decomposition of money laundering.

An of import characteristic of money laundering is the figure of different methods used to transport it out. I will seek to explicate the most known laundering techniques in footings of chance construction.

Many white neckband discourtesies manifest the undermentioned three belongingss: 1 ) the wrongdoer has legitimate entree to the location in which the offense is committed, 2 ) the wrongdoers are spatially separated from the victims and 3 ) the wrongdoer ‘s actions have a superficial visual aspect of legitimacy. The wrongdoers use three chief techniques which is misrepresentation, maltreatment of trust and the privacy and confederacy. Deception occurs when the following two conditions are met. First one individual must intentionally mean to misdirect another about the nature of world ; 2nd, the other individual must misperceive it ( Benson & A ; Simpson, 2009 ) . Maltreatments of trust occur in agent-client relationships. By and large the agents provide principals with some kind of specialised service. As clients, people place their trust in agents and hope that they will move in their best involvements. White collar wrongdoers besides conspire to conceal the true nature of their activities. The object is, to hide and organize activities so as to illicitly profit the members of the confederacy without of all time uncovering that anything illegal has taken topographic point ( Benson & A ; Simpson, 2009 ) . All the illustrations that I wrote below involve at least one of three belongingss of white neckband discourtesies, and they are committed by the three chief techniques that I mentioned above.

Cash smuggling is one of the oldest arrangement techniques. Normally big sums of majority cargos are driven across the boundary line or hidden in lading to traverse the boundary line. Launderers purchase transportation concerns so that they can hive away hard currency inside the goods. Messengers transport hard currency in checkered or carryon luggage or on their individuals ( Reuter & A ; Truman, 2004 ) . Smugglers can besides utilize merely utilize the mail or transporting companies such as UPS or FedEx ( Reuter & A ; Truman, 2004 ) . Launderers frequently purchase concerns engaged in the cargo of goods and conceal the soiled money inside the merchandise. So they hide the true nature of their concern by privacy. Customss functionaries must pass most of their times and resources for inspecting people and lading coming. US imposts functionaries are really sensitive to the people and cargo coming into the United States, so it is comparatively easy to transport currency to another state which ‘s review is non comprehensive ( Reuter & A ; Truman, 2004 ) .

Casinos and other chancing locales are the other money washing instruments. French friess are bought with hard currency and after a period of clip, they are traded in for a cheque from the casino. When casino has constitutions in different states, it may function as an international bank if clients request their cheques made available in a casino in another state ( Reuter & A ; Truman, 2004 ) . Casinos are really attractive to money launderers because they often provide the same services as do Bankss such as widening recognition, altering currency, and conveying financess ( FinCEN 1996 ) . In the wake of the onslaughts on the World Trade Center and Pentagon, the USA Patriot Act of 2001 extended the coverage of minutess that exceed $ 10,000 to a host of other establishments including casinos, money sender services, auto traders and insurance companies ( Shields, 2005 ) .However to shut wholly near down this chance, all the authoritiess around the universe must implement the same demands. To be to the full effectual, the mandatary coverage demands must be internationalized.

Horse racing and lotteries are besides used to wash the money. Wining tickets are bought from the victors when they arrive at the lottery office with a little premium. In this manner, the launderer collects cheque from the path whereas the victors of the race and lotteries escape from the revenue enhancement liability.

Single premium insurance policies for which the premium is paid in an upfront ball amount is another manner of money laundering. Criminals purchase these insurance policies and so deliver them at a price reduction, pay the needed fees and punishments and have sanitized cheque from the insurance companies ( Reuter & A ; Truman, 2004 ) . Insurance policies are normally sold through the mediators, so insurance companies have no direct contact with the donee. In add-on, the longer term processes for individual premium contracts offer felons a lower hazard of sensing and besides excess clip for layering ( Reuter & A ; Truman, 2004 ) .

Securities are most normally used during the layering and integrating stages. During the layering measure, launderer purchase securities with illicit financess, so utilize the returns from selling these securities as legitimate money ( Reuter & A ; Truman, 2004 ) On the other manus carrier securities do non hold a registered proprietor. This means that, when they change hands the dealing involves merely physically passing over the security. So, the security proprietor merely the individual who possesses it ( Reuter & A ; Truman, 2004 ) . A figure of chance constructions make this concern an attractive mark for the money launderers. The first one is its nature of going international. Brokerage houses have offices all around the universe and it is ordinary for minutess to be conducted by wire transportation from, to or through multiple legal powers. The 2nd chance is that the securities are extremely liquid. Purchases and gross revenues can be made and colonies consummated within a really short period of clip. Third, security agents work in a really competitory environment. Agents get their money from the sale committees so they often disregard the beginning of their clients. Finally, as I wrote supra, in some states, securities histories can be maintained by securities firm houses as campaigners or legal guardians therefore allowing the individualities of true donees to be concealed ( FinCEN 1996 ) .

Historically, Bankss are the of import ways of money laundering. One of the manner to wash the reprehensively derived money through Bankss is to utilize the histories in false names, or in the names of individual or involvements runing on behalf of donees ( canvassers, lawyers, comptrollers, shell companies ) ( FinCEN 1996 ) . The histories are utilised to ease the sedimentation or transportation of illicit financess. Representative offices of foreign Bankss can accept sedimentations and reassign the financess to their ain histories with a local bank without unwraping the individualities of the depositors and donees. On the other manus wire transportations in which Bankss transfer control of money by directing presentment to another establishment electronically plays an of import function at all phases of washing procedure. Fundss can be transferred through several different Bankss in several legal powers in order to film over the trail to the beginning of the financess ( Reuter & A ; Truman, 2004 ) .

The electronic financess transfer systems which are SWIFT ( Society for Worldwide Interbank Financial Telecommunications ) , FEDWIRE ( Federal Reserve Wire Network ) and CHIPS ( Clearing House Interbank Payment System ) handle the monolithic volume of minutess. Each twenty-four hours more than 465,000 wire transportations valued at more than $ 2 trillion are moved by FEDWIRE and CHIPS and an estimated 222,000 transportation messages sent by SWIFT ( Shields, 2005 ) . Due to the high volume of minutess, jurisprudence enforcement bureaus have had great trouble supervising the flow of illicit financess over these wire transportation systems. The US Office of Technology Assessment sums up the chance construction of wire transportation systems to money launderers as follows ;

“ The fastest manner to travel 1000000s of dollars out of sight of jurisprudence enforcement is to utilize international wire transportations, even though this requires first puting the money into a bank. With about 700,000 wire transportations every twenty-four hours, illegal transportations are easy hidden. Their audit trails are obscured within tremendous databases that are by and large safe from jurisprudence enforcement research workers. By comparing, physically smuggling hard currency and even paper based pecuniary instruments across national boundaries – although frequently successful – is slow and unacceptable risky ” ( Shields, 2005 ) .

In 1999, jurisprudence enforcement bureaus pushed the Bankss to shut down one of the chance construction by implementing the “ cognize your client ” regulation. The regulation requires all fiscal establishments to develop elaborate profiles on their clients and find the beginning of financess that may be incommensurate with a client ‘s profile or typical bank activity ( Shields, 2005 ) . But strong resistance from fiscal establishments and civil autonomy groups obstructed the execution of this regulation.

Fiscal Action Task force ( FATF ) , reports that a important displacement has been happening in washing activities from the traditional banking sector to non-bank fiscal sector, and to non-financial concerns and professions ( FinCEN 1996 ) . For case, Bureaux de alterations ( Currency exchange agency ) pose an increasing money laundering menace. They attract the launderers because they are non as to a great extent regulated as Bankss and other fiscal establishments. Launderers use these topographic points in two ways. The first 1 is to alter big sums of condemnable returns in local currency into low majority of Euros or Dollars. The 2nd manner is to utilize electronic financess transfer to offshore centres. An seaward bank can be a bank anyplace in the universe that accepts sedimentations entirely on behalf of non-residents. These banking centres are place to more than $ 5,000 billion in assets, $ 1,000 billion in bank sedimentations and $ 4,000 billion held in the signifier of stock, bonds, existent estate and trade goods ( Henderson, 2003 ) . Many states that have small or limited foreign exchange and no chances of important economic chances realized the immense additions by merely going safe oasiss for foreign revenue enhancement and jurisprudence evaders ( Henderson, 2003 ) . These oasiss besides offer tools available merely to non occupants and merely to be used offshore, which are designed to get the better of the Torahs of other states. They enforce really rigorous fiscal secretiveness to efficaciously screen foreign investors from probes and prosecution from their place states.

Most late, the outgrowth of new payment engineerings such as “ cyberpayments ” has presented new challenges ( FinCEN 1996 ) . These systems involve new signifiers of currency such as stored value cards and web based merchandises which can be used to do payments over the cyberspace ( Shields, 2005 ) . These cards can besides be used by peddling machines or terminuss that deduct the sum of dealing. When the money inside the card is used, they can be reloaded in many ways. These merchandises have really high or even no bounds. They can be used at any take parting retail constitution. Some of them let value to be accessed and transferred without the demand for fiscal establishment mandate or interaction. It enables instantaneous entree to banking services from distant locations ( FinCEN, 1996 ) . These advantages of cyberpayments make it attractive for the launderers. The ability to carry on important minutess anonymously and wholly outside the banking system enables launderers to hedge the government of hard currency and fiscal establishment based preventive steps ( FinCEN, 1996 ) . These new engineerings make the sensing of illicit financess much more hard. They frequently rely on complex encoding engineerings that cut down the likeliness of dealing go forthing a traceable electronic trail. The developers of these payment methods are acute to foreground encryption-enabled remunerator namelessness as a merchandising point of their merchandises ( Shields, 2005 ) . Money launderers use this chance to go around 1000000s of dollars around the universe with small hazard of sensing. These new payment systems bypass most of the cardinal choking coil points that block the money laundering.

Liberalization of cross boundary line fiscal flows, the rapid deployment of electronic financess transfer webs has permitted organized offense to jump in front in their battle with jurisprudence enforcement. All these webs undermined jurisprudence enforcement ‘s “ follow the money ” attack and plunged jurisprudence enforcement bureaus into crisis ( Shields, 2005 ) . Consequently, the modern-day fiscal system and its emerging engineerings have become the dreams of money launderers.

As the technological developments undercut the control of provinces, the solution once more rests in the proficient sphere. Application of fiscal intelligence to fiscal dealing databases, technology an enhanced monitoring capableness into wire transportation systems will let the jurisprudence enforcement bureaus to shut the engineering spread on felons.

Peoples who are convicted of white collar types of offense in the federal judicial system are non like the people who are convicted at that place of ordinary street offenses ( Benson & A ; Simpson, 2009 ) . Those convicted of white colour offenses come from a different and societal and demographic background than common wrongdoers and bulk of them do non see themselves as condemnable or their activities as offenses. These people are comptrollers, notaries, fiscal advisors, stockbrokers, insurance agents, auto traders, auctioneers, casino operators, jewelry makers, and existent estate agents can affect in money laundering offenses. If they allow their concerns to be used by launderers, in most legal powers, they are besides thought to be money launderers. Now, all around the universe Torahs are being enacted for these concerns to develop their staff in relevant jurisprudence and steps to observe and discourage money laundering ( Silkscreen Consulting, 2009 ) .

Persons inside the fiscal establishments, for illustration, bank employees can be coerced or bribed non to register leery activity studies or currency dealing studies. On the other manus these signifiers may be filled out but non to direct to authorities, merely kept transcripts in instance of an probe ( Reuter & A ; Truman, 2004 ) . They may besides move wholly innocently and assist the felons to wash soiled money.

Lawyers are besides most common laundering agents or facilitators. A attorney can utilize his ain name to get bank histories, recognition cards or other money washing techniques on behalf of the client. In the event of the probe, lawyer- client confidentiality privileges can be invoked ( Reuter & A ; Truman, 2004 ) .

In decision, money laundering threatens states in several ways. First, washing activities increase the menace posed by serious offenses, such as drug trafficking, racketeering, and smuggling by easing the underling offense and supplying financess for reinvestment that allow particularly the organized condemnable endeavors to go on their operations. Second, from the economic position, it reduces the revenue enhancement grosss and establishes significant belowground economic systems which frequently stifle legitimate concerns and destabilise fiscal sectors and establishments. Finally, it undermines democratic establishments and threatens good administration by advancing public corruptness through kickbacks, graft, illegal run parts, aggregation of referral fees, and embezzlement of corporate revenue enhancements and licence fees ( Schroeder, 2001 ) .