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Everything You Need to Know About Money Laundering and Regulations

Money laundering is one of the most common financial crimes. It is a means of processing money made through criminal activity, and as such, governments have put increasingly strong controls on financial and other organisations.

But what exactly is money laundering? And what sorts of regulations can you expect to face when running a financial service provider? Why is it so difficult to sign up with banks,  remittances companies and corporate FX firms?

 

What is money laundering?

ustreasurylogoThe crime of money laundering has been around as long as people have been using money. The U.S. Treasury Department defines money laundering as “the process of making illegally-gained proceeds (i.e. dirty money) appear legal (i.e. clean)”. The Financial Conduct authority defines it similarly, and so does every other financial regulator across the globe.

Individuals or businesses that are making money through fraud or other crimes need a way to explain the influx of money. This usually takes 3 steps:

  1. Placement. The funds are furtively introduced into the financial system.
  2. Layering. The money is moved around through numerous accounts to create confusion.
  3. Integration. It is integrated into the financial system through additional transactions until the dirty money appears clean.

For example, a financial firm obtains a sum of money through fraudulent means that they cannot record in their books. Instead, they introduce it into their accounts bit by bit, under the guise of smaller, legitimate transactions that appear legal. They consequently layer and integrate it, to make it difficult for investigators to trace it back to its real source.

Anti-money laundering (AML) regulations have been developed to make it easier to detect fraudulent activity from the start. Financial institutions and other regulated entities are required to prevent, detect and report any potentially suspicious activity to government regulators.

Historic overview

Ancient times

Money laundering goes back at least to 2000 BC. Chinese merchants would hide money from rulers who would take it off them. They’d often move this money offshore. Essentially, this was early money laundering, as they were bringing illicit funds into the financial system.

Over the next 4000 years, money laundering was used similarly by minorities in order to hide their income from oppressive regimes. There have been various parallel banking systems to move this money around without the official financial systems.

 

The roaring 20s

In a more modern context, money laundering became especially relevant during the Prohibition era. Bootleggers of alcohol or operators of illegal casinos had to account for their incomes, and would open cash businesses. According to some, laundry businesses were a suitable and popular option, leading to the term money laundering.

The 70s: introducing the new era of AML

The United States’ Bank Secrecy Act (BSA), was one of the earliest and most important modern tools to fight money laundering. Introduced in 1970, the BSA put new requirements in place for private individuals, banks and institutions (essentially record keeping and reporting of transfers).

Banks were required to:

  • report cash transactions over $10,000 using the Currency Transaction Report
  • properly identify persons conducting transactions
  • maintain a paper trail by keeping appropriate records of financial transactions

The 80s and 90s: guilty until proven innocent

The so-called War on Drugs in the 1980s caused governments to put even stricter AML regulations in place. Bills were passed to root out loopholes and expand the definitions of companies under stricter regulations. Monetary transactions of over $3000 required identity verification.

Eventually, AML regulations turned the rules of evidence – innocent until proven guilty – upside down. Money could be confiscated and held until the individual or institution proves it was obtained legally.

The 2000s: defunding terrorism

After 9/11, America introduced the Patriot Act, and governments around the world tightened their AMLs in order to prevent individuals and institutions from funding terrorism. Regulations were put in place to facilitate better communication between countries, and keep more careful track of money that left the country.

The FATF

The Financial Action Task Force on Money Laundering (FATF) was formed by the G7 countries in 1989, with the task of:

  1. Monitoring members’ progress in implementing anti-money laundering measures.
  2. Reviewing and reporting on laundering trends, techniques, and countermeasures.
  3. Promoting the adoption and implementation of FATF anti-money laundering standards globally.

The FATF now has 36 member states and regions.

 

Famous incidents relating to money laundering

Al Capone

The famous mob boss might have inadvertently originated the term “laundering”. He laundered an estimated $1bn through various businesses. He started out with a chain of laundromats which were cash operated.

The BCCI scandal

The Bank of of Credit and Commerce International (BCCI) was the 7th largest private bank in the world. That is, before it was taken down by the CIA in a bust revealing a mass of money laundering activity. Some of their most famous clients were revealed to be Saddam Hussein and other dictators and terrorist leaders.

(fines by regulators, famous people who have been accused of it, terror activities that were funded this way etc.)

HSBC inadvertently helps fund terrorists

In 2012, a Senate report revealed that HSBC’s lax anti-money laundering procedures had helped for Mexican drug money, Iranian terrorist money, and suspicious Russian money enter the U.S. HSBC was ordered to pay $1.9bn in fines. To the ire of many, no jail time was handed to anyone responsible for the oversights. However, HSBC are still facing knock-on effects of this report today, with families of victims of Mexican drug cartel activity sueing the company. The 2016 Panama Papers scandal has also revealed more information on the HSBC’s illegal activities, days after monitors called their AML measures inadequate.

You can read about more bank scandals here.

The Panama Papers scandal

In April 2016, 11.5 million files were leaked from the world’s 4th biggest offshore law firm, Mossack Fonseca. The documents contained information on world leaders, politicians, and even sports stars using offshore accounts. Some of this information shows inconsistencies with AML regulations, as well as criminal activity.

Current policies

Current AML policies require the following:

  • assessing the risk of your business being used by criminals to launder money
  • checking the identity of your customers
  • checking the identity of ‘beneficial owners’ of corporate bodies and partnerships
  • monitoring your customers’ business activities and reporting anything suspicious to the National Crime Agency (NCA)
  • making sure you have the necessary management control systems in place
  • keeping all documents that relate to financial transactions, the identity of your customers, risk assessment and management procedures and processes
  • making sure that your employees are aware of the regulations and have had the necessary training

Regulations are put in place by both local and international authorities. Thus, each country will, in addition to the FATF’s regulations, have its own specifications.

Procedures for banks and money transfer companies to approve a transaction

AML regulations are particularly significant for banks and money transfer companies needing to approve international transactions. They are required to verify the identity of all their clients. Documentation proving the client’s identity, as well as the legitimacy of the money is required.

Future outlook

With money laundering still common and organisations still failing to comply with current regulations, governments are putting increasing accountability measures into place. As global terrorism continues to be a threat, with groups such as ISIS targeting European and American states, possible terrorist funding is being taken seriously.

Companies aim to develop quicker and more secure ways to comply with AML regulations, with improving technology allowing for greater data encryption. Thus, suspicious transactions will be more easily identified and reported.

Anti-money laundering regulations have been around in some form as long as money has existed. The 20th Century brought increased regulations in order to counter illegal activities, especially those involving drug cartels and terrorist organisations. Still, some banks and financial organisations have had major lapses, and even with AMLs it is unlikely that money laundering will ever be entirely eradicated.

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