Money laundering

Money laundering is the process of creating the appearance that large amounts of money obtained from serious crimes, such as drug trafficking or terrorist activity, originated from a legitimate source. It is a crime in many jurisdictions with varying definitions. It is a key operation of the underground economy.

In US law it is the practice of engaging in financial transactions to conceal the identity, source, or destination of illegally gained money. In UK law the common law definition is wider. The act is defined as taking any action with property of any form which is either wholly or in part the proceeds of a crime that will disguise the fact that that property is the proceeds of a crime or obscure the beneficial ownership of said property.

In the past, the term "money laundering" was applied only to financial transactions related to organized crime. Today its definition is often expanded by government and international regulators such as the US Office of the Comptroller of the Currency to mean any financial transaction which generates an asset or a value as the result of an illegal act, which may involve actions such as tax evasion or false accounting. In the UK, it does not even need to involve money, but any economic good. Courts involve money laundering committed by private individuals, drug dealers, businesses, corrupt officials, members of criminal organizations such as the Mafia, and even states.

As financial crime has become more complex, and "Financial Intelligence" (FININT) has become more recognized in combating international crime and terrorism, money laundering has become more prominent in political, economic, and legal debate. Money laundering is ipso facto illegal; the acts generating the money almost always are themselves criminal in some way (for if not, the money would not need to be laundered).

Definitions
To save repetition, this article uses the terms "clean" to mean money legally obtained, and "dirty" to mean money illegally obtained.

Modern development
Invention of money laundering Money laundering is not a crime invented during the Prohibition era in the United States, but techniques were developed and refined then. Many methods were devised to disguise the origins of money generated by the sale of illegal alcohol. After Al Capone's 1931 conviction for tax evasion, mobster Meyer Lansky transferred funds from Florida "Carpet Joints" to accounts overseas. After the 1934 Swiss Banking Act, which created the principle of bank secrecy, Lansky bought a Swiss bank into which he could transfer his illegal funds through a complex system of shell companies, holding companies, and offshore bank accounts.

In the post-World War II era, legislators found themselves in a quandary as they were confronted with a growing list of commercial, fiscal, and environmental offenses that did not actually cause direct harm to any one identifiable victim; there was no stinking corpse. Since human greed and the profit motive fuel organized crime, they decided that confiscating the proceeds of crime would adequately deter potential criminals. Anxious to avoid confiscation, organized criminals now needed to give these huge sums of money – not easily consumed or invested in the legal economy without raising eyebrows – a patina of legitimacy: they needed to "launder" it. Money laundering has been dubbed the "Achilles’ heel of organized crime", for it compels mobsters to seek out and co-opt established businessmen and women with highly technical know-how and access to legal institutions like banks to launder their plunder.

The term "money laundering" does not derive, as is often said, from Al Capone having used laundromats to hide ill-gotten gains. It is more likely to mean that dirty money is made clean. At some point in the process there must be a switch between the two; necessarily the art is to keep that switch hidden.

Meyer Lansky perfected a predecessor of money laundering, "capital flight," transferring his funds to Switzerland and other offshore places. The first reference to the term "money laundering" itself actually appears during the Watergate scandal. US President Richard Nixon's "Committee to Re-elect the President" moved dirty campaign contributions to Mexico, then brought the money back through a company in Miami. It was Britain's The Guardian newspaper that coined the term, referring to the process as "laundering." (See Jeffrey Robinson's three books on money laundering, The Laundrymen, The Merger and The Sink.)

Money may be laundered through a complex business network of shell companies and trusts based in tax havens. "Smurfing" is an example of a money laundering technique.

Cashing up
A business taking large amounts of small change each week (e.g. a convenience store) needs to deposit that money in a bank. If its deposits vary greatly for no obvious reason this can draw suspicion; but if the transactions are regular and roughly the same the suspicion is easily discounted. This is the basis of all money laundering, a track record of depositing clean money before slipping through dirty money.

In the United States, for example, cash transactions and deposits of more than $10,000 must be reported by the cashier (the bank etc) as "significant cash transactions" to the Financial Crimes Enforcement Network FinCEN, with any other suspicious financial activity identified as "suspicious activity reports" (SARs).

In other jurisdictions suspicion-based requirements may be placed on financial services employees and firms to report suspicious activity to the authorities.

Irregular funding
One way to keep cash anonymous is to give it to another who is already legitimately taking in large amounts of cash. The intermediary then deposits the money in an account, takes a premium, and writes a cheque. Little attention is drawn because, for the intermediary, it is a relatively small amount of the usual takings, but for the originator it is all of his takings. This works well for one-off transactions, but if it happens regularly then the cheques themselves form a paper trail that can raise suspicion.

Captive business
Another method is to start a business whose cash inflow cannot be monitored, and funnel the small change into it and pay taxes on it. But all bank employees are trained to be constantly on the lookout for transactions that seem to be trying to get around reporting requirements. To avoid suspicion, shell companies should deal directly with the public, perform some service (not provide physical goods), and have a business that reasonably would accept cash as a matter of course. Dealing directly with the public in cash gives a plausible reason for not having a record of customers.

For example, it is quite reasonable to think that a hairstylist is paid in cash and, even if she knows her customer's names, does not know their bank details. A record of a haircut must ostensibly be accepted as prima facie evidence. Service businesses have the advantage of the anonymity of resources &mdash; but the disadvantage that they must deal in cash. A business that sells computers has to account for the computers, whereas the hairstylist does not have to produce the cut hair, but the receipt for the computer, even if inflated, exists &mdash; that for the haircut probably does not. It is of course also possible to invent customers, purely for the purpose of accepting money from them.

Legislation
Many jurisdictions adopt a list of specific predicate crimes for money laundering prosecutions as a "self launderer".

Bangladesh
In Bangladesh, this issue has been dealt with by the Prevention of Money Laundering Act, 2002 (Act No. VII of 2002). In terms of section 2 (tha), "Money Laundering means (a) Properties acquired or earned directly or indirectly through illegal means; (b) Illegal transfer, conversion, concealment of location or assistance in the above act of the properties acquired or earned directly of indirectly through legal or illegal means." In this Act, “Properties means movable or immovable properties of any nature and description”.

India
The Prevention of Money-Laundering Act, 2002 came into effect on 1 July 2005. Section 3 of the Act makes the offense of money-laundering cover those persons or entities who directly or indirectly attempt to indulge or knowingly assist or knowingly are party or are actually involved in any process or activity connected with the proceeds of crime and projecting it as untainted property, such person or entity shall be guilty of offense of money-laundering.

Section 4 of the Act prescribes punishment for money-laundering with rigorous imprisonment for a term which shall not be less than three years but which may extend to seven years and shall also be liable to fine which may extend to five lakh rupees and for the offences mentioned [elsewhere] the punishment shall be up to ten years.

Section 12 (1) prescribes the obligations on banks, financial institutions and intermediaries (a) to maintain records detailing the nature and value of transactions which may be prescribed, whether such transactions comprise of a single transaction or a series of transactions integrally connected to each other, and where such series of transactions take place within a month; (b) to furnish information of transactions referred to in clause (a) to the Director within such time as may be prescribed and to (c) verify and maintain the records of the identity of all its clients. Section 12 (2) prescribes that the records referred to in sub-section (1) as mentioned above, must be maintained for ten years after the transactions finished.

The provisions of the Act are frequently reviewed and various amendments have been passed from time to time.

United Kingdom
The United Kingdom has an "all-crimes" regime.

Money laundering legislation in the UK is governed by four Acts of primary legislation:-


 * The Terrorism Act 2000
 * The Anti-Terrorist Crime & Security Act 2001
 * The Proceeds of Crime Act 2002
 * Serious Organised Crime and Police Act 2005

Secondary regulation is provided by the Money Laundering Regulations 2003. and 2007

Professional guidance (which is submitted to and approved by the UK Treasury) is provided by industry groups including the Joint Money Laundering Steering Group. and the Law Society

In the UK "money laundering" does not necessarily involve money (relating to assets of any kind, both tangible and intangible, and to the avoidance of a liability), also not necessarily passing on the assets: a thief's possession himself is included. There is no lower limit to what has to be reported&mdash; a suspicious transaction involving 1 penny must be reported. Technically, everyone, not just financial services employees or firms, is required to report, and get consent for, his own involvement in crime or suspicious activities involving money or assets of any kind. A thief who steals a vest from a clothes store commits, as well as common theft, a money laundering offense: because he has possession of an asset derived from crime. He is technically required to seek consent from law enforcement for his continued possession of the vest if he is to avoid risk of prosecution for money laundering.

Under the UK law, it is a money laundering offense when a person enters into, or becomes concerned in, an arrangement which facilitates by whatever mean the acquisition, retention, use, or control of criminal property by another person. This has concerned lawyers and other professional advisers who act for clients charged with these offences, since they are brought under the same law themselves.

Because the UK legislation is wide-ranging, the Serious Organised Crime Agency receives many SARs; in 2005 nearly 200,000. The number of SARs appears to be growing by almost 50% each year.

The UK legislation was relaxed slightly in 2005 to allow banks and financial institutions to proceed with low value transactions involving suspected criminal property without requiring specific consent for every transaction, but the reporting of all transactions is still required.

Bureaux de change
All UK Bureaux de change are registered with HMRC using form MLR100, which issues a trading licence for each location. MLR8 is also applied to each outlet making AML checks a requirement. Checks can be carried out by HMRC on all MSB's, however this tends to be conducted only against money transmitters.

United States
In US law, "reasonably accepting cash" means the business must regularly perform services that on average are less than $500 each. It is assumed that above that amount most people pay with a check, a credit card, or another (traceable) payment method. The company should actually function on a legitimate level. In the hairstyler example, it is perfectly reasonable for a lot of the business to involve mostly labour (dyes and machine oil and so forth being relatively small concerns), and for most transactions to be settled in cash. But it is unreasonable for all of the business to work without parts and just on cash. So the legitimate business will generate a legitimate (if low) level of parts use, and enough traceable transactions to mask the illegitimate ones.

Anti-money laundering (AML/CFT) laws typically have other offences such as "tipping off (warning)", "willful blindness", "not reporting suspicious activity", "conscious facilitation of a money launderer", "assisting a terrorist financier with moving terrorist financing".

The Bank Secrecy Act of 1970 requires banks to report cash transactions of $10,000.01 or more. The Money Laundering Control Act of 1986 further defined money laundering as a federal crime. The USA PATRIOT Act of 2001 expanded the scope of prior laws to more types of financial institutions, and added a focus on terrorist financing, specifying that financial institutions take specific actions to "know your customer" (KYC).

In the United States, Federal law provides: "Whoever ... knowing[ly] ... conducts or attempts to conduct ... a financial transaction which in fact involves the proceeds of specified unlawful activity ... with the intent to promote the carrying on of specified unlawful activity ... shall be sentenced to a fine of not more than $500,000 or twice the value of the property involved in the transaction, whichever is greater, or imprisonment for not more than twenty years, or both.''

While money laundering typically involves the flow of "dirty money" (criminal proceeds) into a clean bank account or negotiable instrument, terrorist financing frequently involves the reverse flow: apparently clean funds converted to "dirty" purposes. A hawala may launder drug proceeds and help fund a terrorist, netting the incoming and outgoing funds with only occasional small net settlement transactions.

NASA case
From 1992 to 1996 a nine-agency Federal Task Force investigation led by NASA's Office of Inspector General investigated Omniplan Corporation of Houston and California. It became the largest count indictment and conviction in NASA history, with the owner of Omniplan, Ralph Montijo, being convicted of 179 felonies in his multi-million dollar embezzlement scheme. Five of his companies were also convicted of felonies, they were, Omniplan, Papa Primo's of Texas, Papa Primo's of Arizona, Omnipoint Production Services and Mercury Trust. These companies, together with two unincorporated companies, Space Industries Leasing and Space Industries Properties were liquidated. Each embezzlement count was associated with a corresponding money laundering count which resulted in dozens of convictions for money laundering. In a New York Times story, NASA Office of Inspector General Senior Special Agent Joseph Gutheinz, who led the Omniplan investigation, said "We didn't get any pizzas, but we got the bills", referring to the fact that some of the alleged mischarging to the NASA contract also involved costs associated with two of Ralph Montijo's pizza companies, Papa Primo's of Texas, and Papa Primo's of Arizona.

Laundered or not?
Money obtained by an illegal action is not, of itself, laundered money. The laundering offense comes from the attempt to conceal its source, not because the transaction was itself illegal (which is a separate offense).

The Supreme Court of the United States on June 2, 2008, rendered two judgments in favor of defendants, narrowing the application of the federal money-laundering statute.

In a unanimous opinion written by Justice Clarence Thomas, the Court reversed Acuna, Mexico's Humberto Cuellar's conviction and ruled that "hiding $81,000 in cash under the floorboard of a car and driving toward Mexico is not enough to prove the driver was guilty of money laundering; instead, prosecutors must also prove the driver was traveling to Mexico for the purpose of hiding the true source of the funds." That is, the prosecution had not made its prima facie case. The Court further ruled "that federal prosecutors have gone too far in their use of money laundering charges to combat drug traffickers and organized crime; that money laundering charges under the Money Laundering Control Act of 198, Sec. (a)(2)(B)(i) apply only to profits of an illegal gambling ring and cannot be used when the only evidence of a possible crime is when a courier headed to the Texas-Mexico border with $81,000 in cash proceeds of a marijuana transaction; it cannot be proven merely by showing that the funds were concealed in a secret compartment of a Volkswagen Beetle; instead, prosecutors must show that the purpose of transporting funds in a money laundering case was to conceal their ownership, source or control; the secrecy must be part of a larger design to disguise the source or nature of the money."

Later, in a divided decision, the Court reversed the convictions of Efrain Santos of Indiana and Benedicto Diaz for money laundering based on cash from an illegal lottery. In the plurality opinion, Justice Antonin Scalia wrote that the law referred to the "proceeds of some form of unlawful activity; paying off gambling winners and compensating employees who collect the bets don't qualify as money laundering; the word “proceeds” in the federal money-laundering statute,, and §1956(a)(1)(A)(i) and §1956(h), applies only to transactions involving criminal profits, not criminal receipts; those are expenses, and prosecutors must show that profits were used to promote the illegal activity." Congress clarified the meaning of the statute in the Fraud Enforcement and Recovery Act of 2009, defining proceeds explicitly to include both profits and gross receipts.

Congress enacted the 1986 statute after the President's Commission on Organized Crime stressed the problem of "washing" criminal proceeds through overseas bank accounts and legitimate businesses. It imposes a 20-year maximum prison term.

In Canada
The battle against money laundering is directly related to the war against drugs and drug criminals. The United Nations Commission on Narcotic Drugs estimates the annual volume of drug trafficking is close to $500 billion. Of, that amount, about 70% is laundered. In Canada, the RCMP estimates that the drug trade has the ability to reach more than US$3 billion at the wholesale level which translates to about US$13 billion at street level for the criminals. Canada's war against drug abuse includes implementing laws, but they focus mainly on prevention, education, treatment, and rehabilitation. Canada has also increased guidelines for testing, law enforcement and research. In addition, Canada has focused it's resources in reducing the supply and demand for the illegal drugs. The 11 federal agencies and departments dealing will this issue spent US$500 million in 2001 and an additional US$500 million in 2002.

Canada launched the first comprehensive drug enforcement strategy, Canada's Drug Strategy(CDS). This national drug strategy was the result of the original National Drug Strategy, launched in 1987 being merged with the already functioning National Strategy to Reduce Impaired Driving. This new, combined, strategy has the goal to: “reduce the harm associated with alcohol and other drugs to individuals, families, and communities. The strategy reflects a balance between reducing the supply of drugs and reducing the demand for drugs. It involves a variety of partners including 14 federal departments, provincial/territorial governments and addictions agencies, non-governmental organizations, professional associations, law enforcement agencies, the private sector, and community groups.”

The National Initiative to Combat Money Laundering, with the involvement of the Solicitor General of Canada, the RCMP, Justice Canada, Canada Customs and Revenue Agency, and, Citizenship and Immigration, began operation in 1998.

Fighting money laundering
The first defence against money laundering is the requirement on financial intermediaries to know their customers&mdash; often termed KYC know your customer requirements. Knowing one's customers, financial intermediaries will often be able to identify unusual or suspicious behavior, including false identities, unusual transactions, changing behaviour, or other indicators of laundering. But for institutions with millions of customers and thousands of customer-contact employees, traditional ways of knowing their customers must be supplemented by technology. Companies such as Lexis Nexis and WorldCompliance provide software and databases to help perform these processes. Bank and corporate security directors can also play an important role in fighting money laundering.

Using information technology
Information technology can never be a replacement for a well-trained investigator, but as money laundering techniques become more sophisticated, so too does the technology used to fight it. Before anti-money laundering programs became commonplace, in the U.S. the Bank Secrecy Act required financial institutions to file Currency Transaction Reports for cash transactions of more than $10,000. These CTRs prove invaluable for investigators, but money launderers began to structure their transactions to avoid the reporting requirements. As a result, the U.S. passed laws against structuring transactions to avoid the reporting requirements, and most structuring would trigger a Suspicious Activity Report by the financial institution.

The various software packages are capable of name analysis, rule-based systems, statistical and profiling engines, neural networks, link analysis, peer group analysis, and time sequence matching. Also, there are specific KYC solutions that offer case-based account documentation acceptance and rectification, as well as automatic risk scoring of the customer taking account of country, business, entity, product, transaction risks that can be reviewed intelligently. Other elements of AML technology include portals to share knowledge and e-learning for training and awareness.

This software is not used exclusively to track money laundering, but more often the common theft of credit cards or bank details. Unusual activity on an account may trigger a call from the card issuer to make sure it has not been misused.

Financial Crimes Enforcement Network FinCEN is an organization created by the United States Department of the Treasury. FinCEN receives Suspicious Activity Reports from financial institutions, analyses them, and shares their data with U.S. law enforcement agencies and Financial Intelligence Units FIUs of other countries. One of its strategic goals is to improve information-sharing through eGovernment. It offers training and advice to organizations of foreign governments to help improve the efficacy of their own anti-money laundering programs.

9/11 and the international response to the underground economy
After September 11, 2001, money laundering became a major concern of the United States' war on terror, although critics argue that it has become less and less important for the White House.

Clearstream International, based in Luxembourg, was a central securities depository and clearing house, a "bank of banks" which practiced financial clearing and centralized debit and credit operations for hundreds of banks. It was accused of being a major operator of the underground economy via a system of unpublished accounts. Bahrain International Bank, owned by Osama bin Laden, would have profited from these transfer facilities. The scandal prompted André Lussi, Clearstream's CEO, to resign on 31 December 2001; several judicial investigations were opened and the European Commission was interpelled by Members of the European Parliament (MEPs) Harlem Désir, Glyn Ford, and Francis Wurtz, who asked the Commission to investigate the accusations and to ensure that the 10 June 1990 directive (91/308 CE) on control of financial establishment was applied in all member states, including Luxembourg, effectively.

The international response to the underground economy has been coordinated by the "FATF" (also known by its French acronym of "GAFI"), whose original 40 principles form the basis of most international responses to money laundering. A further 8 principles, designed to counteract funding to terrorist organisations, were added on 30 June 2003, in response to the 9/11, with another added 22 October 2004, to form what are now known as the (AML/CFT). Compliance with these principles, or at least a move towards them, is now seen as a requirement of an internationally active bank or other financial service entity.

Amounts
Many regulatory and governmental authorities quote estimates each year for the amount of money laundered, either worldwide or within their national economy. A frequently cited figure is 2-5% of the worldwide global economy, stated by the IMF. But some academics note that such figures are usually simply "best guesses". In 1997 the FATF, an arm of the OECD set up to combat money laundering, frankly admitted "the vast majority of FATF members lack sufficient data to support any credible estimate." Although admissions of that nature are no longer maintained, there is still a dearth of data on the actual amounts of money laundered worldwide. Some academic commentators have expressed real concerns about the reliability and basis of figures used by governmental and multinational organizations. It is always hard to find out real figures about illegal acts.

We are faced with the problem that there has been little work to develop an objective academic analysis of the true extent of laundering, which means that we do not have a framework within which the appropriateness of legislative measures can be evaluated. Without this, it is difficult to challenge the 'alarmist' position of the authorities whereby such estimates have been put forward, quoted and repeated, becoming, through such repetition, seemingly established truths. It can be argued ... that global estimates are little more than informed guesses: "large numbers are frequently thrown around without serious support" (Reuter and Truman, 2005, p.56), reproduced to the point at which they gain, through mere repetition, [they are perceived to have] some form of reliable accuracy.

On television

 * Money laundering is the subject of several episodes of The Sopranos.
 * Episode 132 of The Simpsons featured a money laundering gag. The gang leader Fat Tony hosted a dinner for the criminal fraternity and informed his guests that if they needed any money laundered, they could leave it outside their door overnight and it would be ready for them in the morning.
 * In the series Big Love, Lois Henrickson opens a laundromat as a means to launder money that she has illegally obtained.
 * In the Showtime series Weeds Nancy launders money through various fake businesses.
 * Katrina Rafferty's character Teddy Picker Girl is said to be a money launderer in TV show Funland
 * In Burn Notice Michael Weston continually uses money launderer Barry for favors.
 * In Breaking Bad Walter White is seen laundering money, both in the common sense (through a shady lawyer with underground connections), and in the literal sense (drying wet cash in a clothes dryer).
 * In The Shield, Vic and his Strike Team steal millions of dollars from a money laundering operation run by the Armenian mob.

In film

 * Money laundering is one of the main subjects of the 2006 documentary Cocaine Cowboys.
 * In Layer Cake, the main unnamed character discusses how the profits from selling cocaine are laundered through a local financial institution.
 * In Scarface, drug kingpin Tony Montana launders money through a series of shell businesses.
 * In Office Space, the main characters discuss the possibility of laundering money they've stolen from their company, but the plan fails when they realize they know nothing about the practice and try to look up money laundering in a dictionary.
 * One of the purest examples of layering comes at the end of Millions, in which an ordinary family exchanges stolen British pounds for euro in many small, apparently untraceable transactions at banks all over the city.
 * In Mad Money, the main characters steal money from a Federal Reserve Bank and then attempt to conceal their gains through concocting innocent-sounding reasons for them to have gained it. This is undone when one of them makes a transaction of more than $10,000, thus triggering the financial reporting mechanisms in the Bank Secrecy Act.
 * A literal interpretation of money laundering is shown in the film To Live and Die in L.A.. A counterfeiter sets up shop in a rented warehouse, equipped with engraving equipment, a printing press, and a new clothes washer and dryer. After he prints a batch of new bills, the counterfeiter bundles them into the washer and washes them with hot water and detergent; then he dries them on high heat. By doing so, he turns his crisp, new bills into rumpled, faded, used-looking bills.
 * In License to Kill a drug dealer creates a cult to launder drug money.
 * In Donnie Darko, there is a clip of George H. W. Bush on television denying the purported money laundering activities of Manuel Noriega.
 * In Mickey Blue Eyes, the family of Michael's fiance is deeply involved in Mafia crime. Michael is unwittingly involved in a money laundering scam.
 * In Blow, titular character George Jung narrates that he has forgone the opportunity to launder his drug proceeds for a sixty per-cent fee, instead opting to deposit the money in a Panamanian bank. This decision proves poor, as Panama seizes the assets of their banks' account holders when Manuel Noriega takes control of the small country, leaving Jung penniless. The real-life George Jung lost this money when his wife accidentally burned a box containing the only proof of his ownership of these numbered bank accounts.
 * In the 1990 film Ghost, the villains are involved in laundering drug money through an investment bank.

In music

 * In 2004 Hip-hop recording label Murder Inc (run by brothers Irv “Gotti” and Chris Lorenzo) was suspected of laundering money for drug kingpin Kenneth "Supreme" McGriff. The brothers were acquitted of all charges by a jury on December 2, 2005.