Money Laundering

Money laundering is the process of generating a large amount of money from illegal sources. People launder money because the process is a profitable business activity. Schaap (1998) informs the reader   that the term money-laundering was established in 1970s by US investigators. During this period, the term was used in the Watergate scandal and in 1980s, the term was internationally acceptable following the various scandals of drug-trafficking in the world.  This period marked the history of money laundering and the history of crime had never given an account of such cases before (Schaap, 1998). Even though criminals formed organized crimes which were related with money laundering, there is a big difference between traditional and modern organized crimes since in modernity; criminals have knowledge and skills on modern technology which allows them to become money-laundering professionals. Money laundering is a global threat which is affecting economy and security. According to ‘Financial Action  Task Force’ money laundering is a process where criminals conceals their illegal activities of generating money  and they  gains  an opportunity to spend them in legal economy (Turner, 2011). They conceal the acts so that they can retain control and enjoy a high income and wealth.  Money derived from illegal activities is referred to as ‘dirty money’ and criminal activities associated with money laundering include sexual exploitation, kidnapping, corruption, human trafficking, and drug trafficking among many (Turner, 2011). Criminals deposit money in foreign financial institutions to avoid taxing authorities. For example, criminal conceal the source of dirty money  through depositing the  dirty money in different financial  institution using fake names,  deposits  the money using  bearer  instrument and investing money in corporations (Hopton, 2016). Criminals are not interested in converting the money into property but rather they focus on concealing the illegal source.  Their aim is to generate a large profit and use a proportion of the amount   in proceeding with criminal activities. Money laundering is an activity which is done in different forms in terms of participants and settings. Criminals can use large respectable banks which serve customers well or small non-financial businesses (Hopton, 2016). In most cases, criminals do not conduct international transactions but they deal with domestic and national transactions. After laundering money, criminals carry out other procedures based on transfer and deals to make the money appear to be derived from legitimate source (Hopton, 2016).

 

Laundering Mechanisms

Placement

 Placement is the process of depositing a large amount of illegitimate fund in banks and financial systems. The fund may be derived through criminal activities such as drug trafficking, extortion among other forms of crime. The purpose of this process is to ensure that the illegal money is separated from the original sources and the criminals may decide to deposit the money in different financial institution in different volume (Booth, 2011). Criminals believe that the process is less suspicious and will allow them proceed with money laundering and avoid detection.  Criminals transport the cash using smuggling methods such as concealing money in cargo or use of mailing packages.They deposits money in financial institution using different methods such as smurfing- this involves depositing small amount of cash of less than 10,000 in different banks (Booth, 2011).  Different people will have named accounts where they access bank drafts which avoid transaction reporting. Another method which is used in depositing money is electronic wire transfer- this is a process where criminals use electronic payment where they can transfer money in different account. Next, investment related transaction is also used in placement where criminals request investment management services. They also do placement in Non-bank financial services where criminals are involved in currency exchange (Booth, 2011). 

 

Layering

  After placing funds in the financial system, financial operations are done to create a legal origin. Offshore mechanisms are needed to mislead the investigators in finding the origin source. The accumulated funds are converted into checks and orders and combined with assets to avoid suspicion. Apart from offshore corporations, other layering techniques include bank secrecy laws for shielding the foreign investors from conducting investigation (Hopton, 2016). Criminals use intermediaries such lawyers for the purpose of creating insulation, confidentiality and relationship. Layering involves the transfer of money in different financial institutions especially in countries where there is poor law enforcement. Corporate structures are used to conceal the real detains and show anonymity (Hopton, 2016). The purpose of this process is to break the bookkeeping trail and conceal the root source of the money.  In layering, consecutive electron transactions are done where large amount of money is reduced in volume.

 Integration

 The process involves the act of moving the washed money into financial institutions and in this process, criminals they can withdraw and spend it for economic purposes. The clean moneys appear to be normal business money where it can be used for long term or short term investment in legal economy. The ill-gotten money is recycled and put in the legal economy (Hopton, 2016). Criminals may conduct business operations such as purchasing real estate, luxury goods and more in the legal economy. When money is used in the legal economy, criminals tend to develop a legitimacy perception where it becomes hard to make out whether the money is legal or illegal. Criminals gain an opportunity to create wealth and proceed with money laundering (Hopton, 2016).  In integration, criminals use techniques such as Haven Bank, Credit Cards where they use these tools to repatriate funds while omitting the financial trail. They also arrange corporate loans where they give local business loans and expect return with interest. Real estate transactions is also a technique where criminals sells a property to offshore companies through in inflated cost and receives it as a capital gain (Hopton, 2016).

Money laundering and terrorist financing

 Terrorism is among the categories of offences and this is a type of offense which   converts both legitimate and illegitimate money into criminal use.  First, it is important to understand that the international law defines the ‘act of terrorism’ as the   intentional criminal act which causes violence to a target population for political purpose (Booth, 2011).  On the other hand, organized crime has the objective of gaining money but not causing coercion to the population. However, both require financial support to complete their activities as planned. Other thing to understand is that ‘financing of terrorism’ is the process of supporting terrorists in term of providing financial support (Booth, 2011).

Hopton (2016) asserts that terrorism objective is to cause coercion to the population and governmental organizations toward engaging or refraining from certain actions. The book states that the fund which supports terrorists’ activities is derived from two major sources.  The firs source is organizations and the second is source is legitimate or illegitimate sources such as charities and drug-trafficking (Hopton, 2016). First, terrorism acquires money from criminal assets-money derived from activities such as drug trafficking, kidnapping and more. They also derive money (clean fund) from political parties. Other source is money laundering- this means that money is raised from money laundering activities such as drug trafficking, prostitution and corruption to support the activities. Hopton (2016) Drug trafficking is known to be the major criminal activity which funds terrorism.  Nonetheless, there are also activities which funds the terrorism such as’ revolutionary tax’, human trafficking and more. During the period of cold war, terrorist organizations derived fund from government but the end of cold war terminated the governmental source and terrorists are forced to get support from other sources (Hopton, 2016). For example, The Irish Republican Army gets financial support from Irish community and other terrorists organizations such as Armenian terrorists, Al-Qaeda and others gets financial support from expatriates. Generally, organizations seek support from charitable organizations which allows individuals, private business and government to establish legitimate and illegitimate proceeds and this makes it hard for investigators to make out whether the money is clean or not (Hopton, 2016).

Example of terrorist groups

Jemaah Islamiyah is a militant Islamist group in Southeast Asia and it was established in 1993.   The group is an Indonesian Islamist and Indonesia is a country which has poor regulations on financial system, poor law enforcement and effective tactics of attacking targeted population.  Jemaah Islamiyah gets finance from money laundering and in specific activities such as corruption, prostitution, theft, credit card fraud and more World Bank. (2009). They offshore the illegal activities and the money is brought back for commercial needed. The second terrorist group which benefit from money laundering is an American organized group called The Sicilian mafia. The group gets support from drug trafficking. Since the U.S government has put regulations on illegal assets, the group conduct overseas drug trafficking to gain profit Savona, 2005).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reference

Hopton D. (2016).  Money Laundering: A Concise Guide for All Business. CRC Press

 

Booth, R. (2011). Money laundering law and regulation: A practical guide. Oxford: Oxford University

Press.

 

Schaap, C. D., & Nederlands Instituut voor het Bank- en Effectenbedrijf. (1998). Fighting money

laundering: With comments on the legislation of the Netherlands Antilles and Aruba. London:

Kluwer Law International.

 

Turner, J. E. (2011). Money laundering prevention: Deterring, detecting, and resolving financial fraud.

Hoboken, N.J: Wiley.

 

Savona E.  (2005). Responding to Money Laundering. Routledge

 

World Bank. (2009). Combating money laundering and the financing of terrorism: A comprehensive

training guide. Washington, D.C: World Bank.