Anti Money Laundering Blog

Money laundering is often conceptually linked with offshore, therefore the term “offshore” itself is worth discussion. This has already been discussed, indeed, however, new valuable information regarding this has recently emerged.

When talking about offshore companies and onshore companies, business, bank accounts, transactions, whatever else, for some reason “offshore”often has a negative connotation, while “onshore” – a positive one. Does this have any grounds? Probably not, as the International Trade and Investment Organisation (ITIO) commissioned a report with quite a peculiar statement.

On May 1, 2007, the ITIO, which is a group of small countries with international financial centres across Europe, the Caribbean, Latin America, the Pacific and Asia. I, released a report entitled “Assessing the Playing Field“ stating that there is no big difference between offshore and onshore financial centres and disproving that offshore centres have weaker regulation standards than onshore ones. The report is based on an analysis of objective data compiled by the Organisation for Economic Cooperation and Development.

Based on the conclusions made in the report, ITIO Deputy Chair Malcolm Couch says that “it’s time to stop treating small countries with finance centres as different” adding that “big countries have no moral or legal edge over small ones”. He also suggests that ”large countries should stop stigmatising small and developing ones”, because there is no factual basis for that. According to Couch, both large and small countries should continue “to work on a cooperative and fair basis” as well as to participate in the OECD’s Global Tax Forum aimed at helping each other tackle tax evasion and criminal and terrorist financing.

The report suggests that large countries should open up access to the international network of double taxation treaties to small ones.

Insider trading (or insider dealing) is often regarded as something connected with money laundering. While the offence of insider trading may not predicate the offence of money laundering, the offence of money laundering could arise in case inside dealing involves engaging in a business transaction that involves property acquired with proceeds of illegal activity. Also, insider trading may be related in corruption, which may be related to money laundering. Therefore, insider trading is quite worth discussion.

First of all, it is worth indicating that insider trading is a term that includes both legal and illegal conduct. However, most people usually associate it with illegal conduct.

Legal insider trading is when corporate insiders (including directors, officers, employees) buy and sell stock in their own companies. When trading in their own securities (like bonds or stock options), they usually must report their trades to the Securities and Exchange Commission.

Illegal insider trading generally regards buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, when having some material nonpublic information about the security at one’s disposal. The prevention of insider trading is widely considered to be an important function of securities regulation.

However, some economists and legal scholars consider that insider trading should be absolutely legalized because insider trading based on material nonpublic information benefits investors by means of introducing new information into the market more quickly. They also suggest that insider trading has nothing to do with crime as it has nothing to do with victim – a willing buyer and a willing seller agree to legally trade – so who’s the victim?

Still, pros and cons of insider trading are not the subject under consideration here. What is important is that if illegal insider trading is connected with money laundering it must be identified and punished.

The US Securities and Exchange Commission has compiled a list of anti-money laundering laws and rules. These apply to brokerage firms. The guide aims at providing all the information available through a single location in order to allow the firms to easier comply with the regulations.

The summarized information in the research guide compiled by the staff of the US Securities and Exchange Commission is current as of January 1, 2007.

The SEC has assembled key laws, rules and guidance applicable to brokerage firms and posted it on its Web site. So, the Guide is available online.

The guide includes the requirements under the Patriot Act, the Bank Secrecy Act and other laws, as well as provides a list of contact information.

Men are the ones to be more often the victims of Internet fraud. Also, they used to lose more money than women.

In accordance with annual report published by the FBI’s Internet Crime Complaint Center, a typical victim of Internet fraud is a 30-40-year-old man from New York, California, Florida, or Texas. As to victims of Internet fraud living outside the USA, a substantial number lived in the UK, Nigeria, Canada, Romania and Italy.

According to the report, in 2006 men lost USD 1.69 to every USD 1 that women lost.  

The 2006 Internet Crime Report is the 6th annual study based on complaints referred to law enforcement or regulatory agencies. Between January 1 and December 31, 2006, the web site received 207 492 complaints, which is a 10.4% decrease from the number of complaints filed in 2005. 

The total loss from all the referred fraud cases in 2006 was USD 198.44 million, while the total loss in 2005 was USD 183.12 million. An average loss per complaint in 2006 was USD 724.

According to the report, the most reported crime was Internet auction fraud which accounted for 44.9% of all fraud complaints. The fraud complaint that caused the highest loss was the Nigerian letter scam, followed by check fraud.

When it comes to age groups, the elderly used to lose the most to scammers. People of 60 and older lost more money than any other age group and reported losing about USD 866 per victim.

The problem of money laundering amounts has already been discussed previously. This is the continuation of the topic.

When talking about the particular money laundering cases, the estimated amounts laundered are exactly or approximately clear. However, when talking about money laundering on a global scale, laundered funds are harder to estimate. Money laundering is involved in secrecy and has a clandestine nature, and therefore is not easily subjected to statistical analysis. This is why all the estimated figures provided below have huge margin between.

The International Monetary Fund (IMF) that recognizes the importance of the problem of money laundering has estimated that the amount of funds laundered in one year all around the world could be between 2% and 5% of the world’s gross domestic product (GDP).

According to 1996 statistics, provided by IMF Working paper No. 96/55 (may 1996), this is between USD 590 billion and USD 1.5 trillion.

The United Nations Office on Drugs and and Crime (UNODC) provides slightly different figures. In accordance with its estimates, the amounts of money laundered yearly globally have ranged between USD 500 billion and USD 1 trillion.

Taking into consideration the above-mentioned estimates, it is obvious that money laundering is the problem to be paid great attention by each and any country of the world.

One of the valuable achievements of the Egmont Group is publishing Egmont 100 sanitized cases. This is a compilation published in 2001 to describe and analyze  100 sanitized cases on successes and learning moments in fighting money laundering and a product of contributions made by Egmont Group members.

After editing 100 cases, the Egmont Group produced a list of most frequently observed indicators that point at money laundering. They are as follows:

• large-scale transactions;
• atypical or uneconomical fund transfer to or from foreign jurisdiction;
• unusual business activity or transaction;
• large and/or rapid movements of funds;
• unrealistic wealth compared to client profile;
• defensive stance to questioning.

Despite the fact that the World Bank and the International Monetary Fund (IMF) have different missions, they have united to work jointly to fight money laundering and terrorist financing.

The co-operation of the World Bank and the IMFÂ started in April 2001, when the two Boards of Executive Directots of the World Bank and the International Monetary Fund realized that money laundering has become a global problem that affects both smaller and major financial markets. The World Bank recognized that, taking into consideration devastating economic, social and political potential of money laundering, it could impose big costs upon developing countries. The IMF recognized that money laundering could cause destructing macroeconomic consequences such as unpredictable changes in currency demand and vulnerability of international capital flow.

After the events of 9/11, both organizations adopted action plans to enhance their efforts for anti-money laundering and terrorist financing.

In 2002, the organizations recognized the 40 Recommendations on Money Laundering and Special Recommendations on Terrorist Financing issued by the FATF as the relevant international standards.

In November 2002, the World Bank and the IMF started a 12-month pilot program to conduct assessments in 33 jurisdictions, and FATF and FATF-style regional bodies conducted assessments in 8 jurisdictions. The outcome of the pilot program was reviewed in March 2004.

Following the successful pilot program, the organization decided to include anti-money laundering and combating terrorrist financing in their permanent activities, to continue co-operating with the FATF and to develop and revise standards and methodology of this matter.

A peculiar project has revealed that money in the USA is easy to launder.

How much does it take? Well, about a month. How much does it cost? Well, about USD 4 000.

To demonstrate how easy it is for tax evaders, money launderers or terrorists to hide behind secretive domestic companies, 2 retired IRS agents, Michael McDonald and Steven Smith, formed anonymously owned companies in New York, Florida and Panama and after that wired money among the companies’ bank accounts. As a result, it became obvious to anyone that it takes no painful and hard efforts to move money in and out without a trace using US companies.

Alert Global Media began this research project in the beginning of 2006 for a presentation at a money-laundering conference that opened on March 19, 2007 in Florida.

Michael McDonald and Steven Smith refused to name a firm that registered Greenlink Ventures in New York and Franklin Grant & Associates Management in Florida and advised to use Internet banks for corporate accounts. Throughout the process, Smith used his real name and obeyed laws. However, using the Nevada firm, he created the companies and got an IRS identification number without revealing his Social Security number. When asked to list an alternate company contact in case of an emergency, he provided the name Bange Mason.

Then, Smith and McDonald created Grupo Griffin Internacional in Panama and then opened an account there. The Panama bank required notarized copies of the 1st page of his passport and both sides of his driver’s license. Smith found surprising that it was more difficult to open an account in Panama than it was in the USA.

After the registration process was completed, the retired agents wired USD 9 000 from the Florida company to Grupo Griffin’s Panama bank and then wired the funds to the Internet bank account of the New York company. The agents said that the transactions were nearly impossible to trace.

McDonald made a conclusion that while the USA beats up on small island jurisdictions, it is not having adequate controls inside the country.

Money laundering and terrorist financing make harm to financial systems and weaken and even endanger financial institutions. The destructive impact of money laundering and terrorist financing on overall economic development is obvious. As to consequences to financial institutions like banks, insurance companies and investment management firms in more particular terms, they can be generally described as 4 types of risks.

The risks to financial institutions caused by money laundering and terrorist financing can be classified as reputational, operational, legal and concentration. However, it is often quite difficult to exemplify and distinguish them, as these risks are largely interrelated.

Reputational risk is the potential to adverse publicity as regards financial institution’s practices and result in a loss of confidence in the integrity of the institution. If institution’s reputation has been damaged by suspicions, rumours or allegations of money laundering or terrorist financing, borrowers, depositors and investors quit doing business with it. This, in its turn, increases the risk of the overall loan portfolio.

Operational risk is the potential for loss, which is a result of inadequate or failed internal processes or external events. Such losses take place when financial institutions incur reduced, terminated or increased costs for inter-bank or correspondent banking services. Increased borrowing or funding costs also belong to this type of losses.

Legal risk is the potential for law suits, adverse judgments, fines and penalties generating losses, unenforceable contracts, increased expenses for an institution or even closure of it. As a result, legitimate customers may become victims of a financial crime and sue the institution for losing money. It goes without saying that investigations also cost money and they may involve penalties and fines.

Concentration risk is the potential for loss, which is a result of too much credit or loan exposure to a single borrower. lacking knowledge about a customer and his/her business can expose a financial institution to risk.

To conclude, due diligence procedure is what helps financial institutions to understand and identify customers and to protect themselves.

It has already been discussed that money laundering and terrorist financing have significant consequences influencing both on individuals and on the population globally. Here we come to even more global scale – money laundering and terrorist financing has a direct negative effect on overall economic development.

Money laundering and terrorist financing negatively affect economic growth as they divert resources to less productive activities. Laundered illegal funds choose to follow not the same path as legal funds. They are not placed in productive channels aimed at further development. Illegal funds are often placed into so-called sterile investments in order to preserve their value as well as to be at one’s disposal as easily transferable. Such investments are real estate, jewelry, antiques, art, luxury automobiles, etc. The above-mentioned investments are not as productive as they could be. The sterile investments do not generate additional productivity for the economy.

However, the situation could be even worse if productive enterprises that provide their input for economic development are transformed into sterile investments by criminal organisations because they are operated primarily for money laundering, and just secondly for profit generation.

It is obvious that investments must be driven by productive purposes, and if resources are dedicated to sterile investments, the overall economy of a country reduces. So, the war proclaimed to money laundering and terrorist financing is also the war for responding to consumer demand and stimulating the productivity of the overall economy.