The fundamentals of money laundering

Illegal arms sales, smuggling, and the activities of organised crime, including for example drug trafficking and prostitution rings, can generate huge amounts of proceeds. Embezzlement, insider trading, bribery and computer fraud schemes can also produce large profits and create the incentive to “legitimise” the ill-gotten gains through money laundering.

When a criminal activity generates substantial profits, the individual or group involved must find a way to control the funds without attracting attention to the underlying activity or the persons involved. Criminals do this by disguising the sources, changing the form, or moving the funds to a place where they are less likely to attract attention.

How is money laundered? In the initial - or placement - stage of money laundering, the launderer introduces his illegal profits into the financial system.

This might be done by breaking up large amounts of cash into less conspicuous smaller sums that are then deposited directly into an account in a financial institution, or by purchasing a series of monetary instruments (cheques, money orders, etc.) that are then collected and deposited into accounts at another location.

After the funds have entered the financial system, the second – or layering – stage takes place.

In this phase, the launderer engages in a series of conversions or movements of the funds to distance them from their source.

The funds might be channelled through the purchase and sales of investment instruments, or the launderer might simply wire the funds through a series of accounts at various banks across the globe. This use of widely scattered accounts for laundering is especially prevalent in those jurisdictions that do not cooperate in anti-money laundering investigations. In some instances, the launderer might disguise the transfers as payments for goods or services, thus giving them a legitimate appearance.

Having successfully processed his criminal profits through the first two phases the launderer then moves them to the third stage – integration – in which the funds re-enter the legitimate economy. The launderer might choose to invest the funds into real estate, luxury assets, or business ventures.

How does money laundering affect business? The integrity of the banking and financial services marketplace depends heavily on the perception that it functions within a framework of high legal, professional and ethical standards.

A reputation for integrity is the one of the most valuable assets of a financial institution.

If funds from criminal activity can be easily processed through a particular institution – either because its employees or directors have been bribed or because the institution turns a blind eye to the criminal nature of such funds – the institution could be drawn into active complicity with criminals and become part of the criminal network itself. Evidence of such complicity will have a damaging effect on the attitudes of other financial intermediaries and of regulatory authorities, as well as ordinary customers.

As for the potential negative macroeconomic consequences of unchecked money laundering, one can cite inexplicable changes in money demand, prudential risks to bank soundness, contamination effects on legal financial transactions, and increased volatility of international capital flows and exchange rates due to unanticipated cross-border asset transfers. Also, as it rewards corruption and crime, successful money laundering damages the integrity of the entire society and undermines democracy and the rule of the law.

The League’s Initiatives In advancing its educational thrust, the League keeps abreast of Money Laundering and its effect on businesses at every level. It is in this connection that the above vital information was researched via the Financial Action Task Force (FATF) – the Policy-making Body to enlighten all members.

The League’s Shared Services Platform and AML/CFT Training interventions are spearheaded by the chief operating officer, Dianne Joseph. The service were set up to proactively safeguard the interest of co-operatives and to ensure that they are not exploited by high-pricing strategies offered by external parties. Currently, general workshops and in-house training sessions for credit unions throughout the country are taking place to ensure remains a good understanding and appreciation of the fundamentals of money laundering and terrorist financing.

This, Joseph stressed will serve to protect co-operative institutions from being used for any illegal activity.

Joseph also reminds all cooperatives of the requirement under the Financial Obligation Regulations to get registered with the Financial Intelligence Unit, to develop a Compliance Programme and to ensure that all directors and staff are adequately trained.

The League remains open to assist where necessary and can be reached at 671/4704.