The fight against dirty money

As a result, he said casinos have been singled out for regulatory supervision by the international authorities on money laundering.

Restaurants, nightclubs and taxi firms, all which deal with large volumes of cash, can be used as front companies with the intention of laundering money via mixing criminal proceeds and legitimate business income, he warned.

Or they can be exploited by launderers to place relatively small amounts of criminal funds into the system, he said, saying that business which deals with high value items — works of art, jewelry or cars, are also coming under the radar.

Speaking at a seminar organised by ACCA at the Hilton Conference Centre for local accountants last week, the ACCA boss said as trainee accountants they were always told that the ultimate responsibility of an accountant in practice was to protect the interests of their clients but that has since changed.

Like it or not, he said accountants must become increasingly involved in the struggle against financial crime, saying this trend is likely to continue in the years to come.

The figures he presented on the scale of money laundering was mindblowing. World-wide, money laundering could amount to between two to five percent of world GDP - between $590 billion - $1.5 trillion, according to IMF figures.

He said about ?25 billion of criminal assets is laundered through UK financial system every year, UK Government estimate, said.

Money laundering is a genuinely global problem, he said, noting it is not restricted to particular countries and regions - it happens everywhere, and even the biggest and most reputable institutions can fall victim to it.

“It is a problem which affects the financial community throughout the world and at all levels,” he said.

He urged them to always remember that a big part of the problem facing the authorities is that criminals will always be trying to stay one step ahead of the game. “Whenever one set of controls is put in place, money launderers will try to get around them by turning to new methods, and dedicated financial criminals will very often have the means and resources to do this successfully,” he said in an interview.

For example, one of the controls that have been brought in within the international banking sector in recent years is that transactions above a certain level — usually around $10,000 — have to be reported to the authorities.

This though has led to the practice of smurfing, where multiple wire transactions are pushed through just below that threshold with the aim of avoiding detection, so the authorities have had to react to this and re-draw the bar, he said.

“The environment is constantly changing,” he said.

There is a clear attraction for criminals to be able to convert the proceeds of their crime as “quickly, quietly and efficiently as they can manage, without of course being detected and linked with the original criminal activity,” he said.

The most attractive financial rewards for money laundering is narcotics smuggling.

“But on top of drug trafficking, illegal arms sales, embezzlement, insider trading, bribery and computer fraud are all staple sources of laundering operations,” he told the accountants.

There is no one method of laundering money, he stressed, noting the methods that are used can involve the purchase and sale of a house, a luxury car, jewelry, or a work of art, to passing money through a web of otherwise legitimate businesses and shell companies.

He then outlined the various stages of money laundering.

In the placement stage, he said the actual proceeds of a crime are entered into the legitimate financial system. This could be, and usually is, through bank accounts or similar channels. Or via the direct purchase of valuable assets, although doing that could be somewhat more risky to the criminal if the cash used can be immediately traced back to the initial crime and the individuals buying the assets can be connected with the crime.

One feature, which regulators are very aware of, is that launderers do not normally commit the basic mistake of trying to place large chunks of money into the system in one go — and through the same channel.

They will invariably break up substantial criminal proceeds into smaller deposits and try to place these into the financial system, either through the same institution or through many different ones.

By doing this, the idea is effectively to sneak below the “radar” of financial institutions so as not to create suspicion. As a result of the various preventative measures being put in place in recent years, the placement stage is becoming increasingly difficult for criminals to negotiate, resulting in a shift in the methods used by money launderers.

One of the major shifts, he said, has apparently been an increasing use of front companies to increase the distance between the entity making the deposit and the individuals who are behind it. Another attraction of using front companies - companies which are otherwise pursuing legitimate business - is that the criminally-derived funds can be mixed up with legitimate earnings.

This, he said, is designed to minimise the risk of financial institutions being suspicious about payments into the system, noting in the UK in 2002 the most popular form of placement of criminal funds was in real estate, which, he added, may go some way to explaining the sharp rise in house prices.

Then comes the layering stage, where the money is moved around via a sequence of transactions which has the objective of making the trail so complex that it will be impossible for investigators to follow an audit trail back to the people who first introduced the money into the system.

“If this is done successfully, then it becomes impossible for the authorities to prove in a court of law the criminal origins of the funds concerned,” he said. Likewise, the number of different institutions through which the funds may pass and the number of different financial products can be as high as the perpetrators want, he said.

Not only that, but they are often prepared to see substantial amounts of their criminal proceeds absorbed by this process. As a rule of thumb, launderers will often be prepared to commit 25% of the value of their criminal proceeds to the expense of going through the laundering process.

Despite all the controls put in place by the UK Government, every year around ?25 billion worth of criminal proceeds are laundered through the UK financial system, so around ?6 billion is spent on the costs of laundering.

Next comes the integration stage, where the dirty money is re-integrated back into the legitimate economy.

“If the layering process has succeeded in stripping the funds of their association with the original activity, then those funds will then be available to be re-entered into the financial system as apparently normal business funds,” he said, noting they can then be used either for consumption or used to finance other criminal activity. He said the best known organisation involved in the international fight against money laundering is the Financial Action Task Force (FATF). Based in Paris, the FATF, operating within the OECD, was initially established at the G7 meeting in 1989 in response to mounting concern over the effects of money laundering on the world’s banking system and financial institutions.

What the FATF does, he said, is to keep under constant review the methods and techniques of money laundering and to issue recommendations to governments.

On how FATF regulations affects accountants, he said due diligence and record keeping were quite significant. Institutions, he said, should not keep anonymous accounts or accounts held in obviously fictitious names and they should undertake customer due diligence (CDD) measures when establishing business relations in the first place.

An institution, he warned, should not commence business relations with a new client if it is not for any reason able to carry out these steps, or if it tries to but is unable to satisfactorily establish or verify the identity of the client.

On threats from new technology, he said financial institutions should pay special attention to anything that might favour anonymity and urged accontants to take any appropriate measures to prevent their use in money laundering schemes.

“The criminals will always try to evade existing controls and stay one step ahead of the authorities, so the job of the regulators always has to be to try to stay aware of new methods used by criminals and to try to negate them,” he said.

He urged them to keep records, noting institutions should keep transaction records for five years, to enable them to comply with information requests from the government authorities.

“Those who are involved in money laundering will always try to get around whatever new laws are introduced, he said, noting that accountants must keep money launderers on their toes and make it as difficult as possible for them to operate.