1. Certificate for Introduction to Securities & Investment (Cert.ISI) Unit 1 Lesson 55:  Financial crime  Money laundering and related criminal offences 55cis

2. The proceeds of crime Crime generates large amounts of cash. Criminals like cash: it is difficult to trace.  Child pornography  Handling stolen goods  Drug trafficking Cash represents a very small proportion of overall money supply in our economy  Arms trafficking Legitimate businesses do not like receiving large amounts of cash. It is a security risk and has to be counted. So, for money to be really useful, it needs to be in electronic form, in a bank account. This poses a problem for criminals: Q: How to convert large amounts of illegal cash into legal bank account balances? A: “Launder” the money to make it clean

3. Definition of money laundering Definition: Money laundering is the process of turning money that is derived from criminal activities (“dirty money”), into money that appears to have been legitimately acquired (“clean money”), thus making it easier to spend or invest.

4. The use of money to commit crime Le Chiffre

5. Money laundering The funds involved in money laundering are increasing rapidly. The most recent estimate by the FATF suggests that the aggregate size of global money laundering is between 2% and 5% of world economic output, or between US$590bn and US$1.5trn, most of which is gained from illicit drug trafficking, but also from corruption, fraud and organised crime. FATF: Financial Action Task Force: an inter-governmental body to develop and promote national and international policies to combat money laundering and terrorist financing. Based at the OECD in Paris US$bn per year Estimate global flows of laundered money Source: John Walker, Crime Trends Analysis 2003

6. Economic consequences of money laundering The International Monetary Fund believes that other potential consequences of unchecked money laundering are:  inexplicable changes in money demand  contamination effects on legal financial transactions  increased volatility of international capital flow and exchange rates owed to unanticipated cross-border asset transfers. A reputation for integrity is perhaps one of the most valuable assets of a financial system. Therefore, on a macro level, money laundering poses a risk to confidence in the financial system and its institutions. Money laundering has a direct effect on the foreign exchange market of an economy. Large movements of forex, especially from illegal sources, from one jurisdiction to another are capable of worsening the exchange rate volatility. This can be devastating especially when there is no corresponding increase in production: hence the domino effect on regulating cash flow and inflation.

7. Reputational consequences of money laundering A reputation for integrity is perhaps one of the most valuable assets of a financial institution. The discovery of a financial institution laundering money for an organised crime syndicate is more than likely to generate adverse publicity for the bank. This is exemplified by the case of E.F.Hutton, a US brokerage house that received negative publicity for laundering criminal funds for the Mafia’s Patriarca family. A lack of confidence in a banking institution is likely to result in declining business as clients take business elsewhere. EF Hutton suffered a downgrade to its credit rating and agreed to be taken over by Shearson Lehman shortly after. Patriarca crime family Raymond Patriarca Sr.

8. Money laundering Money-laundering is a dynamic three-stage process  Placement  Layering  Integration  First, moving the funds from direct association with the crime  Second, disguising the trail to foil pursuit  Third, making the money available to the criminal once again with the occupational and geographic origins hidden from view.

9. Money laundering

10. Money laundering: placement This is the movement of cash from its source. On occasion the source can be easily disguised or misrepresented. This is followed by placing it into circulation through financial institutions, casinos, shops, bureaux de change and other businesses, both local and abroad.  Currency smuggling  Bank complicity  Currency exchange  This is the physical illegal movement of currency and monetary instruments out of a country. The various methods of transport do not leave a discernible audit trail  In a number of transitional economies, the liberalisation of foreign exchange markets provides room for currency movements. Laundering schemes can benefit from such policies.  This is when a financial institution, such as banks, is owned or controlled by individuals suspected of conniving with drug dealers and other organised crime groups. This makes the process easy for launderers. The complete liberalisation of the financial sector without adequate checks could make laundering easier.

11. Money laundering: placement (cont.) Other placement processes include:  Stock-brokers  Blending of funds  Asset purchase  Brokers can facilitate the process of money laundering through structuring large deposits of cash in a way that disguises the original source of the funds.  The best place to hide cash is with a lot of other cash. Therefore, financial institutions may be vehicles for laundering. The alternative is to use the money from illicit activities to set up front companies. This enables the funds from illicit activities to be obscured in legal transactions.  The purchase of assets with cash is a classic money laundering method. The major purpose is to change the form of the proceeds from conspicuous bulk cash to some equally valuable but less conspicuous form.

12. Money laundering: layering The purpose of this stage is to disguise of the source of the ownership of the funds by creating complex layers of financial transactions designed to disguise the audit trail and provide anonymity. It is meant to make the trailing of illegal proceeds difficult for the law enforcement agencies.  “Shell” companies  Financial assets  Layers are created by moving money in and out of the offshore bank accounts of shell companies. Most shell companies are registered in offshore tax havens; their directors often are local lawyers acting as nominees, obscuring the beneficial owners through restrictive bank secrecy laws and attorney- client privilege.  This involves the conversion of deposited cash into monetary instruments (bonds, stocks and shares, etc). These are then moved around the world in complex dealings with stock, commodity and futures brokers.

14. Money laundering: integration This is the movement of previously laundered and layered money into the economy mainly through the banking system. The money appears to have derived from normal business earnings.  Property Dealing  Luxury assets  Payment for services rendered  The sale of property to integrate laundered money back into the economy is a common practice amongst criminals. For instance, many criminal groups use shell companies to buy property; hence proceeds from the sale would be considered legitimate.  Laundered money is often used to purchase luxury assets such as cars, yachts, etc. These can then be sold in the secretive world of the super-rich without attracting attention  Consultancy or service contracts are often used as cover for transfer of money from one company’s account to another

15. When clean money becomes dirty money Terrorists needs money to finance their operations. Some of this money may be “clean” money which is donated to bogus charities or collected specifically for the purposes of terrorism. It s difficult to determine at which point this “clean” money becomes “dirty” money. Sums involved can be quite small. Terrorist organisations will use sophisticated techniques to move their money between jurisdictions and to avoid detection by the authorities. These are very similar to those used by money launderers The total cost of launching the Al Qaeda 9/11 attacks has been estimated at between US$400,000 and US$500,000 Some terrorist organisations fund their activities with illegal activities, such as drug processing and trafficking. The money has obviously been obtained illegally from the start.