Table of Contents

1. WHAT IS MONEY LAUNDERING?.....................................................................................................2

2. METHODS AND STAGES INVOLVED IN MONEY LAUNDERING?........................................................2
2.1 Placement....................................................................................................................................3
2.2 Layering.......................................................................................................................................3
2.3 Integration...................................................................................................................................3
3. HSBC CASE ON MONEY LAUNDERING.............................................................................................4
3.1 Area of Abuse..............................................................................................................................4
 Servicing High Risk Affiliates........................................................................................................4
 Evading U.S Laws.........................................................................................................................4
 Ignoring Terrorist Financing Links................................................................................................5
 Clearing Suspicious Bulk Travelers Checks...................................................................................5
 Offering Bearer Share Accounts...................................................................................................5
3.2 Why it has been difficult to trace the money?.............................................................................5
3.3 Concluding the case study...........................................................................................................6
4. HOW DOES NATIONAL AND INTERNATIONAL AGENCIES TACKLE AND PREVENT MONEY
LAUNDERING?........................................................................................................................................6
4.1 National level...............................................................................................................................6
4.2 International Level.......................................................................................................................7
o Financial Action Task Force (FATF)...............................................................................................8
o Basel Committee on Banking Supervision....................................................................................8
o International Organisation of Securities Commissions (IOSCO)...................................................8
o The United Nations......................................................................................................................8
o The Egmont Group of Financial Intelligence Units.......................................................................9
5. CRITICISM ON THE ANTI MONEY LAUNDERING FRAMEWORK........................................................9
5.1 National Regulators.....................................................................................................................9
5.2 International Regulators............................................................................................................11
6. CONCLUDING REMARK.................................................................................................................13
7. REFERENCES..................................................................................................................................14

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 1. WHAT IS MONEY LAUNDERING?
Money laundering is defined as the process of concealing the origins of money obtained from
illicit activities. According to OED 2002, money laundering is more usefully defined as the
concealment of assets acquired legally or illegally intended for personal consumption or
beneficial heirs.

Most countries align the definition of money laundering to that of United Nations Convention
against Illicit Traffic in Narcotic Drugs and Psychotropic Substances 1988 - ViennaConvention
and the United Nations Convention against Transnational Organized Crime 2000 - Palermo
Convention which describe the following:

1. The conversion or transfer of property derived from drug trafficking or related offences
in purpose of concealing the illicit origin of it and to escape from any legal
consequences.
2. The camouflage of the true source, nature and origin knowing that the assets are
resulted from any offences or participation of such actions.
3. The acquisition of property, knowing that the proceeds of such property are derived
from illegal activities.

2. METHODS AND STAGES INVOLVED IN MONEY LAUNDERING?

A reasonable conjecture is that different methods are used for laundering the proceeds from
different predicate crimes. Offences can be classified into 5 categories for purposes of
understanding the effects of specific money laundering; drug distribution, “blue collar crime”,
“white collar crime”, bribery and corruption. These categories are homogenous in view of its
effects of interventions and the seriousness and distribution of harm caused to the society, but
they differ to each other. For example, a “white collar crime”, proceeds from casinos are
different from that of drug trafficking, both are laundering money and have adverse effect on
the society, however, the severity of harm and the means of dealing differs: for example, drug
trafficking is exclusively cash whereas white collar crime is mixed both cash and other assets.

Money laundering is considered as one of the most sophisticated crime because the process of
concealing the origin of illegal funds by passing it through a sequence of banking transfers or
complex commercial transactions. A country’s entire wealth can vanished due to financial
sophistication instruments. It enables the concealment and flight of wealth from one
jurisdiction to another.

Money laundering is usually described as having three sequentially elements: placement,

layering and integration.

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 2.1 Placement
This involves the physical movement of currency or other funds derived from illegal activities to
a place or into a form which is less suspicious to law enforcement authorities and more
convenient for criminals. This is followed by placing it into circulation through financial
institutions, casinos, shops, bureau de change, and other businesses, both local and abroad.
The process of placement can be carried out into the following conditions:

 Currency Smuggling- This is the physical illegal movement of currency out of the
country.
 Bank complexity- This is when financial institution, such as banks, are owned or
controlled by unscrupulous individuals suspected of conniving with drug dealers and
other organized crime groups.
 Currency Exchanges- In a number of transitional economies the liberalization of foreign
exchange markets provides room for currency movements.

2.2 Layering
The second stage is layering and this involves the further separation of the proceeds from their
illegal source by using multiple complex financial transactions for example wire transfers,
purchase of insurance contracts and monetary instruments to obscure audit trail and hide
proceeds.

 Securities Brokers- 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.
A launderer can purchase those securities with illicit funds, transferred from one or
more account and then use the proceeds from selling those securities as legitimate
money.

2.3 Integration
The third stage is integration. During this stage illegal proceeds are converted into legitimate
business earning through normal financial or commercial operations. The money is reintegrated
in the financial system, for example through,

 Asset Purchase- This is the most 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. The purchases of property, art work or high-end
automobiles are common ways for the launderer to enjoy their illegal profits without
necessarily drawing attention to him.

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 3. HSBC CASE ON MONEY LAUNDERING

In December 2012, multinational banking institution HSBC was penalized a record $1.92
billion by the United States for violating laws and for being engaged in other illegal
financial activity. HSBC banking executives laundered as much as $881 billion dollars.

A US Senate investigation reported that global banking giant HSBC and its U.S. affiliate
exposed the U.S. financial system to a wide array of money laundering, drug trafficking,
and terrorist financing risks. The July 2012 report and investigations by US authorities
led to the UK-based bank being fined almost $2BN for failing to stop criminals using its
banking systems to launder money. These scandals occurred because of poor anti
money laundering controls in U.S. Between 2006 and 2010; HSBC Bank USA violated
several components of the Bank Secrecy Act.

3.1 Area of Abuse

There were 5 main areas of abuse in the HSBC money laundering scandal which are as
follows:

 Servicing High Risk Affiliates

HSBC’s U.S. bank, HBUS, offered correspondent banking services to HSBC Bank Mexico, and
treated it as a low risk client, despite its location in a country facing money laundering and drug
trafficking challenges. According to the report, HSBC’s Mexican affiliate channeled $7 billion
into the U.S. between 2007 and 2008 which possibly included “proceeds from illegal drug sales
in the United States.”

 Evading U.S Laws

US laws prevent banks from doing business with what it regards as the most dangerous
individuals and countries. HSBC frequently evaded U.S. safeguards designed to prevent dealings
with Iran, Burma and North Korea.  In one case examined by the Subcommittee, two HSBC
affiliates sent nearly 25,000 transactions involving $19.4 billion through their HBUS accounts
over seven years hiding the transactions’ links to Iran.

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  Ignoring Terrorist Financing Links
HSBC US (HBUS) offered U.S dollars and banking services to some banks in Saudi Arabia and
Bangladesh despite the high volume of terrorism-related financing that occurs there.

 Clearing Suspicious Bulk Travelers Checks

HSBC had cleared $290 millions of travelers’ checks over a number of years for a Japanese
bank, without proper anti-money laundering controls, despite evidence of suspicious activity
benefiting Russians who claimed to be in the used car business.

 Offering Bearer Share Accounts

HSBC offered more than 2,000 accounts to companies which practice "bearer share dealing",
where the equity in the company is legally owned by whoever holds ("bears") the share
certificate. These stocks are hugely useful for money laundering because their ownership can
be transferred without creating any sort of trail.

3.2 Why it has been difficult to trace the money?

The primary regulator for HSBC’s U.S. bank (HBUS) is the U.S. Office of the Comptroller
of the Currency (OCC).OCC is said to have tolerated HSBC's weak controls against money
laundering for years and said agency examiners who had raised concerns were
overruled by their superiors. The money started a journey from bank to bank and
country to country and tracing its origin became difficult that is drug traffickers evaded
the anti-money laundering controls at US banks by transporting US dollars to Mexico,
and then using HSBC Mexico (HSMX) to transfer it to the US. Money laundering risks
associated with doing business with certain Mexican customers were ignored,
compliance issues at HSBC Mexico were overlooked and adequate anti-money
laundering program was not implemented. Furthermore there was high-profile clients
involved in drug trafficking and HSBC Bank was motivated by greed so it became difficult
to track it. There has been poor money laundering controls. HSBC US (HBUS)
nevertheless classed Mexico as a low-risk country and as a result, failed to properly
monitor its transfers and other dealings with it.

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3.3 Concluding the case study

This scandal took place because of lack of proper anti money laundering measures.
Thus controls were enhanced. However, it can be noticed that a new Swiss Bank leak
has been discovered in February 2015. The UK is considering a money laundering
investigation of HSBC Swiss operation in light of recent allegations that the bank
maintained accounts for financial criminals. HSBC has broken the law by actively
helping its clients avoid paying tax. This scandal involves 106,000 clients in 203
countries and assets worth $118 billion.

4. HOW DOES NATIONAL AND INTERNATIONAL AGENCIES TACKLE

AND PREVENT MONEY LAUNDERING?

A great deal can be done to fight money laundering, and, indeed, many governments
have already established comprehensive anti-money laundering regimes. These regimes
aim to increase awareness of the phenomenon and then to provide the necessary legal
or regulatory tools to the authorities charged with combating the problem .

4.1 National level

The Bank of Mauritius and Financial Services Commission are the two financial
regulators of Mauritius and they ensure that their licensees comply with AML/CFT
requirements. They have a duty, under the Financial Intelligence and Anti Money
Laundering Act (FIAMLA) 2002, to pass on information relating to the possibility of
money laundering or a suspicious transaction, to the Financial Intelligence Unit (FIU).
The Bank of Mauritius (BOM) is the supervisory authority for banks, foreign exchange
dealers and money changers. It issues guidelines for the fight against money laundering
and terrorism financing. Any non-compliance, through negligence, omission or a serious
defect in the implementation of the codes and guidelines or the requirements imposed
in the FIAMLA 2002 and FIAML Regulations 2003, is subject to sanction by the BOM. On
the other hand, the FSC regulates the non-banking sector on the prevention of Money
Laundering and Terrorist Financing for three categories of businesses, namely,
Management Companies, Investment Businesses and Insurance Entities.

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 Mauritius has enacted AML/CFT legislation, to deal with the prevention of corruption,
fraud, financial crime, money laundering and terrorism activities.  These include,
namely, the Financial Intelligence and Anti Money Laundering Act (FIAMLA), the
Prevention of Terrorism Act and the Prevention of Corruption Act.  The Financial
Intelligence Unit has been set up with enactment of the FIAMLA in 2002. Financial
institutions are required to report suspicious transactions to the FIU.

The FIAML Regulations 2003 requires all Licensees to implement a system of internal
controls as well as other measures to combat money laundering and financing of
terrorism. This would include programs for assessing risk relating to money laundering
and financing of terrorism as well as the formulation of a control policy that covers
issues of timing, degree of control, areas to be controlled, responsibilities and follow-up
actions. Licensees must therefore have a system of internal controls to manage their
AML/CFT risks and to provide a systematic and disciplined approach to assuring
compliance with AML/CFT laws, codes and standards of good practice. Licensees should
also incorporate in their internal control system appropriate policies to prevent the
misuse of technological developments in money laundering or terrorist financing
schemes. Licensees must appoint a Money Laundering Reporting Officer (MLRO) to
whom all internal report of suspicious transactions must be made. The FIAML Act also
requires licensees to verify the true identity of all customers and other persons with
whom they conduct transactions.

The Prevention of Terrorism Act (POTA) 2002 aims at combating terrorism in general
and empowers the Mauritian legal system to adequately deal with the phenomenon of
terrorism. This act:
i) Provides for prevention and suppression of terrorism
ii) Reinforces intelligence gathering, investigatory and enforcement measures relating
to terrorism offences; and
iii) Implements the international commitments of the Republic of Mauritius in respect
of terrorism.

4.2 International Level

The international community has taken and continues to take concerted action against
money laundering and terrorist financing. The goals of this effort are protecting the
integrity and stability of the international financial system, cutting off the resources

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 available to terrorists, and making it more difficult for those engaged in crime to profit
from their criminal activities. Some of the international agencies which combat money
laundering are:

o Financial Action Task Force (FATF)

The FATF Recommendations are the internationally endorsed global standards against
money laundering and terrorist financing: they increase transparency and enable
countries to successfully take action against illicit use of their financial system. The FATF
issued forty recommendations setting out the basic framework for anti-money
laundering efforts and nine special recommendations on terrorist financing.

o Basel Committee on Banking Supervision

The Basel Committee on Banking Supervision has issued a set of guidelines to describe
how banks should include risks related to money laundering and financing of terrorism
within their overall risk management framework. These guidelines are consistent with
the International Standards on Combating Money Laundering and the Financing of
Terrorism and Proliferation issued by the FATF in 2012 and supplement their goals and
objectives. These guidelines emphasizes on customer due diligence for banks and the
importance of KYC (Know Your Customer) management.

o International Organisation of Securities Commissions (IOSCO)

In 1992, IOSCO adopted a resolution inviting IOSCO members to consider issues relating
to minimizing money laundering. The IOSCO Statement of Principles provides a
comprehensive framework relating to Customer Due Diligence requirements that
complements FATF’s Recommendations and addresses the securities regulator’s role in
monitoring industry compliance with AML obligations. The IOSCO Objectives and
Principles of Securities Regulation form the basis for the evaluation of the securities
sector for the Financial Sector Assessment Programs (FSAP) of the International
Monetary Fund (IMF) and the World Bank.

o The United Nations

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 The UN was the first international organization to undertake significant action to fight
money laundering on a truly world-wide basis. The UN actively operates a program to
fight money laundering; the Global Programme against Money Laundering (GPML),
which is headquartered in Vienna. In order to expand the effort to fight international
organized crime, the UN adopted The International Convention against Transnational
Organized Crime (2000) - Palermo Convention. The Palermo Convention specifically
obligates each ratifying country to criminalize money laundering and establish
regulatory regimes to deter and detect all forms of money laundering.

o The Egmont Group of Financial Intelligence Units

As part of the effort to fight money laundering, governments have created agencies to
analyze information submitted by covered entities and persons pursuant to money
laundering reporting requirements. Such agencies are commonly referred to as FIUs.
Because money laundering is practiced on a worldwide scale, there has also been the
need to share information on a cross-border basis. In 1995, a number of governmental
units known today as FIUs began working together and formed the Egmont Group of
Financial Intelligence Units. The purpose of the group is to provide a forum for FIUs to
improve support for each of their national AML programs and to coordinate AML
initiatives.

5. CRITICISM ON THE ANTI MONEY LAUNDERING FRAMEWORK

5.1 National Regulators

As it was described before, launderers explore some countries’ weaknesses in the legal,
economic and political fields in order to execute their illicit activities. In the case of
Mauritius also, despite the fact that there are regulators such as the Bank of Mauritius
and Financial Services Commission, there are still cases of money laundering. Several
loopholes have been identified in these regulators.
The Central Bank has set a loose trend in getting banking licenses to large oligopolistic
conglomerates, mainly family dynasties. The financial system has thus flourished within
its very walls as the commercial, banking, speculative and due diligence roles are
distributed among the large family conglomerate.

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 This becomes very hard for auditors to track the flow of funds and this eases the task of
money launderers to transfer illicit funds in the economy. Furthermore, Group accounts
that is, consolidated accounts are being prepared and the overseas branches and
subsidiaries are also merged.
The rising cases of money laundering scams in Mauritius shows clearly a dearth of
professional responsiveness and a severe absence of FIU's real incidence on preventing
Fraudulent Schemes.
Besides, the FSC provides license to The Global Business License 2 (GBL2). The GBL2 are
companies that have no physical presence in Mauritius, and are inherently difficult to
supervise and monitor. Many were licensed at the time when Mauritius did not have
strong customer identification requirements in place.

The International Monetary Fund prepared a detailed assessment report on anti-money

laundering and terrorist financing in March 2008, and the following findings were
discovered:

 With the adoption of the FIAMLA, the authorities sent a clear message as to their
intention to apply the money laundering offense to all serious offenses under the
Mauritian legislation. However, the underlying criminal laws (including the Criminal
Code) were not amended to guarantee the widest range of predicate offenses. As a
result, several of the categories of offenses which should constitute predicate offenses
to money laundering are outside the scope of the FIAMLA because they have not been
criminalized in Mauritius.
 Section 188 of the Criminal Code covers organized crime in a way which broadly meets
the requirements of the Palermo Convention. However, the local authorities do not
make use of it and seem to consider it as outdated.
 It also seems that the relevant authorities need further training on the specificities of
the money laundering offense and on the Mauritius AML/ CFT framework in order to be
able to investigate, prosecute, and sentence money laundering cases effectively.

In Mauritius, banks fail to report in a timely and significant manner, and the few cases
communicated by banks to the FIU did not result in expeditious legal action, which
raises legitimate concerns about the supervision and enforcement of AML/CFT
legislation. Mauritius excels in adopting legislation that complies to the highest and
latest international standards, and in setting up the finest institutions, but lags in the
effective enforcement of legislation and the proper functioning of institutions.

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5.2 International Regulators

Every time the global financial regulators come up with a new rule, with more
paperwork requirements, the MLs find legal or illegal ways around it. In January of this
year, the Center of Law and Globalization (a partnership of the University of Illinois
College of Law and the American Bar Foundation) released its report “Global
Surveillance of Dirty Money: Assessing Assessments of Regimes To Control Money-
Laundering and Combat the Financing of Terrorism.” 

The authors of this report revealed that “FATF did not articulate its objectives
sufficiently precisely for reliable evaluations. …The FATF and the IMF assessments
focused almost entirely on formal compliance with FATF standards and whether
countries appeared to implement programs.’’

The report also criticized the lack of risk analysis and both quantitative and qualitative
systematic data to provide defensible bases for recommendations. The authors
discussed the lack of realism by the IMF and FATF in trying to compel all countries to
adopt the same standards while ignoring their ability to do so.

The war on money laundering has failed for the last quarter of a century because it had
not prevented terrorists, drug dealers and assorted criminals from transferring money
around the world. What it has done is greatly increased the cost of transferring money
by innocent people and businesses, greatly reduced access to banking services for
millions, destroyed personal and financial privacy for much of the world’s population,
and enhanced the ability of government officials around the world to abuse their own
citizens.

The Basel Committee claimed that ‘Know your Customer’ can reduce money laundering.
However, several banks such as Barclays, Lloyds Banking Group, Credit Suisse, ING and
Standard Chartered, all paid fines of several hundred million dollars for compliance
breaches relating to sanctions or anti-money laundering, while HSBC was fined close to
US$2 billion in 2012 for flaws in its money laundering checks. Commercial banks are
profit motivated and since all the rivals are abiding by KYC, some try to by-pass it so as
to benefit from competitive advantage.

In an article by Indian Express in May 2013, financial regulators were criticized and it
was claimed that there is considerable delay in identification, classification and
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 reporting of frauds by the financial sector. Delay in reporting helps corporates or
borrowers to defraud the banking system and also leads to loss of time enabling the
fraudster to dispose the available assets making the task of investigative agencies
difficult.

An essential part of the FATF activities is assessing the progress of its members in
complying with the FATF recommendations. In 2011, the FATF completed the third
round of mutual evaluations of all the FATF members. Only a few countries are
considered to be non-cooperative countries. The countries in this group include Iran and
the Democratic Peoples’ Republic of Korea (North Korea). The FATF faces a number of
difficulties in determining how fully member countries are complying with the special
recommendations.

Between 2002 and 2003, the International Monetary Fund (IMF) and the World Bank
participated in a year-long pilot program to conduct assessments of national approaches
to detecting and controlling money laundering and terrorist financing in various
countries using the methodology developed by the FATF. The most common
weaknesses identified by the IMF and the World Bank were:

 Poor coordination among government agencies, especially among financial supervisors,

financial investigators, the police, public prosecutors, and the public.
 Ineffective law enforcement due to a lack of skills, training, or resources to investigate,
prosecute, and adjudicate money laundering cases among police, prosecutors, or the
courts.
 Inadequate systems and controls among financial firms to identify and report suspicious
activity, or to ensure that adequate records were being maintained.

In a recent study, Thomas Cosimano and Dalia Hakura analyze one of Basel III’s central
regulations – increased bank capital requirements on loan volumes and rates – and
conclude that higher equity-to-debt ratios are likely to increase lending costs, even if the
full effects of the regulation remain to be seen. While Basel III can reduce systemic risk,
empirical studies like this one raise serious concerns about possible adverse
consequences on lending in developed economies.

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6. CONCLUDING REMARK

At the end of the report, it can be highlighted that AML initiatives are becoming
increasingly interconnected across the globe as a result of a demanding and
continuously evolving regulatory landscape. Also several special units are in operation as
watchdogs both locally and internationally. However, considerable challenges remain.

Although the financial services industry is increasingly moving towards a globally

standardized approach, there is still notable inconsistency with regard to
implementation of AML controls. Despite some positive steps and evident strides in
coming to grips with the 21st century challenges posed by money laundering threats,
regulators and the financial services industry continue to lag behind today’s globally
connected money launderers. Inconsistent regulations have left gaps in which money
launderers find their way to carry out this dirty activity.

The way in which financial institutions respond to AML challenges will continue to
remain subject to public scrutiny as regulators, investors, and members of the public
continue to stress the importance of managing these risks effectively.

7. REFERENCES

 http://www.bbc.com/news/business-18880269

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 http://blogs.reuters.com/financial-regulatory-forum/2012/07/20/compliance-lessons-u-s-
senate-report-on-hsbc-aml-failings/

 https://www.bom.mu/pdf/Legislation_Guidelines_Compliance/Guidelines/GUIDANCE_A
ML-CFT20140715.pdf

 http://www.iosco.org/about/pdf/IOSCO-Fact-Sheet.pdf

 http://siteresources.worldbank.org/EXTAML/Resources/396511-
1146581427871/Reference_Guide_AMLCFT_2ndSupplement.pdf

 http://www.compasscayman.com/cfr/2014/04/07/The-destructive-effort-to-combat-
money-laundering,-tax-evasion-and-terrorist-financing/

 http://www.compasscayman.com/cfr/2014/04/07/The-destructive-effort-to-combat-
money-laundering,-tax-evasion-and-terrorist-financing/

 http://www.kpmg.com/KY/en/IssuesAndInsights/ArticlesPublications/PublishingImages/g
lobal-anti-money-laundering-survey-v3.pdf

 http://www.bbc.com/news/business-18880269

 http://blogs.reuters.com/financial-regulatory-forum/2012/07/20/compliance-lessons-u-s-
senate-report-on-hsbc-aml-failings/

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