Financial institutions play a key role in detecting, preventing, and controlling money laundering and terrorism financing through continuous monitoring of customer relationships and timely reporting of suspicious activities. They must follow know-your-customer procedures and report currency transactions, funds transfers, and other activity to the Financial Crimes Enforcement Network. This helps law enforcement maintain security and integrity in the global financial system.
2. Money Laundering
The processes by which criminals
conceal:
The Origin,
The Possession, and
The Control
of the proceeds of criminal behavior
(Cassara, 2016; Christensen, 2011;
Olatunde Julius & Lauwo, 2012).
3. Methods of Money Laundering
The misuse of the international
financial system (both formal and
alternate),
The physical movement of cash
(cash smuggling)
The abuse of trade transactions
and their financing (APG, 2012).
4. Trade Based Money Laundering
The misuse of business and their funding include:
Over/under invoicing of goods,
Multiple invoicing of goods,
Over/under shipments of goods and
False description of goods.
Above activities may be combined with
Cash inflow based payment,
Third party payment,
Segmental modes of payment and
Alternative remittance payment (APG, 2012).
5. Banking Based Money Laundering
The misuse of the international financial system involves three
independent steps:
Placement: A process for transferring the proceeds from illegal
activities into the financial institutions or converting cash into
instruments.
Layering: It is a process in which a launderer may conduct a series of
financial transactions to distance the proceeds from illegal source.
Integration: It is the final stage in the laundering process; illicit funds
are integrated with monies from legitimate commercial activities as
they enter the mainstream economy (Moustafa, Abd El-Megied,
Sobh, & Shafea, 2015)
6. Terrorism
The use or threat of action with a political motivation, which involves:
Serious violence against a person,
Serious damage to property and
Grave danger to the health and safety of the public.
Article 2 of the 1999 International Convention for the suppression of
terrorist Bombings states that a person commits an offence within the
meaning of the Convention if they cause
Damage to public or government property intending
Death or Serious bodily injury
Significant economic loss, (Grozdanova, 2014).
7. Terrorism Financing
Intentional collection or provision of funds to support an act or
acts of terrorism. Terrorist organizations raise funding from
legitimate sources, including
The abuse of charitable entities
Legitimate businesses or
Self-financing by the terrorists themselves.
Terrorists also derive funding from a variety of criminal activities
ranging in scale and sophistication from
Low-level crime to systematic fraud or narcotics smuggling,
State sponsors
Events in failed states and other safe havens.
8. Proliferation of Weapons of Mass Destruction (WMD)
Proliferation is the
production,
storage,
transmission,
trade and
Use or threat of use
of weapons of mass destruction, whose spread and their
delivery systems could have incalculable consequences for
global stability and prosperity. Financing of these operations
is illegal and notifiable. Financial institutions have a
responsibility to enforce sanctions imposed by the UN, the US
and their allies.
9. Financial Action Task Force (FATF)
FATF is an independent inter-governmental body that develops
and promotes policies to protect the global financial system
against
Money laundering,
Terrorist financing and
The financing of proliferation of weapons of mass destruction.
The FATF Recommendations are recognized as the global anti-
money laundering (AML) and counter-terrorist financing (CFT)
standard ((FATF), 2012).
10. Financial Crimes Enforcement Network
The mission of the FinCEN is
To safeguard the financial system from illicit
use and
Combat money laundering
Promote national security through
The collection, analysis, and
Dissemination of financial intelligence for
strategic use by financial authorities
11. Financial Institutions AML/CTF
Know Your Customer (KYC)
CDD
Enhanced CDD for PEPs
Correspondence banking
Natural and Legal persons, legal arrangements and Ultimate beneficial ownership
Continuously monitor new and persisting relationships
Currency activity reports,
Funds transfer reports,
Monetary instrument sales reports,
Larger item reports,
Significant balance change reports,
ATM transaction reports, and
Nonsufficient funds (NSF) reports
Report to FINCEN
Suspicious Activity Report SAR
Bank Secrecy Act Currency Transaction Report (BCTR)
12. Summary
Financial institutions play a key role in the detection,
prevention and control of criminal intention to hide the
origin, possession and control of proceeds of crime
The continuous monitoring of both prospective and
persisting relationships ensure the integrity and security of
the financial system
Timely detection and reporting to FinCEN ensure that Law
enforcement has the necessary information to maintain
security
13. References
(FATF), F. A. T. F. (2012). INTERNATIONAL STANDARDS ON COMBATING MONEY LAUNDERING
AND THE FINANCING OF TERRORISM & PROLIFERATION. Retrieved from February 2012:
www.fatf-gafi.org/recommendations.html
APG. (2012). APG Typology Report on Trade Based Money Laundering. Retrieved from
http://www.apgml.org/documents/default.aspx?pcPage=10
Cassara, J. A. (2016). Trade-based money laundering: the next frontier in international money
laundering enforcement. Hoboken, New Jersey: John Wiley & Sons.
Christensen, J. (2011). The looting continues tax havens and corruption. Critical Perspectives on
International Business, 7(2), 177-196. doi:http://dx.doi.org/10.1108/17422041111128249
Grozdanova, R. (2014). 'Terrorism' - Too Elusive a Term for an International Legal Definition?
Netherlands International Law Review, 61(3), 305-334.
doi:http://dx.doi.org/10.1017/S0165070X14001351
Moustafa, T. H., Abd El-Megied, M. Z., Sobh, T. S., & Shafea, K. M. (2015). Anti money laundering
using a two-phase system. Journal of Money Laundering Control, 18(3), 304-329.
Olatunde Julius, O., & Lauwo, S. (2012). The role of offshore financial centres in elite money
laundering practices: evidence from Nigeria. Journal of Money Laundering Control, 15(3), 336-
361. doi:http://dx.doi.org/10.1108/13685201211238070
Editor's Notes
Money laundering is the processes by which criminals conceal the origin, possession, and control of the proceeds of criminal behaviour by making such profits appear to have been derived from legitimate sources (Cassara, 2016; Christensen, 2011; Olatunde Julius & Lauwo, 2012).
There are three primary methods of money laundering. The misuse of the international financial system (both formal and alternate), the physical movement of cash (cash smuggling) and the abuse of trade transactions and their financing (APG, 2012).
The misuse of business transactions and their funding include activites such as over/under invoicing of goods, multiple invoicing of goods, over/under shipments of goods and false description of goods. These activities are combined with cash inflow based payment, third party payment, segmental modes of payment and alternative remittance payment (APG, 2012).
The misuse of the international financial system involves three independent steps as reported in the Background Intelligence Brief Money Laundering, 2005 by Molander et al., (1998) as cited by Moustafa et al.,. ((2015):
Placement: It is the first stage in the money laundering process, and it is a process for transferring the proceeds from illegal activities into the financial institutions or converting cash into instruments.
Layering: It is a process in which a launderer may conduct a series of financial transactions to distance the proceeds from illegal source.
Integration: It is the final stage in the laundering process; illicit funds are integrated with monies from legitimate commercial activities as they enter the mainstream economy. The integration of illicit monies into a legal economy is tough to detect unless an audit trail had been established during the previous stages (Moustafa, Abd El-Megied, Sobh, & Shafea, 2015).
Terrorism is the use or threat of action with a political motivation, which involves serious violence against a person, serious damage to property and grave danger to the health and safety of the public. Alternatively going by the international convension, Article 2 of the 1999 International Convention for the suppression of terrorist Bombings provides a definition. The Article states that a person commits an offence within the meaning of the Convention if they cause damage to public or government property intending to cause death or serious bodily injury and results in significant economic loss, which arguably amount to political motivation (Grozdanova, 2014).
Terrorism financing is intentionally collecting or providing funds to support a act or acts of terrorism. Terrorist organizations raise funding from legitimate sources, including the abuse of charitable entities or legitimate businesses or self-financing by the terrorists themselves. Terrorists also derive funding from a variety of criminal activities ranging in scale and sophistication from low-level crime to systematic fraud or narcotics smuggling, or from state sponsors and events in failed states and other safe havens.
Proliferation is the production, storage, transmission, trade and use of weapons of mass destruction. The spread of nuclear weapons and other weapons of mass destruction (WMD), and their delivery systems could have incalculable consequences for global stability and prosperity. During the next decade, proliferation will be most acute in some of the world’s most volatile regions. Financing of these operations is illegal and notifiable. Financial institutions have a responsibility to enforce sanctions imposed by the UN, the US and their allies.
The Financial Action Task Force (FATF) is an independent inter-governmental body that develops and promotes policies to protect the global financial system against money laundering, terrorist financing and the financing of proliferation of weapons of mass destruction. The FATF Recommendations are recognised as the global anti-money laundering (AML) and counter-terrorist financing (CFT) standard ((FATF), 2012). The 25 recommendations that concern the operations of financial institutions are listed below. The rest of the 48 are concern with regulation and enforcement ((FATF), 2012). International Statrndards on compacting money laundering and the financing of terrorism & proliferation. The FATF Recommendations, published in February 2012 and updated June 2016, these are:
1. Assessing risks & applying a risk-based approach
2.National cooperation and coordination
3. Money Laundering offence
4.Seizure and provision measure
5. Terrorist financing ofference
6 Targeted financial sactions related to terrorism & terrorism fiinancing
7.Targeted financial sactions related to proliferations
8. Non-profit organizations
9. Financial institutions secrecy laws
10. Customer due diligince
11. Record keeping
12. Politically exposed persons
The measures to be taken are as follows:
Imposes specific CDD obligations, either through law of Identifying the customer and verifying tthrough independent source documents, data or information customer’s identity using reliable,
Identifying the beneficial owner, and taking reasonable measures to verify the identity of the beneficial owner, such that the financial institution is satisfied that it knows whco the beneficial owner is. For legal persons and arrangements, this should include financial institutions understanding the ownership and control
structure of the customer natural persons, legal persons or legal arrangements.
Understanding and, as appropriate, obtaining information on the purpose and intended nature of the business relationship.
(d) Conducting ongoing due diligence on the business relationship and scrutiny of transactions undertaken throughout the course of that relationship to ensure that the transactions being conducted are consistent with the institution’s knowledge of the customer, their business, and risk profile, including, where necessary, the source of funds.
13. Correspondence banking
14. money or value transfer
15. New technologies
16.Wire transfers
17. Reliance on third parties
18.Internal controls, foreign branches, and subsidiaries
19. High risk countries
20. Reporting sucspicious activities
21 Tipping-off and confidentiality
22. Desginated non-financial business and professions (DNFBPs): Customer Due Diligence (CDD)
The measures to be taken are as follows: (a) imposes specific CDD obligations, either through law or Identifying the customer and verifying that independent source documents, data or information of customer’s identity using reliable,
(b) Identifying the beneficial owner, and taking reasonable measures to check the identity of the beneficial owner, such that the financial institution is satisfied that it knows who the beneficial owner is. For legal persons and arrangements, this should include financial institutions understanding the ownership and control
structure of the customer.
(c) Understanding and, as appropriate, obtaining information on the purpose and intended nature of the business relationship.
(d) Conducting ongoing due diligence on the business relationship and scrutiny of transactions undertaken throughout the course of that relationship to ensure that the transactions being conducted are consistent with the institution’s knowledge of the customer, their business, and risk profile, including, where necessary, the source of funds.
23. DNFBPs: Other measures
24. Transparency and beneficial ownership of legal persons
25. Transparency and legal ownership of legal arranements
Know your customer in new and persisting relationships. Understand the legal arrangements, know the ultimate beneficial ownership of any relationships. Continouslly monitor relationships against the known facts and ask questions. Report to FinCEN
Financial institutions play a key role in the detection, prevention and control of criminal intention to hide the origin, possession and control of proceeds of crime
The continuous monitoring of both prospective and persisting relationships ensure the integrity and security of the financial system
Timely detection and reporting to FinCEN ensure that Law enforcement has the necessary information to maintain security