Money Laundering

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(a)        how effective do you believe the anti laundering laws to be; and (80% marks)

Money laundering is the process where criminals attempt to hide the origins and ownership of the proceeds of their criminal activities.  The aim is to retain control over the proceeds and provide a cover for their wealth and income. Money laundering occurs every time any transaction takes place which involves any form of property or benefit whether it is tangible or intangible and derived from criminal activity. This leave financial institutions vulnerable.

Article 1 of the draft European Communities  EC Directive of March 1990 defines money laundering as:

‘......the conversion or transfer of property, knowing that such property is derived from serious crime, for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in committing such an offence or offences to evade the legal consequences of his action, and the concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of property, knowing that such property is derived from serious crime.

Due to its secretive nature, the actual amount of laundered money is impossible to calculate but has led to claims that it is one of the world’s largest industries. It has been claimed the amount is anywhere between $500bn to $1.5trn

 People may wish to launder money to avoid paying tax, traffic drugs, perform terrorist activities, perform organised crime, trade fraud and human trafficking.  Somebody who  legitimately  earns money in one country may place the funds into a bank in another country. This is a legal thing to do however if they fail to declare this income on their tax returns in the country that it was earned the funds become the proceeds of crime. The bank will be unaware that it is laundering funds. Criminals may wish to launder money to avoid the detection, prosecution and confiscation of there illegal activities. They may also need to disguise the fact that they own the property to break the connection between themselves and the criminal activity.  Previously gangsters and the mafia from the USA were earning enormous amounts from extortion, gambling and prostitution. The bought legitimate businesses and mixed the illegal funds with legitimate earnings from the business in order to make all the funds look legitimate.

There are over 20 ways to launder money including cash couriers, cash conversion, domestic bank accounts, credit cards, wire transfers, alternative remittance systems, precious metals and gems, casinos and shell corporations.  The FSA has stated that money launders are developing even more techniques through a larger number of financial transactions and shell corporations in order to legitimise the proceeds of crime.

Money laundering comprises of three stages, placement, layering and integration.

Placement is the first stage of the washing cycle. It involves removing the cash from the source of the acquisition to avoid detection by the police. This is done by introducing the funds into the financial system or retail economy or exported and transform it to another asses such as travellers cheques, postal orders etc. The placement stage is where the proceeds of crime are most apparent and at risk of detection as banks and financial institutions have developed AML procedures.

The second stage is layering and is the first attempt to disguise the source of the ownership of the funds by creating complex layers of financial transactions in order to hide the audit trial. These layers can be created by moving the funds in and out of offshore accounts by electronic transfer. Electronic transfer is used as it provides very limited information to determine whether the funds are illegitimate or not. Launderers also use the stock exchange as given the high volume of daily transactions and high degree of anonymity the chances of the transactions being traced is very low. Criminals can also buy assets with the money and then later re sell them.

The final stage is known as integration. The illegal funds is integrated into legitimate economic and financial system. Integration of the “clean” money makes it appear the funds have been obtain legally and by this stage it is very difficult to distinguish between legal and illegal wealth.

There are many laws and international agreements to combat money laundering. The financial Action Task Force on Money Laundering (FATF) also know by its French name Groupe d'action financière sur le blanchiment de capitaux (GAFI)  is a inter-governmental body founded in 1989 by the G7. Its purpose is to develop policies to combat money laundering on a international scale. The FATF issues 40 recommendations in 1990 which included to criminalise money laundering an confiscate the proceeds of money laundering and to implement customer due diligence. FAFT membership currently consists of 34 countries including Britain.

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The first legislation which prohibited obtaining property which had been obtained unlawfully was contained in Section 22(1) of the Theft Act1968. The act states that if a person obtains goods that he knows are stolen and treats them like he is the owner then he is guilty of the offence. The Theft Act is a wide ranging piece of legislation but only relates to goods which are or represent the proceeds of stolen goods. Section 22 covers a wide range of laundering activities when money of other property could be dishonestly handled.

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