The motive of AML/CFT are:-
1. To protect the
integrity and stability of the financial
system
2. To cut off the
resources available to terrorists
3. To make it more
difficult for those engaged in crime to profit from their criminal activities
What is Money
Laundering
Criminal activities, such as drug trafficking, smuggling, human
trafficking, corruption and others, tend to generate large amounts of profits
for the persons carrying out the criminal act.
However, by using funds from such
illicit sources, criminals risk drawing the authorities' attention to the
underlying criminal activity and exposing themselves to criminal prosecution.
In order to benefit freely from the proceeds of their crime, they must therefore
conceal the illicit origin of these funds.
Money laundering" is the process by which
proceeds from a criminal activity are disguised to conceal their illicit
origin. Terrorist financing is the collection of funds for terrorist purposes.
In the case of money laundering, the funds are always of illicit origin,
whereas in the case of terrorist financing, funds can stem from both legal and
illicit sources.
In both cases, the perpetrators of crime make an illegitimate use of the financial
sector.
Methodology of Money Laundering
Criminals are
very creative in developing methods to launder money.
·
Structuring:
Often known as smurfing, this is a method of placement whereby cash
is broken into smaller deposits of money, used to defeat suspicion of money
laundering and to avoid anti-money laundering reporting requirements.
·
Bulk cash
smuggling: This involves
physically smuggling cash to another country and depositing it in a financial
institution with greater bank secrecy or less rigorous money laundering enforcement.
·
Cash-intensive
businesses: In this method,
a business typically expected to receive a large proportion of its revenue as
cash uses its accounts to deposit criminally derived cash. Examples are parking
structures, strip clubs, tanning salons, car washes, arcades, bars, restaurants, and casinos.
·
Trade-based
laundering: This involves
under- or over-valuing invoices to disguise the movement of money.
·
Shell companies : Money is routed through the bank accounts of
companies which are only on papers and doing no business.
·
Round-tripping:
The money is routed through different countries to be received back as Foreign
Direct Investment.
·
Bank capture: In this case, money launderers or criminals
buy a controlling interest in a bank, preferably in a jurisdiction with weak
money laundering controls, and then move money through the bank without
scrutiny.
·
Casinos: in
casinos, winners are paid through cheques. The illicit money is converted and
shown as proceeds of win.
·
Real estate: Someone purchases real estate with illegal
proceeds and then sells the property. To outsiders, the proceeds from the
sale look like legitimate income.
·
Black salaries: A company may have unregistered employees
without written contracts and pay them cash salaries. Dirty money might be used
to pay them.
How, banks are used by money launderers
Money Launderers
generally use three stages to clean
their dirty money through banking channel:-
Placement is the first stage in money laundering
where the cash proceeds of criminal activity enter into the financial system.
This is most
critical stage for any money launderer as the criminal can effectively mask his
‘dirty’ funds by mixing with his ‘clean’ funds and create an impression of
legitimacy.
Examples of
Placement include:
·
Depositing
cash below threshold reporting limits
for AML purposes into multiple bank accounts
·
Purchasing
demand drafts for cash and depositing the same into bank account.
Layering is the second stage in money laundering
where attempts are made to distance the money from its illegal source through
layers of financial transactions.
Examples of
Layering include:
·
Sending funds to
different onshore and offshore bank accounts
·
Creating complex
financial transactions
·
Loans and
borrowing against financial and non-financial assets
Integration is the third stage of money laundering.
This stage involves the re-introduction of the illegal proceeds into legitimate
commerce by providing a legitimate-appearing explanation for the funds.
Examples of Integration
include:
·
Buying businesses
·
Investing in
luxury goods
·
Buying commercial
property
·
Buying residential
property
It is clear from
above that banking institutions are required by money launderers to conceal
their illegal funds and that is why it is important that Know-Your-Customer
(KYC) checks are done on customers. In certain cases there may be a need
for Enhanced Due
Diligence (EDD) on clients.
Money laundering
can’t happen without banks being involved somewhere within the three stages.
Since they are our first line of defence against criminals, by having robust
controls and access to accurate KYC data, banks will prevent many money
laundering attempts.
Tilak
Gulati
Executive
Trainer & Blogger
Author: www.itstrgulati.blogspot.in
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