The Process And Principles Of Money Laundering Finance Essay

The Process And Principles Of Money Laundering Finance Essay

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Introduction

Money laundering can defined as process of transforming illegal money earned to become legal money which is come from legal activities. According to Shijia Gao et al (2009) in HM Treasury 2004, "Money Laundering is a term usually used to describe the ways in which criminals process illegal or 'dirty' money derived from the proceeds of any illegal (e.g. the proceeds of a drug-dealing, human trafficking, fraud, embezzlement, insider trading, bribery, theft or tax evasion) through a succession of a transfers and deals until the source of illegally acquired funds is obscured and the money take on the appearance of legitimate or 'clean' funds or assets". In order to have a deep understanding on money laundering, we must understand in term of "capital flight" and "smurfing". According to financial dictionary, "capital flight means rapid withdrawal of capital (capital flight) from a country as a result of loss of confidence in its government". It is also means how much the money move to another point to another, driven by possible gains or concerns about government policies. Another term is smurfing that are related directly to smurf which are person who help move the funds from one institution to another or from one country to another. A smurfing operation will involve a major coordinator called "papa smurf" who will direct is smurfs to make deposits of drug profits at a large number of banks, usually ally at numbers just below local reporting requirements, like drug-smuggling airplanes that fly below radar screens

Usually, money laundering activities occurs in places that extensive banks secrecy laws, weak financial regulatory regimes, lake enforcement, and corruption. In order to make money laundering, there are three stages that a launderer always do such as placement, layering, and integration.

Placement

According to Ricardo Baba (2007), it's a phase placement of currency into a financial services institution. It's could be a bank, a brokerage house, and so on. Placement also can define as a proceeds from illegal activities into the financial system in such manner as to avoid detection by financial institutions and government authorities by referring to Shijia Gao et al (2009) in IFAC (2002).

Usually, there are several places or technique that a money launderer can use to place their money such as bank institution, insurance institution, real property or lottery business, casinos or other gambling venues, Shell Company or front company, and offshore corporation or offshore financial centre. It can be explained as below:

Bank institution

Bank institution used by a launderer because of bank secrecy which is most applied in many countries. It is also because bank institution have offer several of services such as deposit, loan, acceptance, discount, foreign exchange, settlement and so on. Thus, it helps launderer to transfer funds across international borders with a convenient and prompt. An example case of money laundering using bank institution can be shown as below:

In January 2011, Johor Baharu- The session court was found and discharged a police officer of money laundering involved RM3.8 million between 2002 and 2005. Judge Salawati Djambari made a decision after found the prosecution was failed to prove a prima facie against Supt. Azmi Osman, 55. Azmi, who is suspended from his job, was accused of receiving RM2.08 million through a money-laundering operation in current account at a Malayan Banking Berhad, Jalan Haji Kassim Mentakab between 6 Feb and Dec 20, 2002. In the second charge, he was accused of receiving RM679 850 in the same account between Jan 15 and Oct 2. He was also accused of receiving RM941 930 in another current account at Lot M1-22, Level 3, Johor Baharu City Square, 106-108 Jalan Wong Ah Fook between Jan 13 and Nov 17, 2004 and subsequently RM250 000 in the same account on April 5, 2005

Source: The Malaysian Insider News

Insurance Institution

This intuition can help to disguise the origin and the nature of illegal proceeds and gains obtained from its buying, altering and surrendering insurance policies and filing insurance claims in order to advert the tracing of the authorities. An example of case can be explained as follow:

A drug trafficker purchased a life insurance policy with a value of US$80,000. The policy was purchased through an agent of a large life insurance company using a cashier's cheque. The investigation showed that the client had made it known that the funds used to finance the policy were the proceeds of drug trafficking. In light of fact, the agent charged significantly higher commission. Three months following this transaction, the investigation showed that the drug dealer cashed in this policy.

Source: Ping He (2010) in FATF 2005

Real Property or Lottery

A lucky lottery buyer won 14.3 millions dollars in the "Mass Millionaire" Projects of Massachusetts. Before he cashed the prize wining lotteries, he sold half of them to a company, whose owner was the head of criminal group in Boston "Don Shan", a notorious gang. Purchasing those lotteries was exactly a money laundering scheme, which was discovered by the police when they traced the dirty money gained by this group. Just at this time the gang head was about to cash the lotteries he bought, a joint suspension order was given by the court and the State Lottery Administrative Committee to freeze the wining lotteries, when the case just broken.

It is a new channel for a money launderer to keep their money to become legal such as buying a land using illegal money. An example of case can be shown as follows:

Source: Ping He (2010) in Weimin, 2005b

Casinos or other gambling venues

In casinos, chips are bought with cash, then after a period time during which gambling may or not take place; the chips are traded in a check from the casinos, perhaps in the name of third party. Thus, the chips can be transform back into cash and become legal money.

Shell company or front company

According to Ping He (2010), "Shell Company refers to the company that does not have funds or enough funds required by law, do not have organizational structure or fixed premises for the production and operation. Front company established by the criminals indicates the company with a legal personality, legal business activities, legal operation income, while whose establishment is for the purpose of the laundering the proceeds of crime instead of making profits". These companies used by criminals as a source of illicit the money with a full of control of the company. The example case can be shown as below:

Harry embezzled a sizeable amount of money from a company for which he had used to work. As time passed, he had managed to spend a sizeable amount but had begun to consider which locations- other than his home- he would use to hide the money, as it was a small village in Europe and hid the money in the banking system, using his company as a cover, by claiming the cash was part of his regular income. To avoid difficult face to face questions from the bank employees, he deposited approximately US$14,000- the majority in old bills- into the bank's night safe. As the night safe was emptied the following day, Harry's deposited immediately raised suspicions. How could a car service attract so much income in one day? The financial intelligence unit (FIU) disseminated a report to the police after being informed by the bank. The police's involvement into the money, Harry mixed the illicit money with the business income by establishing the car service station which was served as a front company.

Source: Ping He (2010) in FIU's in action- 100 cases from Egmont Group. Case 15 (Weimin, 2005a, p. 173)

Offshore corporation or offshore financial centre

Over a period of three years, Mr X repatriated the funds to Country Y for his use and benefit. He was assisted by lawyers and accountants using false transactions and offshore corporations. Mr Y, formerly a lawyer, facilitated Mr X's repatriation scheme by managing Mr X's offshore corporation and banks accounts in several important financial centre. Mr Y drafted documents that purported to be loan agreements between offshore shell corporation and a Mr X nominee in Country Y. These loan agreements served as a basis for the transfer of millions from banks accounts in several different countries to the Mr X's home country.

Offshore corporation or offshore financial centre is an institution that has less strict regulations through a legal method. According to Weimin (2005), "corporations which are registered in these areas, whose investors are not required to go the areas personally, and whose businesses can be directly operated anywhere throughout the world are called offshore corporations. It can attract a money launderer to go on these places. An example cases can be shown as below:

Source: Ping He (2010) in FATF, 2003-2004

Layering

It is a second stage in money laundering process. According to Shijia Gao et al (2009), "layering is the process of generating a series or layer of transactions to distance the proceeds from their illegal source and obscure the audit trail". It is also known as a main wash-stage, the launderer try to conceal or disguise the source of funds, by making money around the world in order to hide the origin of the money. Usually there are several techniques most famous used in layering stage such as electronic transfer funds, offshore banks, shell corporations, trusts, walking account, and intermediaries. It can be explained as follows:

Electronic Fund Transfers (EFT).

According to Australian Analysts Transaction Reports (2008), "Electronic Fund Transfers help in layering process by moving money using EFT into and out of domestic and offshore banks account of fictitious individuals and shell companies". Moreover, sometimes information on daily money transactions is limited for authorities making them difficult to recognize or distinguish between the clean money and dirty money. The example can be shown as below:

In order to launder a large sum of money, one criminal syndicate decided to break up the whole capital into parts, and Ralph, a laundering expert in this syndicate, planned to take advantage of payment of smart card. First, Ralph established in country B online entertainment company which could obtain its service fee through smart card. Then, Ralph instigated his laundering employees throughout Country B to pay US$700 to US$800 to buy the same of smart card whose maximum amount of smart card. These deposits for consuming are US$820 from the local distributor of smart card. These buyers enjoyed the service offered by the online entertainment company and paid the bill online or promptly, which was repeated once in three times a week per capita until the capital was totally transformed into the service income of the company. After having received the service fee paid by its employees, the company successfully turned the criminal proceeds into legal income.

Source: Ping He (2010) in Shaping (2003)

Offshore banks.

Offshore banks become places for layering process because they allow an establishment account for non-residents and corporations. It is also have a lower law and regulation for an establishment of account. Furthermore, offshore banks are very popular for a tax evaders and officials corrupt. It becomes easier because according to Australian Analyst Transaction (2008), "some offshore centers combine loose anti-money laundering procedures with strict bank secrecy rules. Criminal can easily maintain and transfer fund from banks in these centers because the detail of client are generally denied to third parties, including most law enforcement agencies". An example can be shown as below:

Banana Banks in the United Apple allows for an establishment account for non-residents. Larry Launder, a non-resident of the United Apple, has a numerous accounts with Banana Banks in the name of different individuals and companies. Larry is a resident of the Republic Watermelon. Funds from illegal activities of Republic Watermelon are placed into Larry account's with Banana Banks using different placement techniques. Once the funds are placed, Larry Launder instructs Banana Bank to various transfers and payments, thereby distancing funds from their origins.

Source: Australian Transaction Report and Analysis Centre: Layering Techniques (2008)

Shell corporations

Shell corporations usually a company that establishment under a legal corporate laws but does not actually conduct a business which is used it to engage in fictitious transactions or hold accounts and assets to disguise the actual ownership of these accounts and assets. An example can be shown as below:

Larry Launder sets up Apricot Trading Co. under the laws of the United Apple. Apricot Trading Co. opens bank accounts with several of banks. Smurf working for Larry Launder transfers illegal funds to the Apricot Trading Co. accounts. Apricot Trading Co. transfers these funds to other accounts or invests them in securities.

Source: Australian Transaction Report and Analysis Centre: Layering Techniques (2008)

Trusts

Trusts are legal arrangement for holding funds or assets for a specified case which is assets or funds are managed by a trustee for benefit of specified beneficiaries. It can help in layering process because they enable to create a fake papers trail and transactions. Moreover, secrecy and anonymity rules help to conceal the identity of the true owner or beneficiary of true assets. An example can be as below:

Larry Launder establishes a business trust by appointing a corporate trustee and drawing a deed of trust, which names Apricot Trading Co. as a beneficiary. Larry Launder transfer funds to the corporate trustee and under a deed of trust, Apricot Trading Co. are empowered to directly use and invest funds.

Source: Australian Transaction Report and Analysis Centre: Layering Techniques (2008)

Walking accounts

Walking accounts also known as capital flight. According to Australian report transactions (2008), "Walking account is an account for which account holder has provided standing instructions that all funds be transferred immediately on receipt to another to one or more other accounts. By setting up a series of walking account, criminal automatically create several layers as soon as many funds transfer occurs". It usually using by criminals because it is difficult to detect and money move very fast around the world. An example can be shown as below:

Using Shell corporations, Larry Launder sets up three accounts with three different banks. He provides instructions to transfer all funds immediately on receipt to one or more of the other accounts. Smurfs deposits cash into the first account. Without the need for further account, the funds are 'layered' by being transferred to the third account.

Source: Australian Transfer Report and Analysis Centre: Layering Techniques (2008)

Intermediaries

According to Australian report transactions (2008), "Lawyers, accountants, and other professional may be used as intermediaries between the illegal funds and criminal. Professionals engage in transactions on behalf of criminal client who remains anonymous. These transactions may include the use of shell corporations, fictitious records paper trails. Money launderer likes to use intermediaries because they lend credibility and decrease suspicion. In addition, these professional generally have confidentiality obligations of their clients so their risk of money launderer getting caught is low". An example can be shown as below:

Larry Launder transfers funds to special account for client funds maintain by the law firm Shady & Hustler. Shady & Hustler establishes a shell corporation, Apricot Trading Co., which opens various banks account. Shady & Hustler now transfers Larry funds into these accounts.

Source: Australian Transaction Report and Analysis Centre: Layering Techniques (2008)

Cash smuggling

In November 1991, the money laundering case by smuggling cash in human body was reported by John F. Kennedy International airport customs authority. A female Ghana immigrant, under interrogation of customs officers, acknowledged carrying $9,000 in cash just under the customs declarations point of $10,000. Nevertheless, customs officers found $24,000 small bank notes packed in some sheets in her luggage, $224,000 in 100 cash rolls hided in shampoo bottles, and $53,000 in small bags in her stomach, which was detected by X-ray test.

Cash smuggling is an attempt to bring out the money outside a country with an illegal ways. According to Ping He (2010), cash smuggling is a method of money laundering in which the proceeds of crime are stealthily moved cross border, and then deposited in banking institution, paid for real estate or invested to establish companies. An example case of cash smuggling can be shown as below:

Source: Ping He (2010) in Dupuis- Danon (2006)

International Trade

International trade can help to disguise illegal money because the origin of the money illegal money can be healed. Moreover, they can easily transfer the illegal money back into a country using the trade transaction to justify payment through financial system. An example of case can be shown as below:

A Brazilian company signs a contract to export soybeans to a German company who prepays the Brazilian company for the shipment. The Brazilian company immediately transfers the funds to a third party that is unrelated to the transaction. The soybeans that were purchased by the German company are never shipped. In this case, the German company transferred the funds to the Brazilian company as an advance for a shipment of soybeans. Suspicious were raised when it was found that export of soybeans were inconsistent with the scale of the company's operations.

Source: Ping He (2010) in FATF, 2006

Integration

Integration is a last stage is money laundering process. Usually, there are several ways used in integration stage which can be explained as below:

Credit and debit cards

Credit and debit card used for entering the illegal funds to engage in financial systems. According to Australian Transfer Reports (2008), "By maintaining an account in offshore jurisdiction through which payment are made, the criminal limit the financial trail that leads to their country residence". An example can be shown as below:

Larry Launder transfers illegal funds into an offshore banks account. He also signs up for debit card and credit cards in the banks. He used the debit card and credit card to make payment for purchases and transactions around the world.

Source: Australian Transaction Report and Analysis Centre: Integration and Techniques (2008)

Consultants

According to Australian Transfer Report (2008), "Consultants is an arrangement that can cover a wide range of non-quantifiable services and often used to integrate illegal funds into legitimate financial systems". They usually employs by the criminal to do a legal work which is involve in purchasing assets and selling an assets, and manage the payment for the criminal behalf. An example can be shown as below:

Larry Launder sets up a shell corporation and related bank account in an offshore jurisdiction. The shell corporation hires a consultant. The consultant performs services and makes payments for Shell Corporation. The consultant is paid by the shell corporation.

Source: Australian Transaction Report and Analysis Center: Integration and Techniques (2008)

Corporate Financing

Corporate financing has offered a various ways to transfer funds between companies. It is because corporate financing usually combined a number of other techniques, including the use of offshore banks, consultants, complex financial agreements, electronic fund transfer, Shell Corporation, and actual business. Thus, it allows money launderer to integrate very large amounts of money into legitimate financial system. An example can be shown as below:

Larry Launder sets up a shell corporation and related bank account in an offshore jurisdiction. He also sets up a legitimate business in his country of residence. Using illegal money in an offshore account, Shell Corporation makes a business loan to, or equity investment in, the legitimate business.

Source: Australian Transaction Report and Analysis Center: Integration and Techniques (2008)

Asset sales and purchases

Larry Launder sets up a shell corporation and related bank account in an offshore jurisdiction. He also owns or controls a legitimate business or real estate in his country residence. The shell corporation purchases the business or real estate at an inflated price. The earning from these transactions is treated as legitimate profits.

An asset sales and purchases make a criminal earn legal funds or profits by purchasing or selling their assets. An example can be shown as below:

Source: Australian Transaction Report and Analysis Center: Integration and Techniques (2008)

Business recycle

According to Australian Transfer Report (2008), "Legitimate businesses that also serve as a conduit for money laundering are referred as a 'front business'. Cash-intensive retail business is some of the most traditional methods of money laundering. This technique combines the different stages of the money laundering process. The principal requirement when using businesses as a front is that they have a high cash sales and turnover. This way it become easy for criminal to merge illegal funds and difficult to for authorities to spot the scheme". An example can be shown as below:

Larry Launders owns or controls a legitimate, cash intensive car wash business. Larry deposits illegal funds into business. These funds are treated as revenue from legitimate businesses.

Source: Australian Transaction Report and Analysis Center: Integration and Techniques (2008)

Export or import transactions

Larry Launder sets up an import company in foreign country as well as an export company in his home residence. They exports goods to the foreign import company. The import company remits illegal funds to pay for the goods on an over invoices basis.

This methods help moves illegal funds between countries by trading export goods to the foreign trading company on an invoice basis and the earning or profits of the transactions will consider as legal profits. An example can be shown as below:

Source: Australian Transaction Report and Analysis Center: Integration and Techniques (2008)

Recommendation

A good understanding on money laundering is very important for everyone in this world. It is because money laundering can destroy moral to generation and it also can cause a big of danger such as terrorist financing which is finally cause war.

It is because good sense in money laundering also helps to prevent and punish people who are involved in money laundering by reporting to the authorities to take an action.

Various techniques to prevent and identify money laundering from happening should be done in order to avoid the consequences of money laundering from happening.

Every country should apply the Financial Action Task Force (FATF) in order to prevent the use of financial system for money laundering.

Conclusion

Money laundering is one criminal activities which is can be categorize as a white collar crime that involved in transforming illegal money to legal money. There are three stages that involved in money laundering process such as placement, layering, and integration. These three stages are playing an important role in money laundering which is every stages have their own technique to wash the dirty money. Thus, when all the stages has completed, the money or fund became a legal money.