Tuesday, January 18, 2011

Concept of Money Laundering

Money Laundering:

Money laundering is generally regarded as the practice of engaging in financial transactions to conceal the identity, source, and/or destination of illegally gained money by which the proceeds of crime are converted into assets which appear to have a legitimate origin. It is common to refer to money legally obtained as “clean”, and money illegally obtained as “dirty”.
In simple words, The process of creating the appearance that large amounts of money obtained from serious crimes, such as drug trafficking or terrorist activity, originated from a legitimate source.
"cleaning of money" with regard to appearances in law, is the practice of engaging in specific financial  transactions in order to conceal the identity, source and/or destination of money and is a main operation of underground money.

 In the past, the term "money laundering" was applied only to financial transactions related to organized crime. Today its definition is often expanded by government regulators (such as the United State Office of the comptrollerof the Currency) to encompass any financial transaction which generates an asset or a value as the result of an illegal act, which may involve actions such as tax evasion or false accounting. As a result, the illegal activity of money laundering is now recognized as potentially practiced by individuals, small and large businesses, corrupt officials, members of organized crime (such as drug dealers or the Mafia) or of cults, and even corrupt states or intelligence agency, through a complex network of shell companies based in offshore tax havens.

Methods and techniques of money laundering
Money laundering is often described as occuring in three stages
1. Placement, 2. Layering, 3. Integration 

1. Placement: refers to the intial point of entry for funds derived from crimnal activites
2. Layering:; refers to the creation of complex networks of transaction which attempts to obscure the link between the intial entry and the exit of the laundering cycle.
3. Integration: refers to thte return of funds to the legitimate economy for later extraction.

Methods of money laundering:
In countries where the banking system is underdeveloped yet, the simplest solution is when the criminals take over the control of the given financial institution and realize through it their dirty transactions.

One of the oldest usual method of money laundering, of presentation as legal of illegal money is the purchase of art treasures and jewellery easy to transfer and of stable value. The laundry presents the art treasures and jewellery in question - or rather the money obtained for them - as if they were the estate not found earlier of a deceased relative of him. To avoid denunciation, it's expedient to sell by public auction the purchased valuable movables and to keep the received coverage certificate. In case of professional laundries it may also happen that they buy themselves the art treasures and jewellery at the auction, and later they sell them again. By so doing the valuables remain and the certificates are also obtained. Although the costs of auction are lost, but a further advantage is that it's even more difficult clear up the origin of money and the valuables can be sold at a higher price.

The technique of illegal money import is excellent for the initial making disappear of the traces, when the smuggler himself, eventually by making use of a messenger or by international transport brings physically the dirty money to a foreign country where the regulation of money market is less developed and/or the legislation prefers the banking secret. Thereafter, as a result of different financial transactions, the money is mixed with the money of legal origin. Disadvantage of this method is that cash is heavy, therefore is difficult to hide, and has the risk to be stolen or the smuggler gets caught at the customs examination.

One of the simplest methods is the technique of smurfing or nominal partnership. A team of couriers (smurf, nominal partner) places small amount deposits every day in always other financial institutions. All deposits are below the amount which would call the attention of the banks (value below report limit). When the money is drawn later on, the origin can be certified with the documents belonging to it.

To further avoiding of reporting financial transactions, respectively to obliterate the traces indicating them, the split or divided into parts money laundering method is applied. A high amount transaction is divided into many smaller amount transactions.

Many money laundering activities are connected to the gambling too. The laundries legalize their income through casinos in most of the cases. They buy tokens for cash in high amount with the aim to play, but they use only a small part of the tokens or they don't use them not at all. Then they redeem them and ask for certificate about the "prize". In case an authority is asking for the origin of the amount, the answer is that it's originating from gambling. A more perfect method is when the laundries have their own casino. In this case the only to do is to record the dirty money as income of the casino

A primitive but functioning method is to agree with the casino owner in a less developed country about the certificate of a higher amount prize.

In addition to the casinos, the gambling prize can origin from lottery, horse-race or even greyhound racing, as well as from activities outside of betting agencies. In this circle the most traditional method is the buying of the wining ticket. In such a case the lucky winner gets even more money than the prize, from the laundry who obtains this way a fully "legal" income. The main point of the fraud related to horse, respectively greyhound racings is thatthe race is hustled then the bet is made with "dirty" money for all possible outcomes of the result. 

The suspicion of money laundering can be also linked with the amusement arcades and gambling machines. These are mostly not fitted with calibrated counters, therefore the declaration of income originating from operation of the machines is made by estimation.

One of the most ingenious solutions is probably the technique of overpayment on tax account. As a result of "incidental procedure error", the private person or the company effects an overpayment of considerable amount to the competent tax office. Then after observation of the error - following filling in of a self-control form - the overpayment is retransferred by the tax office to the bank account of the "erring" tax payer, and the origin of money is already certified.

The point of self-financing loan (Dutch sandwich) is that the "client" places the dirty money in a foreign country or in a financial haven. After that he transfers the money to a bank in an other country, and then applies for a loan at his own bank, the guaranty, collateral being the deposited money. The bank grants the loan, which will be invested into properties, companies respectively into different financial instruments. In case of any suspicion arisen (e.g. sudden richness) the person concerned can refer without fear to the bank loan. This technique can exploit the different countries' regulations concerning banking secret.

The point of the technique related to real estate is when the laundry takes mortgage for the real estate from and off-shore company being in his ownership, or rents real estate from an off-shore company, of which he is anonymous owner.

One of the members of the organisation buys for cash high value article (e.g. car or period piece) and sells within short time, but in the way that the buyer pays already with transfer to one or more legal bank accounts indicated by the seller. 

Buying of gift vouchers as simple all-day buyer, several times, in several places, in average, usual denomination and amount. Thanks to the increasingly spreading franchise systems, these vouchers can be spent at more and more points of the world, or can be simply legally owned, kept.

Assuring real estate credit for an investor, who for some reason could get credit only with difficulties (e.g. the investment is too risky or bizarre, or simply because the investor has no durable contacts established yet with the financial institutions). Let's presume that the loan amount would be HUF 70 million. At this point these "companies" organise a HUF 100 million credit, to be paid back in say 5 year time. The borrower is obliged to buy investment trust unit for HUF 30 million. This is immediately conveyed to the real estate company (to the loaner). About the 70 million a bank is providing security for a letter of credit in amount equal to full interest paid for 70 million, using the investment (real estate) as for pledge. Of course, to avoid risk, this is also conveyed to the real estate company. Result: the investor obtains the necessary amount (70 million), the real estate company gets investment trust unit in the value of HUF 30 million, guaranteed interest payment for the loan, and credit balance certificate if the borrower could not perform his payment obligation. In 5 years time white clean money will be available at zero risk.

Establishing fictitious business organisation - which can't be found at its residence, the manager and members are presumably homeless or persons engaged for money - transfers arrive to its account, and these amounts are collected in cash buy a person who is not member, not officer of the company, or the money is transferred through a subcontractor network among each other with fictitious contracts, as long as the money becomes clean.

Fictitious transactions. Here not the object of purchase is fictitious, but its price is not covering the real market value. Let's suppose we have HUF 100 million. Let's buy for example a real estate for HUF 25 million and let's look for a "buyer" for it who will buy it from us for 75 million with the passing of a certain time. This is of course not a genuine buyer, only such a "blameless" person who could really have that much money without any problem. At the sale and purchase not his 75 million will be received but the our one which we gave him in cash. The payment is effected already with bank transfer, so the amount arrives in a "legal" clean form to our account. It's true that the earlier invested 25 million, the duty and tax to be paid and the fee of "assistance" paid to our "buyer" are to be booked as "loss", but even so, more than the half of our money became white (in addition the state got its part too from this with the paid in duty and tax). This method can work also in the way that a higher amount of down payment is "paid" for the real estate to be purchased, but the sale and purchase fails for some reason, so the amount of down payment is lost, or we get back its double (it makes no difference as the person of seller and buyer is the same).

Creating a cover company, dealing with trade of antiques, among others. It's buying up continuously antiques for cash, which are of average value, popular and relatively many of them passes through many hands. When the stock is available the company offers these for sale, divided among different auction houses country- and worldwide. If one of the lots comes under the hammer the person in question lets to sell it to the person offering the most, or sends in secret one of his people to the auction to buy it back. Independent from the buyer, beside the certificate the purchase price reduced by commission from all lots gets legally to the bank account (in case of own purchase even the article offered for sale is also remaining which can be sold again). The commission can be booked as cost of money laundering.

One of the most perfect ways of perpetration is when the dirty money is mixed with legal money. It's "worth" pumping money into enterprises which are cash intensive branches, i.e. it's normal to have high physical cash flow (e.g. restaurants, casinos, currency exchanges). When the type of enterprise is accepted, i.e. cash forms the higher portion of their income and so of their banking transactions, the dirty cash can be incorporated without any problem into the system. It's very difficult to follow this type of transactions and to prove how many portions of dishes have really been served per occasion. As long as the dirty money is gradually fed into the system, the matter remains undoubtedly unseen. The criminals can apply this technique in case of already existing enterprises or can establish their own one. Indeed they can establish a totally fictitious company too, which has absolutely no activities except invoicing, i.e. is a laundry.

We acquire or establish two companies. One where money was acquired, the other where the money is to be placed. The company, to where the money is to be sent, orders certain goods or services. The trick is: either the invoices containing the products or services areovervalued (the surplus corresponds to the amount to be cleaned) or false invoices are sent. The first method is much more difficult to be disclosed. The paid amount can be deducted by the company which one settled the false or overvalued invoice.

The underworld organisation acquires - possibly fully or partly in cash - an uncared-for restaurant or any kind of service unit in line with its "scope". The renovation, paid mostly also in cash, artificially increases the unit's value. At this point they could get out from the business and could sell the newly started business (even with profit too) as the money becomes legal in their bank account after being transferred. But this can be further increased. The appliances, materials needed to start the business and the continuous daily wasting assets are purchased from a company belonging to the interest of the organisation. At each daily order, the delivered quantity is 20 - 30 percent less than effectively ordered on the documents (e.g.: in case of a restaurant only 40 kg meat instead of 50 kg). The organisation pumps dirty money into the enterprise to replace the shortage. The same happens in case of the other wasting assets too.

The money flown through the different bank accounts of the covering companiesestablished in several countries, more and more legal "layers" are placed, making more difficult to identify the real origin of dirty money. Finally, the off-shore covering ventures invest the money into real estates and wait until they will be suitable to be sold. Completed hotels and apartment houses stand empty for years, waiting for the owners' dirty money to get clean through termination.

The property acquired from crime is inserted in a legally established company, there it's recorded as revenue. Both the revenue and expenditure booking data are forged, i.e. the "cleaned" money is covered with fictitious invoices.

Technique of over- or undercharge. Products or services are purchased at artificially high price (in this case the "profit" remains at the seller) or at artificially low price (in this case the "profit" remains at the buyer) from the money passed through several transactions.

Method of acquisition and selling of companies. From the layered money, the laundries acquire, including assets, a low value company having very little own property. Then the assets are revaluated, the company is sold and "legal" profit is realised.

Insertion of phony companies. The laundries acquire control of a company of which true owners' identity is hidden for the authorities. Trading, financial transaction, forging of balance sheet loss/ profit, borrowings and exploitation of tax benefits are performed under the mask of this covering company.

Acquisition of sports club, respectively player. The buying and selling for several million dollars of professional sportsmen (mainly football players, ice-hockey players), called also slaves of modern age, among the different sports clubs offers excellent opportunities to legalise dirty money. These so called "showcase" companies are ventures which in classical meaning are not connected to the criminal groups, but practically are under inspection and control of the underworld.

We can prepare ourselves also "consciously" for legalisation of our money. The member states of the European Union gradually change to and introduce the euro, giving up their old national currency. This can offer a favourable opportunity to legalize the origin of our money referring to the heritage from a formerly deceased relative, or simply "found in the loft".

By increasing of layering the origin of money becomes untraceable through crossing and covering operations, purchases, electronic transfers, frequent transfers, such as:

Repeated buying and selling of bearer securities

Repeated buying and selling of registered securities with involvement of owner

Electronic there and back transfers among the same accounts

Buying and selling of traveller's cheques, air-tickets, banker's drafts

Commodity exchange contracts

These transactions are easier to perform when the laundries are infiltrated to the brokerage institutions, or the employees of those are corrupted, blackmailed.

Merchandise laundering

In addition to the techniques of money laundering it's also worth to mention the merchandise laundering, being a process similar to money laundering. In this case the merchandise is cleaned, that is it's sold and purchased out of the banking system, adding the most possible masking "layers" as long as the merchandise respectively money becomes fully clean.

The use of gold purchase for criminal purposes is one of the most effective mechanisms to clean illegal money. Its outstanding role is due to the fact that it can be used in many different ways, can be changed in several ways, and can materialize, respectively. promote all separate phases of money laundering. Whether in form of bar, fragments or jewellery, this precious metal is easy to buy, can be got through geographical borders and can be resold, i.e. money can be relatively easily legalised.

The barter trade system of commercial products such as agricultural commodities, other non-ferrous metals and precious stones offers also opportunities the revenues to be "legalised" this way, especially when all this is made in the legal export-import guise between different countries. 

The dirty revenues from drugs laundered in the African barter trade are also to mention here, getting greater and greater role in the money laundering transactions of the world.

Secret banking systems

The more and more strict regulation of banking system leads to that the laundries are forced to find new possible channels outside of the banking system. As stronger the regulation the more demand for new alternatives. It has to be promptly noted that this change is highly touching the legal operating companies of business life too as from now on these are the potential targets for money laundering. The targeted companies are menaced, exploited or their control is overtaken simply by force. Any kind of products can be interesting for the criminals which can be purchased for cash in adequate volume and then can be easily sold.

The laundries also make often use of many forms of the parallel or underground banking systems. These non official, secret banking systems were developed by criminal groups mainly due to political chaos and distrust in banks. The organised (family, tribal) contact is typical for their operation. The purpose during their use is to avoid the financial regulations in force in the different countries in order to bring out the dirty and/or clean money from the country, respectively to settle the goods purchased abroad (capital flight). The system can only work properly when the countries concerned have commercial contacts which each other and the operations can be balanced with the time.

The simplest form was invented by the Chinese under the name fei chien i.e. flying money. The process works as follows: e.g. the dirty money is deposited in a gold shop in Hong Kong - for which the owner gets an overstamped dollar note or a small piece of paper or card marked with an innocent looking secret sign. Later on this is presented at a moneychanger in the Chinatown of an American city and the owner gets his cash which can be further covered through new transactions. 

The essence of Hawalah network is the laundry to place money at a hawalah-banker somewhere in the world, which can be drawn few hours later -after deduction of commission - in an other part of the world (a very good sample is the case of India and the United Kingdom, where it's the interest of the significant Indian population living in Great Britain to bring money grom the subcontinent to Europe). The system works as the market is two-directional. That is, there are persons in both countries who have large amounts of cash surplus (organised criminals, terrorists) and who are ready to pay in a big way for the possibility to make use of a paper free banking system.

New money laundering possibilities offered by the digital money system and by the development of Internet

By development of the techniques at the beginning of the 21st century the laundries have nearly everything available to enter the "space" and by conquering newer and newer dimensions they continue undisturbed their dirty activities.

While the authorities still concentrate on the problem of "terrestrial" money laundering - first of all of off-shore financial centres -, the criminals are one step forward and they move and clean their money in the cyber space, i.e. online, with no little success.

To the greatest pleasure of the laundries, the "face to face", respectively "know your client" principle gets more and more injured by the expansion of online. It is not in the power of the banks, economic units to know who is standing exactly behind the transaction (phone, computer). Who has the disposal of user name and the password belonging to it, can open bank account online; can order international business enterprises; can participate in different share trading models; can communicate via nameless e-mail; can diffuse money through online casinos and betting offices; can buy houses via Internet; can penetrate money through online auctions; can open his own off-shore or online bank, i.e. can do nearly everything.

The possibility of opening online bank account and the banking and electronic payment systems operated through this terminate more and more the need of personal contact. Making use of the free and anonymous services offered by e-mail have access via the Internet to the letters and bank accounts of their own and of others (e.g. in Internet café or in public library). Thus they can create an e-mail possibility which will be then used only from public terminals, that means it's nearly impossible to follow that kind of communication access and utilization. To cover their transactions, they use online channels, deemed to be legal, suitable for money transfer, as e.g. E-Gold or Gold & Silver Reserve, whilst they use names which refer to their position in the hierarchy and their age (e.g. decoders, young people, flock). Let's imagine that one of these groups obtains our personal data or can create false identity. Then he can open with it as much accounts as he wants, has access to them anytime and from anywhere in the world, i.e. can easily launder money through them.

The spreading of prepaid card mobile phones also offers opportunity for anonymity. These can easily be bought without knowing the buyer's identity. Moreover, certain criminal groups are coding their phones with such a sophisticated safe digital method, that it's nearly impossible to trace them.

It's possible to play in the virtual casinos and online football pools sides from any point of the world. Most of them operate as off-shore company of course, and the organised crime is standing in the background. The money laundering trick is as follows. In order to play for "prize", first a credit line is to be registered at the casino. Exploiting the lack of regulation, the most simple is to send average amount of cash. Some gambling is played and the rest of credit line is claimed in form of cheque or transfer.

The sex and pornographic pages as by-product of the sex industry also offer enormous possibilities for those wanting to launder money.

With the use of virtual money used in Internet games, the gambling regulation can be evaded and the criminals can launder illegal money. The registered users can participate in different gambling for the money "issued" by the company. Some companies accept this virtual money for means of payment too, i.e. changes into official currency, thus it becomes available everywhere in the world and can be transferred to everywhere. (E.g. the Internet community building company - where more than 220 million chatters have registered by January 2007 - puts popular virtual money, called Q coin, to the disposal of the users, based on determined Yuan rate, for buying electronic services).
The Risk to the Financial System:

       Another important area of risk to the financial system is the risk posed to the securities markets, most notably the derivatives markets. Owing to the complexity of some derivative products, their liquidity and the daily volume of transactions, these markets have the ability to disguise cash flows and hence are attractive to money launderers. However, their activities pose huge risk to these markets.

Firstly, brokers used to execute orders on behalf of money laundering clients may be criminally liable for aiding and abetting money launderers. What may possibly be of greater concern than that is the money launderer’s skilful manipulation of the futures markets. With regard to local futures exchanges, individuals have colluded to take correspondingly short and long positions so as to clean money debts being paid with dirty money, at the same time profits now being clean money. Owing to their capital, and collusion in positions, they have also in the past deliberately manipulated market prices. If markets are not seen to be transparent and the price system not exogenous of individual agent’s actions, participants may retire from the market and so make the market’s allocative efficiency diminish.

The other major risk is owed to offshore banks, which can wash money by way of derivative markets. Owing to the fact that these banks are foreign, it is not a pre-requisite for them to abide by the same regulations as domestic investors as regards to overexposure to uncovered risks, they can take on huge risk relative to their institutional size. If losses were to arise from such positions the debts may not be fully paid, as the contracts purchased may be only one step in the course of a complex laundering chain that is untraceable. Thus, it is a probable scenario for huge losses to be incurred by legitimate investors, causing damage to the derivates markets.
Hence, money laundering could pose a huge and worrying problem to the financial system of the EU. The various techniques used by organised crime syndicates could most definitely cause a lot of damage and should not be underestimated. Any damage caused by money launderers to the financial system in its entirety has the potential to affect all peoples of the EU.

A Conflict of Interest?
There are in fact two conflicts of interest that arise with banks compliance to such laws. Firstly, in this competitive world, bank officials are constantly under increasing pressure to bring in new business and increase profits. Indeed, it has been suggested that the only reason why many western banks stay afloat is because of the money laundering services they offer and perform. This can be exemplified by the case of the Bank of Credit and Commerce International (BCCI). In this case the bank needed to earn profits in order to cover up the huge losses from loans and trading and the simple solution of money laundering provided an easy way of doing this. The second conflict is that certain banks and countries have a competitive advantage in providing private banking services, i.e. client confidentiality. Bank secrecy laws exist in fifty nations around the world and for such banks this is a necessity for attracting clients. Any moves to abolish or continually override such laws are likely to be strongly opposed.


It can be stated that, at the beginning of the 21st century, not the banks are the number one targets of the laundries, but in addition to conquest of cyber space their "activities" spread more and more to the global world of general business life, where dozens of companies which are deemed to be unblemished, having seemingly honest business operations can always be found (purchasable, blackmailable, establishable).

Those wanting launder money, always going one step forward in front of the authorities, through the most different money laundering techniques, more and more overlie the still unexploited legal economic opportunities - causing several billion dollar damages to the world economy - and resulting from it the difference between legal and illegal economy gets smaller and smaller and presumably will be terminated with the time.

The battle is continuous, but as it's known, the mine of technical achievements and of human ingenuity seems to be everlasting, thus who knows what the future will bring ....

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